How to Take Out a Loan in 5 Easy Steps

businessman lending money to woman

A whopping $143 billion -- that's how much the total personal loan debt in the U.S. is. That amount comes from the 21 million personal loans that U.S. consumers have taken out.

But that's not all.

In 2018, some 23 million people in the country also took out a payday loan.

All these figures and stats show how important loans are to folks in the US. After all, without these products, many of us wouldn't have a home or a car. Many others would also have problems making ends meet.

If you're one of these people who need to take out a loan, it's best to first know the top tactics to use when applying for one. This way, you can boost your chances of getting that much-needed "Yes" from a lender.

Ready to get those funds in your bank account soon? Then keep reading this loan guide so you can start your application ASAP!

1. Decide How Much Money to Borrow

Base the amount of money to borrow on the expense you need the loan for. Make sure to factor in your income too and the other existing expenses you already have every month. This will give you an idea of how much "left-over" money you have that you can use to pay off your new loan.

Let's say your salary is within the 2019 median income in the U.S, which is $905 per week or $3,620 a month. Whereas your monthly expenses are $3,000, leaving you with $620. But you also want to set aside $500 for savings or emergency expenses.

That means you have about $120 left to cover monthly loan repayments. Use this figure as a guide when determining how much to borrow and the term you will choose to pay the loan back. It's also best to borrow less than the maximum you can pay back so you don't have to stretch your budget too thin.

Calculating all these will help you figure out how much debt you can really handle. For starters, if you take out a loan that's more than what you need, the total cost of your loan will skyrocket. You'll face much higher interests, not to mention be in debt longer than necessary.

Whereas a too-small loan may not be enough to cover your costs, which means you may end up taking out another loan. Another lender may approve you, but it'll still take time. By the time you get the money, you may have already incurred penalties from your other due payments.

2. Compare Your Loan Options

Personal loans come in various forms, including unsecured, secured, and co-signed loans. Whichever type you choose, most lenders will likely take a closer look at your credit score. We'll talk more about credit scores later, but for now, we'll give you an overview of these personal loan types.

Unsecured Personal Loans

Unsecured loans are loans approved without requiring the borrower to put up collateral. Rather than requiring you to pledge an asset, say a car title, lenders qualify you based on your credit score. Today though, many online lenders prioritize current income than credit history.

Secured Personal Loan

A secured personal loan is the exact opposite of an unsecured loan. You need to pledge collateral, like a car, house, or other valuable property to qualify for the loan. This serves as the "security" for the loan, which the lender can repossess if you can't pay back the loan.

Secured loans are often easier to get than unsecured ones since there’s a lower risk for lenders. Borrowers with lower credit scores may also find it easier to qualify for a secured loan.

Co-Signed Loans

A "co-signed" loan is a loan that involves at least two borrowers: the main borrower and the co-signer. The latter is a person who agrees to pay back the debt if the primary borrower defaults on the loan. Most people who co-sign a loan usually have a good credit score and long credit history.

Take student loans as an example. Of the $1.5 trillion student loan debt in the U.S., $120 million are private student loans. A huge chunk of these are loans co-signed by the students' parents.

That's because having a co-signer drastically improves a borrower's chances of approval. If you have someone who fits the co-signer bill, consider asking them for help. However, make sure that you can repay the entire debt on time, otherwise, your co-signer will foot the bill.

3. Find out What Your Credit Score Is

This is one of the most important loan tips, as your score determines your qualifications. It also dictates the interest rate lenders will charge you with: the higher your score, the lower the rate. The lower your credit score, the higher your interest rate and loan costs will be.

You can ask for a free credit report copy from the three major credit reporting agencies. These include Equifax, Experian, and TransUnion. It's your right to get this free copy once a year.

But what if you don't have time or you already know that you have a bad credit score? Then consider applying for a loan specifically for people with bad credit. These require lower credit scores, so you have better odds of qualifying for them.

4. Take the Time to Shop Around and Compare Lending Institutions

A good rule of thumb is to compare the loan offers of at least three lenders. Loan comparison is the only way to determine which offer has the lowest interest rates and fees. This will also give you an idea of how much your monthly payments will be, and if you can afford them.

Be sure to check out the loan processing times too, as some lenders may take weeks, even months. If you need the money ASAP, online lenders may be a better choice over traditional banks.

5. Gather the Requirements and Send Your Application In

Check each lender's requirements carefully to find out right away if you're eligible. Otherwise, you'll waste time filling out forms only to find out later that you don't qualify.

Traditional lenders will ask for your credit rating, credit history, and yearly income. Most banks and credit unions also prefer a debt-to-income ratio not higher than 43%. You'd also need an active checking or savings account.

Note that many online lenders have more lenient eligibility requirements. If you can't satisfy traditional bank loan requirements, consider working with online lenders. Most online lenders also have 100% online application procedures, which is more convenient.

Take out a Loan Successfully with These Tips

There you have it, the most important steps and tips on how to take out a loan. Don't skip any of them, as they will all help boost your chances of getting approved. And if you do get approved, be sure to make all your payments on time to avoid penalties.

Looking for more finance tips to get your personal finances back on track? Then be sure to check out the rest of the posts we have under our site's Finance&Real Estate section!

 

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