Taking out a loan is a big deal and the bigger the dollar amount climbs, the bigger the little things matter. No matter what type of loan you are interested in, there are steps that you need to take to get prepared. Let’s take a look at them and get you the best loan terms possible.
Step One, Pull Your Credit
This should be something that you are constantly monitoring with a service such as Credit Karma but if it has been some time since you looked at your credit, take a peak. Don’t worry, pulling your credit yourself will not affect your score in any way.
The first thing that pulling your credit will do is get you your score. This is something that you need to have so that you know what kind of rates to expect. If you were going into a dealership for an auto loan, for example, you need to know your score. They might pull your credit and get it themselves but who is to say that they will tell you what your score really is. knowledge is a powerful weapon.
The other thing that pulling your credit will do is give you the ability to dispute negative information. Accounts and credit statements can easily get assigned to your credit file that are not yours. I once had a government tax lien statement applied to my report that was not mine. That one hurt. If you find incorrect information, you will need to file a dispute and this can take 30 days to get resolved. That is why you need to pull your credit at least two months before you intend to apply for a loan.
Step Two, Pay Down Revolving Credit
If your credit card balances are above 30 percent, your credit score is being affected. Work on getting those balances down and to get that credit score as high as possible. If you can not get the balances down that low, do what you can. If you are at 90 percent, getting your balance down to even 80 percent will improve your score.
A nice little trick to get your balances down is to increase your credit limits. If you have 1000 dollars in credit and your card is charged up to 500 dollars, you are at 50 percent. Get a limit increase to 1500 dollars and all of a sudden, you are at 33 percent. Call your creditors and ask for an increase and if you have good payment history, you will probably get one.
After paying down a balance, the effect will take a month or two to show up on your report so do this at least two months in advance, three may be even better.
Step Three, Get Your Down Payment Ready
The amount that you put down on a loan will have a very big impact on your interest rate and your overall monthly payment. If you are getting a personal loan, you will not need to put anything down but for an auto or home loan, your down payment makes a difference.
For auto loans 10 to 20 percent will get you a better interest rate and will probably allow you to skip on the Gap insurance as well. Gap insurance is optional but if you will be upside down on the loan by several thousand dollars, it is a good idea. Gap usually costs between 400 to 800 dollars.
For home loans, 20 percent down will allow you to not have private mortgage insurance. PMI is a huge expense and can be up to 1 percent of the loan value annually. That is about 200 dollars a month on the average loan.
Step Four, Know What You Can Afford
Sure, your lender will analyze your finances and only approve you for what they think you can afford but they could be wrong. Only you truly know your finances and how much extra money you need to have each month after your bills. Your lender could very easily approve you for more than you can really afford.
Take your budget and plug in that extra loan payment and see how it fits. Determine what loan payment that you can live with and use it to determine how much of a loan you can afford.
Step Five, Get Your Docs Together
Depending on the kind of loan you get, there could be a lot of paperwork needed. Pay stubs, bank statements and even tax returns may be needed. It is best to get all of this stuff together ahead of time so that you are prepared and so that the loan goes as smoothly as possible.
Tina’s Final Word
If you want the best rates and you want the loan process to go smoothly, preparation is key. So, before you take out that next loan, take the time to get truly prepared. Do so 2 to 3 months before the loan and you will be in great shape.