Financial 101: What to know about loans

Money to Loan

There will inevitably come a time in everyone’s financial life when they need to borrow some money. The most common loans are usually for a house, a car, or paying for college. Borrowing money can be a great way to make large (and often, life changing) purchases, but it’s important to understand how the process works to ensure you set yourself up for financial success. 

 

Know why you’re borrowing

This might sound a little strange, but knowing the reason you’re looking to take out a loan can help determine whether you actually even need the money. Obviously when you decide to buy a home or are figuring out how to pay for school, a loan makes a ton of sense. But when you start talking about smaller, personal loans for unforeseen expenses or emergencies, you’ll want to take a step back and assess your options. Often, personal loans can carry higher interest rates which can easily get out of hand quickly. If you’ve been paying attention to our other Financial 101 posts, this is why having a savings plan that creates a financial safety net can be so important. 

 

Options, options, options

All loans are NOT created equal. Knowing where to go and what’s out there when it comes to borrowing can save, or cost, you lots of money down the road. Depending on what type of loan you’ve decided you need, often the easiest approach is to go to the financial institution where you do your personal banking. They’ll know your financial history already and it’s nice to be able to keep track of all your key payments with a single institution. There are also a host of online lenders out there that offer attractive rates for a number of loan options. Many of these online lenders can also offer very attractive loan consolidation options, so shop around and see what’s out there for the loan you’re looking to apply for.

 

What can you afford?

The very nature of a loan suggests you can’t afford something so we know how ridiculous this may sound. However, knowing how much a loan is actually going to cost you is one of the most important steps you can take to ensure you are set up for success. Often, lenders will try to entice you with the lowest APR percentage without explaining some of the fine print that may end up costing you more in the end. When you’re shopping around, factor in the entire cost of the loan over its lifetime. You may find that the lower APR could end up costing you more at the end of the day.

 

Know the your score

We’ve talked about this before, but knowing your credit score when applying for a loan is huge! With so many free credit score reporting services available, knowing your score has never been easier. Lenders will look at this number very closely when determining your risk profile. Not only will it be the deciding factor that dictates whether or not you qualify for a loan in the first place, it will also directly impact the rate and terms you’ll be able to negotiate. Arm yourself with your score and you’ll become a much more informed consumer as you start shopping around.

 

Break out the magnifying glass

When you start looking at loan options, hidden fees and fine print will be everywhere. Doing your due diligence here can save you stacks of cash down the road. Make sure you keep an eye out for late payment fees, prepayment fees (yes, you can be charged for paying off your loan early), processing fees, and how overall interest is calculated and charged. Do your homework and go through those contracts with a fine toothed comb!

 

Being an informed consumer will arm you with all the tools you need to lock in a loan that makes the most sense for you. Borrowing money can seem scary, but it can also be a great way to take your financial wellness to the next level. As always, the more you know the better off you’ll be.

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