It doesn’t take much for life to come crumbling down on you, and all of us can find ourselves in the midst of a financial emergency at any point. To keep chaotic situations from overwhelming you, it’s important to plan ahead and identify your options before calamity strikes.
Imagine what you would do if a loved one suffered from a serious accident and you needed thousands of dollars for treatment. If you couldn’t pay upfront and lacked the ability to pull together the necessary amount of money, you may opt to take out a loan from either a traditional bank or a specialized lender.
Taking on debt is a serious financial decision, however. Keep these lending do’s and don’ts in mind to make smart money moves and stay prepared for the unexpected.
Do look for multiple sources of funds
In the middle of an emergency, you may be tempted to borrow from the first person or institution who offers to lend to you.
Yet if you don’t closely read the lender’s terms and conditions, you could saddle yourself with big losses in the long run.
It is essential that you shop around when looking for a loan. You may be able to find lower interest rates—or better repayment terms.
Don’t apply at too many places
Looking for better rates is one thing: actually applying for loans is something different.
You should never apply at more than two places when taking out a loan. The reason? It affects your credit history.
Too many credit applications in a short timeframe can lower your credit score significantly. Moreover, you may come across as desperate to lenders, which would ultimately reduce your chances of acceptance.
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Do aim to improve your credit score
With a traditional bank loan, you will likely need a good, very good or excellent credit score to get approved.
“Excellent” typically refers to a score over 750, while “very good” is defined as a score over 700. “Good” generally means a score between 600 and 700. Anything less will put you in a long list of pending applications.
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Don’t approach lenders without a credit history
The single biggest component of a credit score is credit history.
What does that mean? “Credit history” refers to your track record of being reliable when it comes to your finances.
In addition to credit history, the lender will check your annual income and housing expenses to gauge your creditworthiness. If you have no credit history, which is likely to be the case if you’ve never owned a credit card or had a bank account, your loan application is likely to get rejected.
Do specify the purpose of your loans
Laymen think that personal loans are great and can be used for any purpose. Experts agree, however, that reckless borrowing and spending will damage your financial health.
First of all, bad borrowing behavior will lead you to pay more in interest. Second, the repayment terms might not be flexible. You may have to pay hundreds of dollars in interest per month.
In many cases, it is better to take out specialized loans—e.g., home loans, business loans or student loans—than personal loans.
Don’t hide your existing debt
Telling lenders that you are debt-free may seem like a strategy for getting a larger loan, but lying about debt is something you should never do.
Lying on a loan application will be considered fraud and could land you in serious trouble. Not only will being truthful save you from potential issues with the law, but it will improve your loan terms in the long run.
Do think before putting up collateral
Banks sometimes ask you to put up collateral as insurance against a loan.
They use the threat of repossession to ensure that you pay back what you owe—as with title loans, where you can instantly get a loan by handing over the title of your car.
The size of the loan will be directly proportional to the value of the collateral, which is ideal if you need a lot of money urgently.
However, putting up collateral is risky because you can lose your assets if you’re unable to pay off the debt.
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Don’t ignore your usual bank for taking out loans
It is great to search around for the best loan option, but it is advisable not to ignore your usual bank when taking a loan. Your chances of getting approved are higher if you apply for loan at the bank you normally do business with.