How To Prepare For Borrowing Money
Friday, May 20, 2011, 2:00 AM | Leave Comment
In today’s environment, millions have declared bankruptcies because they borrowed heavily for mortgage, auto loan, and college loan without really raising questions in their minds how they will ever pay back the loan. Borrowing for these legitimate needs is one thing but many borrowed for extravagant vacations, and for their never-ending shopping sprees using their credit cards. Folks used to get the loan without any particular preparation and calculations. Usually, the lending institutions did the calculations for consumers.
These days, when you want to borrow money, you ought to do calculations and preparations yourself. Now that so many venues are available online, you have to look at your finances from all sides. We all should have legitimate reasons for borrowing. It has been a part of almost everyone’s financial lives.
Loans for our legitimate needs enable us to afford things that are beyond our current financial reach. Credit cards provide convenience in our daily lives that many find essential. However, many experts agree to not use credit cards for borrowing. It may not be too hard to borrow money per say but it also carries serious responsibilities. Too much borrowing or the wrong type of borrowing can cause many problems potentially resulting in a complete destruction of your financial life.
Consider particular need for borrowing
Whether you are applying for a new credit card or any other loan, here are things to consider and keep in mind:
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Your need for borrowing
There are loans that provide long-term and lasting value and then there are loans that provide only momentary or limited enjoyment. You can easily justify borrowing for a home or college education that can potentially give you good return in the long run. However, borrowing for an extravagant vacation or a great outfit you may only wear occasionally cannot be justified especially when you may already be in debt. -
How responsible you are to repay
You must understand the responsibility of paying back the loan. You ought to be able to pay back the principal as well as the cost (interest) for it. Make sure you can afford to make these payments. In addition, do research on your own to find the loan with an interest rate and terms that best suits your needs.
Before filling out loan application
Before you fill out application form for the loan, or perhaps arrange a meeting with the lending officer, consider the following:
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Get your credit report
If it’s not an extreme emergency and you have time, apply for your annual credit report. Most lenders will automatically order a credit report. In either case, you should know your credit history. -
Proof of income
You should be able to provide proof of income in either of two ways: copy of a recent payroll check stub or a W-2 form from previous year. -
Personal financial statement
Lenders may require you to supply a financial statement listing all your assets and liabilities. It’s generally a good idea to prepare a personal financial statement annually as part of managing your finances -
Tax return
Mortgage or a large personal loan may require you to supply copies of at least one federal tax return of prior year. You should be saving your tax returns anyway for the last few years. Some experts say perhaps 7 years.
Finally here is what lenders look for
Obviously, when banks lend you money, they want you to pay it back promptly within the mutually agreed upon time. They live on the interest and late fee charges for a better part of their banking business. So they want to make sure that you hold up to your responsibilities of paying back the loan. They have their own ways of risk management. They will be looking at other aspects of your finances to get the comfort to approve your loan and to take the risk out of lending to you as much as possible.
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Your income
Lenders not only look at your income but they also want to know if you have had steady income. They don’t look favorably if you are a frequent job hopper. However, you may mention that you have changed jobs often to make your income higher. You may give them the history of your income raises. -
Your present residence
You must have lived in your present place of residence for at least 6 months. Longer is a big plus. -
Your responsibility for other debts
If you have acquired other debts, whether they are paid off or not, banks might want to know how prompt you are to pay them back. It gives lenders confidence you will be able to handle debt, for the loan you are applying for, in the same manner.
In a Nutshell
Borrowing money is obviously serious business. Millions of folks apparently were unable to think it over and plan for it. That’s one big reason why they have problems paying back their loans. You ought to spend some time to think about how much to borrow and how you would pay it back.
Being properly prepared will make the process easier and may improve your chances of getting the loan approved. Better yet, you may be able to get the loan at favorable terms.
And remember, borrowed money is not your money. It belongs to someone else. You must pay it back within the mutually agreed upon time.
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