When you apply for loans, it can be a very scary endeavor. And why would it not be? You are asking for a large sum of money that needs to be paid back with interest. It is not like borrowing $20 from a friend and saying “I’ll get you back one day.” No. Failing to do so, in a worst case scenario, can leave one bankrupt if an individual does not manage their money well or overestimated what they could handle or they were unfortunately enough to be left without a way to pay it. But it does not have to be scary! Here is what you can do.
What Is A Loan?
Like mentioned before, let us say you borrow from a friend, like the aforementioned $20. However, your friend says they will lend you the money but you must give it back to them, plus 10 percent interest. Interest is an amount of money that needs to be paid for borrowing the money, it is generally a percentage of the full amount. In this scenario your friend tells you, you have a year to pay it. To find the simple interest, you multiple 20 by the percentage, .10. By the end of the year, you will have to pay your friend the $20 plus an interest of $2, for a total of $22.
This is a gross simplification, but it stands as a general example. Entities where an individual can apply for loans tend to come with a few extra strings. Take mortgage, for example. If you took out a mortgage and fail to make payments, the lender can take the property you signed the agreement on. Most home buyers take out a mortgage, as many as 88 percent do.
Tips Before You Apply For Loans
Like the example used before, these are general tips and can change depending on where you get your loan, but should serve as a tool to prepare yourself.
First on the list are credit cards. Credit cards are a good tool for improving one’s credit score by incremental measures, if payments are made on time and used sparingly. If you asked 10 people if they had a credit card, chances are good that seven of those participants will have at least one. However, if you already own one, hold off on getting another one. If you do not have one, do not get one. Your credit score is important for loans and for every credit card you apply for, your credit score can drop a few points.
If you have any debt, like credit card debt, it is imperative you pay it off, as well as any other debt you have accumulated. Not only does this look good on you, it frees up disposable income that can be used for paying your loan.
Lastly, shop around and find a banker that can explain the process to you. And if it just so happens to be the bank you wish to borrow the loan from, they can help you pinpoint all the documents you will need to successfully apply for a loan. Looking for a credit union is also a viable option since they are twice as likely to offer free checking.