These days, you can apply for a loan for anything from adding a swimming pool to your backyard to financing a new business venture and beyond. Loan terms can vary from a couple of years to several decades, and you need to be comfortable with the loan payment and term that you apply for. If you are preparing to apply for a loan for any reason, you may wonder what steps you can take to make the most educated and informed decision possible. These tips can be applied to your efforts to find the best loan for your needs.
1. Explore Suitable Options
In many cases, there are multiple lenders who offer similar loan programs, such as a home mortgage or refinance. However, those lenders’ reputation and experience in the industry may vary. Take time to read consumer reviews for various lenders to narrow down your options. Steer clear of lenders with a reputation for changing terms, charging high fees, or being difficult to reach during or after the loan process.
2. Understand Loan Types
For many types of financing needs, there is a wide range of loan options available. For example, with pool financing, you may obtain an unsecured loan or a loan that is secured by the property itself. A secured loan typically will have a lower interest rate and more affordable payments. You may also benefit from a longer term. However, with a secured loan, you risk losing the collateral tied to the loan if you default on your payments. You should understand the risks and benefits of the different loan types available while also comparing rates and fees. Keep in mind that loan fees can vary substantially from program to program even when offered by the same lender. This will help you to find the right loan program for your needs while keeping costs as low as possible.
3. Select Your Down Payment Amount
With most loan programs, you will be required to make a down payment. For example, a mortgage can require anywhere between three and 20 percent down, depending on the sort of mortgage selected. Making a larger down payment will yield lower monthly payments and can allow you to pay off the loan in a shorter amount of time. It may also help you to qualify for a lower interest rate. While there are benefits associated with making a larger down payment, do not make such a large down payment that you put yourself in financial jeopardy. You should still be fairly liquid after making your down payment. In addition, if you are buying a depreciating asset with a loan, such as a car or a boat, make a large enough down payment to avoid going upside down with your purchase. For example, it is wise to make at least a 20 percent down payment on a new car purchase because cars start losing their value the second you sign the papers and drive them off the lot.
4. Know Your Budget
Before you finalize your loan request and start signing papers, you should be very comfortable with your budget. Ensure that your budget is up to date, and adjust it to take into account changes based on your upcoming purchase. For example, if you are adding onto your home, then higher utilities bills, insurance rates, and property taxes will inevitably follow in the coming months. Your loan payment should be affordable for you even after all of these other factors are taken into account.
While taking out a loan should only be done when necessary to avoid falling deeply into debt, a strategic loan can improve your life in various ways. Because there are so many variations between lenders, loan programs, and loan terms, it is important that you fully understand all of the terms associated with the loan that you are applying for. Ask questions when necessary, or use the Internet to expand your understanding of different concepts. By taking these important steps, you can set up the right loan for your needs.
by: Dennis Hung