Given that 80% of Americans are in debt, you might apply for a loan at least once in your life. Though being financially indebted is the last thing we need when we’re trying to save money, it becomes a necessity and a blessing, even, especially if it’s the reason we have a roof over our heads.
But being granted a loan isn’t a privilege given to all. It is not the last resort that we can always take when times get tough. Creditors will assess our capabilities to repay a loan, and if they found that we can’t, then that rejection can affect all the other loan applications we’ll make in the future.
So if this is your first time applying for a loan, here’s everything you need to know to set yourself up for approval:
1. You Need a Good Credit Score
When creditors assess your repaying capability, it means they’re looking at your credit score and history. Ideally, borrowers must have a credit score of at least 690, although 300-689 can be considered fair enough. Anything below 300 puts you in a bad light, while scores exceeding 700 are deemed excellent.
If you happen to have a bad credit, choose financial institutions that are willing to lend money to individuals with less than ideal credit. But generally, those with good credit are always favored by lenders, so strive to improve your credit score by staying updated on all your monthly payments (cellphone, internet, credit, etc.).
2. You Need to Submit a Couple of Documents
Lenders need to confirm all the information you’ve sent them, so you need to gather documents proving your employment, place of residence, other sources of income, and the like. If you’re receiving aid from a federal or provincial program, you also need to prove your income from those. Valid IDs will also be required.
3. Types of Loans
You should educate yourself about loans first if you’re not yet quite knowledgeable about them. You might already know what a student loan is, so let’s dive into the other types:
- Personal Loans
- Secured loan – This involves a collateral item, which is a personal property of yours that the lender will seize if you fail to repay.
- Unsecured loan – No collateral backing, but the lender can sue you if you default on the loan.
- Business Loans – A variety of loans with different terms, where a collateral item may also be involved.
- Conventional mortgages – Comes in either a fixed-rate mortgage (interest rate staying unchanged throughout the whole loan term) or a variable-rate mortgage (interest rate changes depending on the market’s state).
- Government mortgages – These include Federal Housing Administration loans (FHA), Veterans Affairs loans (VA), and Rural Housing loans (RHA).
- Equity Loans – A variety of loans that can be taken against your home’s equity, for any purpose, including home improvement.
- Auto Loans – Loans you use to purchase and drive a vehicle
4. Monthly Payment Obligations
As you apply for a loan, your lender may review your existing monthly payments. If your monthly income is $5,000, and you’re spending $4,950 for all your monthly bills, then you won’t likely be approved for the loan, as you have a lot on your plate.
5. How to Get Approved
It all boils down to good credit. With an impressive record, you’ll have high chances of being approved for the best mortgage rates and other types of loans with favorable rates. You also need to make a down payment to reduce your monthly dues and the loan’s principal amount.
Considering all those, ensure that you’re always on time with your monthly payments to boost your credit. And once you obtain the loan, try to limit your expenses so that you can repay it earlier, if possible.