There are a lot of disastrous money habits that can ruin your financial life. A number of them can cause problems when it’s time to take out a loan. Unlike some bad money habits, the steps you take during the loan process could have long-term repercussions.
That’s why it’s so important to use caution and follow the guidelines below when you weigh your loan options.
Always Borrow the Minimum Amount Needed
The first rule of financially savvy lending is to only borrow what you truly need and not a penny more. It’s easy to give into the allure of extra cash, but keep in mind the money isn’t free. Every dollar you borrow comes with interest.
The one hang up is, some traditional banks don’t provide small loans. If you just need a small personal loan for an emergency car repair or unexpected expense you have several options beyond expensive payday loans. Online lenders like MaxLend.com offer small expedited loans that are affordable payday loan alternatives. Look for small loan options that can be paid in installments at a fixed interest rate.
Never Borrow More Than You Can Afford Right Now
Some people like to project into the future, but the problem is they sometimes factor in pay increases or income they haven’t gotten yet. When you’re taking out a loan never borrow more than you can afford to repay right then when you sign on the dotted line.
This rule applies even if you qualify for a loan that’s outside of your comfort zone. On paper, you may be able to make the payments on a $10,000 loan, but it’s not a good idea if that leaves you with no disposable income or savings each month. The goal is to make things less financially stressful, not stretch the monthly budget to its breaking point until more money starts coming in.
Always Read the Loan Documents Word-for-Word
The devil is in the details. It always amazes me when I hear people say they rarely read loan documents word-for-word - even when it’s related to taking out a sizable loan. You’re signing a document that makes you legally indebted to another, so you might want to know exactly what the stipulations are.
Even if the specifics of the loan were already explained there’s a good chance you missed a vital point or two during the discussions. Always read every word of the loan documents to avoid costly surprises down the road.
Never Remain Silent If You’re Unsure
Before you sign the contract is the time to ask questions. If something is unclear, speak up. Make sure you understand every point before you agree to a loan. It’s never a bad idea to have a financially savvy friend or family member look everything and explain the details.
Always Look for Options With No Payoff Penalties
Did you realize you could pay extra if you pay off a loan early? The goal is to pay back a loan as quickly as possible to minimize the interest fees but there could be a payoff penalty for doing so.
Always look for loan options with no payoff penalty. Keep in mind this isn’t the same as a payoff/closing fee. Some lenders charge a small fee to cover the administrative portion of closing the loan.
Always Check Your Credit Score
Your credit score determines the affordability of a loan. It’s one of the first things a lender will look at when a person applies for a loan. That means you should also know your credit score and what’s in your credit report.
Everyone is entitled to one free credit check a year with each of the three credit bureaus. You can choose to look at all three reports at once or just one at a time. If you want to take out a loan it’s advisable to check your credit report with two of the three bureaus. Check your overall score, discrepancies that are lowering your score and any suggestions for improving your score.
If you find an error that’s lowering your score file an error report immediately. It’s best to get the discrepancy removed before you apply for a loan.