Getting a loan is, generally, far easier than paying it. But that fact would no way dismay borrowers. Still, credit opportunity tends to be availed of once presented. For some, getting a loan is really a way out of their pressing financial predicament, for some just to make their credit scores look better, and others just for the heck of it, like it’s just another habit.
People feel good when their loan is approved and released, but, would feel the other way around when paying time comes. Getting a loan may solve one’s financial problems, the way it may worsen another’s. Default in payment is no joke. Surcharges and penalties imputed can really mess someone’s financial situation. And of course, such would impact negatively on his credit standing as well.
Therefore, to avoid being swayed by your borrower-instincts once a credit opportunity comes up, consider the following factors before applying for a loan.
- THE NEED
Define what the loan is for. Is it to settle a financial obligation, or just to buy something you want? Is it for additional working capital, to fund a new investment, or just to finance travel plans? If it is something that can wait, it is always better to save for it.
How does the loan benefit you? Is it worth the interest you will incur? Will it be a quick solution yet a greater burden later? Loans, especially long-term ones, require financial planning and projections. The loan proceeds you get now may temporarily ease your tight liquidity, but you need to look forward to what situation it may put you into later.
- PAYING CAPACITY
Here’s the most important factor – your capacity to pay. How will you repay the loan? Of course the creditor’s major consideration here is your source of income. Are you employed? How much is your net salary? Do you have your own business? Does your cashflow suit the loan amortization/payment schedule? After deducting all your regular expenses, will you have enough excess cash to pay for the loan?
This item is for those getting a loan to increase working capital or fund investments. Equity pertains to your capital share or funds you have put in your business, representing ownership interest. Most lenders want to see that you are risking your own money before asking for a loan.
Adequate collateral is usually required. For emergency loans like payday advances, a written check would be enough to serve as loan security. However, for long-term and big credit tickets, most lenders would ask for worthwhile assets. Collateral can consist of either personal or business assets, or both. Borrowers can assume that all assets financed with borrowed funds will collateralize the loan.
- CREDIT BACKGROUND
Now, are you ready to present your credit record? Is your credit score favorable? In getting a loan, you should consider not only your current credit standing but, think out how the loan you are applying for would affect it once granted. Are you over-exposed, meaning, will this loan be an addition to the so-many-outstanding financial obligations you already have? According to FICO (the major credit scoring agency) representatives, it is best to have at least four reportable credit accounts active on your credit history (i.e. car loan, home loan, visa, & mastercard). However, having a lot of credit obligations would make it difficult for you to monitor, more so to pay. And take note, if some payments are received one day late, lenders may raise your interest rates and perhaps report you delinquent.
- PREVAILING CONDITIONS
After checking your internal situation, check also the prevailing external conditions vis-à-vis your loan purpose and paying capacity (i.e. retrenchment peak, business slack season, loan rates, inflation, etc). Inadequate or ill-timed financing is a close second to an inappropriate loan when it comes to bad credit.
- THE NEED
It is always good to know that one can apply and qualify for a loan, but it is always better to make the preliminary assessment, because if there is anyone who knows one’s self and his real situation better than any creditor, it is the borrower himself. On top of all these, any negative consequences from the credit transaction entered into, remember that the borrower is the ultimate casualty.