Getting a Loan
Sometimes in life we are all hit with some sort of a financial setback. Sometimes it happens more than once. Sometimes it is such a hard hit that the only place to turn to acquire the financial resources to recover is the bank. And no, I am not suggesting armed robbery. I am suggesting a loan.
Maybe you aren't hit with a setback but instead would like to start a new business and you need a loan to get it going. Maybe you need to purchase a car, or want to purchase a house. These aren't setbacks, but chances are good that you don't have the finances to just go out and start the business or buy the house. You need a loan to provide the funds to do it.
You know what kinds of loans are available, and you already know which type of loan you need. Do you know what you need to do to secure that loan? This article will help you to prepare to receive the loan that you need and make sure that you are not getting yourself caught in a bad situation.
What to Consider Before Applying
There are a few things that should be considered before applying for a loan. Knowing what types of loans are available will help with a lot of these considerations. The fact that you are getting a loan for a specific purpose will considerably help in the process.
First and foremost, you will need to consider whether you will get a secured loan or unsecured loan. If you are looking at a mortgage, auto, or small business loan you don't even have to worry about that choice. You will have to get a secured loan for any of the three. But a loan for just about any other reason could offer you a choice. Remember, a secured loan means that you have agreed to guarantee the loan with one of your assets. For a mortgage, the loan is secured by the house. For an auto, the loan is secured by the car. With unsecured loans you don't have to worry about this.
Next, you need to consider the loan options themselves. They will all have different terms, interest rates, conditions, payback periods, and maybe even borrowing limits. Many will be very attractive, while others are less so. But you need to consider the less attractive loans as well because they might be the best option when you look at all the terms and conditions.
Sometimes you won't be given the option to consider the differences between the loans. If your credit history isn't up to par, or above it for that matter, some of the options may be taken away from consideration. Any time you apply for a loan, your credit history is going to be checked. Certain loans are only available based on specific criteria within the credit history. Be prepared to have options taken away because of your credit history and score.
Another item for consideration is the monthly interest rate. Don't automatically jump on the lowest advertised interest rate. It may cost you more in the long run. Attractively low interest rates detract attention from the true picture of what you will be paying back to the bank. You see, for every good interest rate there is an overhead cost. In fact, there are multiple overhead costs. For example, you may have an originating fee, a processing fee, an underwriting fee, a credit report fee, and maybe even a customer service fee. Add up these fees and that really low interest rate may become a moot point. Some loans with higher monthly interest rates may not have all of those fees applied which in turn makes them the more economical choice.
You didn't realize how much information, consideration, and work goes into getting a loan, did you? Guess what? We are still in the "What to Consider Before Applying" section. There is still more work to be done. But before we move on, let's finish talking about all that there is to consider.
The next consideration is the time period for paying back the loan. Some loans may have a limited choice on paying back what is borrowed. You may be given a choice of 12, 24, 36, or maybe even as many as 72 months to pay back a loan. On home equity loans you may even see a 15 year payback schedule. Why do you have to consider the payback schedule? Simply put, the longer you take to pay off the loan, the smaller the monthly payments will be. Unfortunately, you could possibly be paying more money in interest over the life of the loan just to have the luxury of a smaller monthly payment. Take a mortgage loan as an example. A 15 year term will have a larger monthly payment than a 30 year term. But at the end of both mortgage terms, the 30 year loan will have cost you a few thousand dollars more.
I know what you are thinking at this point: not a big deal because I will get the 30 year loan and make extra payments occasionally (possibly using your yearly income tax return) and cut some time off the term of the loan and save me some money. Am I right? Well, with some loans that would be a great plan. In fact, it is a great plan for any loan, if you are really intent on doing it and disciplined enough to follow through. But before you sign on the contracts dotted line, ask if there is a penalty for early payoff.
Many lenders want to get the money that they calculate to earn by giving you the loan. If you try to pay off your loan early, that means that the lender will not earn as much money off of the calculated interest that you are saving yourself from paying. There are policies that the lender will have attached to each loan, based on the type and/or size, which you need to be aware of. By getting all of the information first, you could be saving yourself a lot of money. It will take some time to research all the information about the loans, but remember what a lot of people say: time is money. In this case, spending more time could save you money.
As you consider all of these things that have been mentioned, realize that it all changes from one lending institution to another. You really need to look at all of your options from the types of loans, the costs of the loans, and the lenders that offer those loans.
What to Expect When Applying for the Loan
After you have decided on what lender you will use, and to some extent the type of loan you want to secure, you are prepared to get the loan. When you go to that institution and start the process, there are some things that you need to expect to happen so that you aren't caught off guard.
At some institutions, and for certain types of loans, you may need to schedule an appointment ahead of time. Call the lender ahead of time to find out so that you don't waste your time showing up and being told you have to make an appointment for the next business day. If you are able to apply over the phone, internet, or by mail, you obviously won't need to make an appointment but be prepared to get a phone call from the lender with a few questions.
