Loan applications can be time-consuming and frustrating, particularly with regard to documentation, third-party verification, and the appraisal process. Banks and other financial institutions want to collect proof that you will make payments in a timely manner. They will look at everything from your repayment history to how much you earn.
Knowing what to do before a loan application will make it easier to get your loan approved and will help you get a loan with the best value
1. How much can you afford?
One of the biggest mistakes loan applicants make is not knowing how much is too much. It’s critical to have a concrete idea of what you can afford to make in loan payments. This will ensure you are better prepared when your bank does its own assessment. Before taking any loan, figure out your month-to-month expenses first. Keep a spending journal to review expenses such as rent, credit card bills, auto loan, insurance, phone, internet, food, clothing and so on. Based on your monthly spending, you’ll be able to figure out how much you have left that’s available for your loan.
2. Save for a down payment
When you need to purchase an expensive item with a loan, you will most likely need a down payment. Down payments help lenders offset their risk, which could mean lower interest for you. It’s therefore important to save diligently. What’s more, saving up for a larger down payment will decrease the amount you will need to borrow.
According to the National Association of Realtors, the national median down payment on a house is 6% of the purchase price but the down payment could go as high as 20%-25%. If you are able to sacrifice to save up for a higher down payment, then you are more likely to manage expenses related to home ownership such as costly repairs and property tax. When getting an auto loan, consider the 20/4/10 rule to keep your finances under control. Pay at least 20% down payment, have an auto loan for 4 years and keep your total transportation costs below 10% of your income.
3. Compare loan terms.
This is one overlooked factor in most loan application processes. Shop around to get a sense of the rates available to you because financial institutions offer you different loans. The main things to consider are; interest rates and points, loan processing time, closing costs, minimum down payment required, and term length. Visit Nordiclenders for a loan, interest, and term that best matches your situation. Your main aim should be finding a loan with the lowest interest while still maintaining a reasonable monthly payment.
4. Check your paperwork.
Banks require documentation indicating your identification, income, liabilities, and assets before they can approve your loan. It’s always best to prepare your paperwork in advance so you don’t unnecessarily delay the loan application process. Most lenders want a standard package of materials but you may be asked to provide additional documents depending on your unique situation.
Documents you may need when applying for a loan:
- IDs such as Driver’s license and passport
- At least 3 consecutive payslips for PAYG employees
- Proof of income for the self-employed
- Most recent 3-6 months bank statements of every bank account
- Outstanding financial obligation including personal loans and credit card
5. Conduct your own credit check
Your bank will run a credit check and get a copy of your credit file. Knowing what is in your credit file will prepare you for any questions the lender may have. In addition, a good credit score will lower your interest rate. Since your credit file will show any defaults or denied applications, it is important to inform your lender about any finance-related mishaps. Being up-front prepares you for any questions your lender might have on your report.
The most important factor in taking any loan is you. Look at your monthly and annual budgets to see how much you can afford to make in loan payments. Check your financial position and compare different loan terms to ensure you will be approved for the best loan possible.