Loans can be your best friend or worst enemy. If you use borrowed money wisely, you can solve many problems and boost your credit score. In the long run, that can do wonders for your overall financial health. But if you’re negligent and irresponsible and take out a loan with no valid reason, that can put you in trouble.
Taking out a loan should be with a purpose. You can find the list of valid reasons for borrowing money on this link. In that case, you should consider your current financial abilities and money needs. It’s never a good idea to ask for a loan when you’re unsure of your capability to return it.
If, on the other hand, your decision to borrow money is final, you should know what you’re in for. Lenders will assess your borrowing capacity to determine the risk of loan default and, based on that, lend you money under certain conditions. You can be at an advantage if you work on your finances and thus increase your chances of getting a favorable deal.
Changing simple spending habits, doing research, and being up-to-date with market situations can provide you with great loan deals. Some actions will take time, but that’s still better than borrowing money at all costs under unfavorable conditions.
Work on Your Credit Score
Besides your current finances, you must check the lender’s criteria and know your credit score before applying for a loan. This parameter indicates your overall financial health, and lenders use it to assess you as a borrower and determine lending conditions. So a good credit score can be your ally in asking for more favorable loan terms.
Checking your credit score is one of the essential steps before applying. You can check your credit score through various platforms for free, and it won’t have too much impact on your credit rating. Still, you shouldn’t do that too often – every few months is an optimal period to see positive results.
You can do many things to improve your credit score. For starters, you can work on your debt. Do your best to pay as much of it and thus reduce the debt amount. For example, settle your bills and pay off credit card balances on time. In the meantime, avoid making new, unnecessary debts.
Next, manage your current lines of credit. Do you really need four credit cards when you use only two? Closing inactive credit lines can clean up your credit profile. Shut those with small limits and those you don’t use often. If necessary, work with your bank to increase active cards’ limits and keep the utilization rate below 30%.
Consider Your Income and Employment History
These two are also parameters that lenders pay attention to when evaluating your application. Regular income and permanent employment are vital eligibility criteria for them because they show your financial stability and the ability to repay installments every month.
Some lenders will ask for a letter from your employer if you’re employed or proof of regular tax payments if you’re self-employed. A stable work history gives you a great advantage and the possibility to apply for larger loans.
The amount of income is not crucial for loan approval. Still, it can significantly increase your odds of getting favorable deals. The more funds you have every month, the less chance of loan default, provided that your debts don’t grow together with your income. Also, you can apply for larger loans.
So if you’re low-income but don’t need the money urgently, try to increase your budget and apply for a loan later. If a raise is not an option, find alternative ways to boost your earnings. Extra shifts, side gigs, and working on projects outside of regular work can be a good source of extra income. Also, you can consider renting out a property you own.
Compare Multiple Offers
If you’re in the market for a loan, you must know under which conditions you can get it. Interest rates can vary and depend on many factors, so it’s good to follow them for a while. In this way, you can see their movement and judge when it’s the right time to borrow money (of course, if you don’t need it for yesterday).
Also, always consider offers from different lenders and compare their terms. Online calculators can be of great help when you shop around, but you must also ask for the lender’s terms. That refers to loan amounts, repayment time, the possibility of settling your debt earlier, etc.
You can also ask for quotes from different lending platforms (not lenders directly, as these will be considered hard inquiries). These are just estimates of possible deals you can get based on some basic information. You can, but you don’t have to accept these offers.
Avoid Multiple Applications at a Time
When people need money, they can make reckless moves. One of the initial mistakes that can have a detrimental effect on your creditworthiness is applying for several billige loans at a time. Many think it would increase their chances of loan approval, but it’s the opposite. Multiple applications can make you seem unreliable and desperate.
Another mistake to avoid is asking for more money than you need. But when you ask for more money than you need, two situations can happen. First, you get a loan with the repayment of which you will later have problems. Or, you can get a no from a lender due to the demand for an amount that’s way out of your financial capability. To avoid rejection, always borrow according to your budget and needs.
Think of a Co-Signer or Joint Applicant
If you still have trouble getting a favorable loan deal, think of improving your stance by adding a co-signer or co-borrower to your loan application. Not all lenders offer these options, so make sure to ask about them before applying.
Co-signers are something like a guarantee that you will repay the loan on time. Their responsibility is only when you, as a primary borrower, default on loan repayment. On the other hand, a co-borrower (or joint applicant) has the same rights and obligations as you from the start.
These two are not the same, but they can work in your favor. Since lenders consider these arrangements less risky, they are willing to approve your application. Plus, they can offer you larger amounts of money or more favorable interest rates.
Borrow for a Valid Reason
Many don’t think of loans as financial aid but as an excellent opportunity to fulfill their dreams. So they borrow money to go on a dream vacation or buy an expensive gadget despite their unenviable finances. That’s not a wise move, as you should only ask for money for a valid reason like medical emergencies, debt consolidation, paying for college, home renovation, etc.
The lenders can adjust their lending terms rate if they find you a worthwhile borrower. Then you can count on lower rates and longer repayment tenures. But if you’re not exactly an ideal applicant, you can give yourself time until you increase your income, reduce the burden on your budget, and/or improve your credit score.