As you fill out the application for the loan, you will have to provide certain information. Be aware that there are no exceptions to the lenders rules and no matter how much you don't want to give out some of your personal information, you will have to. For example, many people are very cautious to give out their Social Security Number (SSN). However, without your SSN the lender cannot request your credit report and score. Without a credit report and score they cannot approve a loan.
Other people don't like to tell what their salary is. Be prepared to do this for certain types of loans. For example, since a mortgage loan is for a large amount of money, the lender will want to make sure that you can pay it off. Not only will he want to know that you are employed, he will probably contact the employer to verify that you do indeed work there and that you make the salary you claimed on your application. It may seem like an intrusion on your personal life, but if you want the loan, it is part of the price you pay.
Something else to expect when applying for the loan is to reserve a lot of time to go through the process. If you are meeting in person with a loan officer it may go faster than if you apply over the phone, internet, or by mail. Applications done by mail generally take the longest. Applications done over the phone and internet won't take as long but may still take a day or two. Applications done in person are usually a lot faster. You might be able to walk into the lenders office and have the loan in your pocket within one hour. But don't expect it to go that fast. Some loans, even when applied for in person, may take a day or two to fund. In fact, if it is a mortgage loan, don't be surprised to see it take anywhere from two to six weeks to fund. Time frames change based on the method of application, the amount applied for, and the type of loan requested.
A delayed response doesn't indicate that the application isn't going smoothly. It doesn't indicate that you are going to be turned down for the loan. What it generally means is that the lender is doing their research to make sure that you are not too high of a risk for the type and amount of loan that you are asking for. Just as you were counseled earlier in this article to research your options, the lender will research theirs. It is all part of the process and is something that you should expect.
What to Take With You
When you apply for a loan, there is certain personal information that you will need. If you are applying in person, make sure to take the items listed below with you. If you are applying over the phone, internet, or by mail, you will still most likely have to provide the information, but may also have to send photocopies of documents later on before the loan is funded. When you apply in person, the lender will take down this information and even make photocopies of certain documents to have on hand for processing the loan. Items to take with you when applying for a loan are:
- Driver's license or other form of official photo identification. The lender will want to see something official with your picture to verify that you really are who you say you are. A driver's license is the most preferred. This is one piece of documentation that the lenders will photocopy for their records.
- Social Security card. Again, they will want proof that you are who you say you are and your SSN helps with that. Identity fraud happens because of people using the personal information of someone else to acquire something of value. A SSN is the most dangerous of personal information to be used in identity fraud so having your card there to show that you are giving them your real SSN will actually help you. This is another piece of documentation that the lenders will likely photocopy for their records.
- Name, address and phone number of employers for the last two years. The lender may want to verify your employment with them. If you have had multiple jobs during the last two years, take the contact information for each job.
- Most recent two months' pay stubs. Certain loans, because of the large amount of money involved, will require a verification of income. You won't get a loan if you can't show that you have enough income to be able to make the monthly payments. Other loans may not require this, specifically unsecured personal loans for small amounts (in this case we will say that $2000 is a small amount) but you should take it just in case. It is better to be prepared than have to leave and return again to make sure that the loan processes.
- Income tax returns for the last two years. The reason for these is basically the same as the reason for the last two months pay stubs. The lender especially likes to see the tax returns of people that work in a position that has a base salary and receive commissions. If they were to rely on just the pay stubs, a salesman could have two really good months and then go to a lender and secure a hefty loan because of a large sum of income during the previous months. But what if the rest of the year is dismal as far as earnings are concerned? The bank wants to have verification of your yearly income, not just monthly, to make sure that you will be able to pay it back.
- Credit card account numbers and balances. This isn't commonly asked for because the same information is available on your credit report that they will request from the credit bureaus. You may want to take this information with you though, or at least call ahead and find out if it is necessary.
- Banks' names and account numbers. This information is used for the same reason that they want your credit card accounts and balances. The lender will look at what you already have available to you to help determine if you need as much as you are asking for. If you have a high credit score and good credit history than you probably don't need to worry about it as much. But do take this information with you because it may not be on your credit report.
- Business and personal references. If necessary to make a decision, they will check on these references to see if you are responsible and trustworthy. Because of this, choose your references wisely.
- Money for the loan application. If a fee is involved, the lender may want you to pay it separately from your own funds. It shows them some financial responsibility. Many times the application fee will be built into the amount of the loan. Sometimes the lender may waive the application fee because of the amount of money they will earn from the interest paid. This is something you will want to find out before you go.
In reality you may not need all of the items listed above. But you don't want to go empty-handed either. Some items, such as the drivers' license and Social Security card are almost always required. Do a little bit of research to find out what you need to take with you. It could be a simple phone call to the lender or maybe a look at the lenders website (if they have one).
Becoming informed through research prior to applying for a loan will save you a lot of stress and maybe a few headaches. More importantly it could save you a lot of money because you will be able to pick the right loan for your needs. The time you spend will be well worth the effort. The preparation time may speed up the application process, the loan processing time, and give you some peace of mind know exactly what you are getting yourself into.