While avoiding debt is important for building wealth, there are many instances when applying for a loan might be beneficial. When purchasing a house, car, or completing a home remodel, it is often advisable to finance rather than spend large amounts of cash that could be invested at a higher return or saved for emergencies. Whether you live in the United States, a European country, or Australia, many of the same rules apply and can help secure the best interest rates and loan terms. Here are 6 steps to complete before applying for a loan.
1)Check Your Credit Report
Like it or not, loan interest rates and the ease of obtaining financing depend on having a good credit report and FICO score. Make sure there are no errors or credit issues that might send up a red flag to loan companies. You can get a free copy of your credit report at annualcreditreport.com
2)Pay Off Consumer Debts
Paying off the balances on credit cards or revolving accounts will produce a better debt to income ratio. If banks or loan companies believe you are a low risk borrower, you’ll secure more favorable interest rates. Be careful not to cancel credit card accounts, though. Having available credit that isn’t being used will increase your credit score.
3)Consider Fees and Closing Costs
When applying for any loan, especially a mortgage, it’s important to consider things like loan origination fees and closing costs. Different lenders can vary by thousands of dollars. When looking at refinancing, check your current mortgage company first. Some offer streamlined refinancing with low closing costs for customers in good standing.
4)Shop Around For the Best Interest Rates
On a long term loan, even a few tenths of a percentage point can mean a savings of thousands of dollars over the life of the loan. It is wise to check rates with brick and mortar companies and online. Online companies might also offer fewer closing costs due to lower overhead.
5)Know How Much You Need To Borrow
Often lenders approve applicants for more than the amount requested. While it might be tempting to upgrade the item you are looking to purchase, remember that higher asking prices come with higher monthly payments. Make sure your payment is not at the upper range of what you can afford.
6)Have an Adequate Down Payment
Especially with home purchases, it’s important to have a down payment, preferably 20%. This eliminates the need for private mortgage insurance or PMI. Buyers have to pay PMI if they don’t have enough equity in their home to insure the lender in case of default. PMI is another added cost that can eat away at monthly savings. It also takes away from money that could be invested or applied toward loan principal.
Applying for a loan can be a tedious. By completing these 6 steps, buyers can make the process less stressful and potentially save money by being prepared.
What steps do you recommend to buyers before applying for a loan?