Getting a loan, whether for personal use or for a business, can often save the day or help you take advantage of a new opportunity. If you’re strapped for cash, a loan might just be the ticket to a better future. However, you must use care and caution when seeking a loan, and you must follow the guidelines lenders have set up. Being thoughtful about how you seek a loan will help you find and get the perfect loan for your specific needs.
These are some basic steps you should take before getting a loan.
Preparing to Apply.
Optimize your credit report. Your credit history is the record of your behavior relating to how you borrow money and pay it back. Your credit report is the main determinant in your ability to get a loan.
Additionally, your credit report contains information about your employment record; the number of times you applied for getting a loan and with which lenders; collection accounts; and judgments.
Three credit bureaus — Equifax, Transunion, and Experian — collect and maintain your credit history information, including account names and numbers, account types, opening/closing dates, credit limits, balances, high balances, monthly payments and late payments.
Order a copy of your credit report.
You may request one free copy of your credit report each year from each of the credit bureaus. You can contact the credit bureaus on the phone or complete a form online to obtain these reports.
It is important to get all three, as some bureaus may report different information than others.
Examine your credit report for negatives.
This includes late payments, over-limit balances, collections, and judgments.
Repair negative issues on your credit report. This may be as simple as reporting an inaccuracy to the credit bureau or may involve paying off a collection or judgment.
Get your credit score. In addition to your credit report, getting your credit score is a good idea. Generally, a credit score of 640 or above is considered above average and will not give you problems when applying for a loan. If your score is below 640, you may have a tough time finding a lender that won’t charge you a high-interest rate or impose other conditions on your eligibility.
Lenders should be able to give you a range of credit scores required for a particular loan.
If you fall within that range based on your credit score, you’ll know that you, at least, have a chance at being approved for the loan. You’ll have a much harder time qualifying for a loan with a range far above your credit score.
If you’re looking to improve your credit score, you can take certain steps, such as getting a better debt to credit ratio, paying off lingering loans, reducing overall debt and opening multiple lines of (good) credit.
Establish a stable source of income.
Your income is equally as important to getting a loan as your credit. Not only will you need a current source of income for loan approval, but you will also need a stable history of earning income.
Keep a recent pay stub from your job when you go to apply for a loan.
It is possible that lenders will want to see proof of income.
The more stable the history of income, the better your chances of getting a loan with favorable conditions, such as a low-interest rate.
You will have to prove your ability and willingness to repay a loan to get approved for a loan. You will need to provide supporting evidence of these qualities in the form of a credit report (which the lender can pull), bank statements, pay stubs and/or income tax forms.
Collect these documents and store them in a safe place. Have them ready for when you find the perfect loan to apply for.
Determine the amount of money you need to borrow. The size of loan you need will help narrow your lender options. Additionally, it is necessary to determine that you can afford the payments on the loan size you need.