Very few of us will go through life without needing a loan. Whether it’s an auto, home, or personal loan, there are things you can do to increase the odds that you will qualify to get the funds when you need them most.
“Before you meet with a lender, you need to start with the first step: research,” says Kwesi-Ann Virgo, Consumer Lending Specialist at Popular Community Bank. “You have to put in time up front.”
Know what you need
Virgo recommends you start your research by figuring out how much money you need to borrow. It may seem obvious, but if you don’t know what you need, you may not get the right loan for your situation.
When seeking a car loan, for instance, determine how much money you are able to put down. “Paying a larger deposit has multiple benefits. It gives you a smaller monthly payment, and allows you to finance the car over a shorter period, which will save you on the amount of interest you will pay,” Virgo says. “It also means that if you so choose, you can trade the car in sooner.”
The required down payment on home loans are anywhere from 3.5% to 20%, while personal loans(students loans, for example) do not require a down payment at all.
Investigate your situation
In January, we discussed why your credit history matters. Because lenders use your credit score to help determine your credit worthiness, you need to know what your score is telling them. Get a free copy of your credit report and make sure there are no surprises such as late or missed payments.
Another big factor for lenders is your debt-to-income ratio (DTI). “Banks want you to have a low DTI because it tells them you are able to pay back what you are borrowing,” Virgo says.
Be realistic about what you can afford to pay back each month. “If you have a short-term loan but the monthly payment is very high, that could put a strain on your finances,” says Virgo. A longer repayment period with lower monthly payments may be a better option.
Look good on paper
When it’s time to talk to your lender, be ready to show you are a good candidate for a loan. After all, the bank wants to make sure it is making a good decision by lending to you.
Here are two things that make your loan application shine:
- Good credit history
- Reliable income source
Not only do they help lenders decide whether to approve you, they also help determine the interest rates you will be charged. “The better the credit score, the lower the interest rate,” Virgo explains.
Of course, if you’re a young person in need of student loans, you probably don’t have either of those things established. That doesn’t mean you can’t get approved. “The advantage to having no credit history is that you don’t have bad credit history. You just need to build one,” says Virgo. As for income, having a parent or guardian available to co-sign the loan can go a long way. “They’re using their good name to vouch for you,” Virgo says.
Make smart choices
These days, banks aren’t the only place to get loans, but they remain among the most reliable. And, as Virgo points out, a good banker is part lender, part counselor. “We listen and ask questions to make sure our clients are not taking on more financial responsibility than they can handle,” she says. “There are some other lending options out there that may be convenient, but you could wind up paying a lot more in fees and high interest.”
Virgo encourages you to plan for when your loan is paid off, too. “Instead of making monthly loan payments, put the same amount into a savings account,” she says. “That way, if you need money down the line you’re less likely to need a large loan.”
This article also appears on PopularTips.com.