Challenges and failures are an important part of a human life. We all come across situations where we are forced to make critical decisions and unpopular choices, especially when it comes to borrow money for your personal needs or to help your company grow to the next level of success. Seeking a loan is not a walk in the park, because it requires you to document your strengths and capabilities in the form of credit history, business plans, and other important documents, etc. The financial institutions require a number of pre-requisites that must be met before a loan application gets an affirmative response. Whether you are borrowing from a private lender or a bank, you have to evaluate the pros and cons of the loan terms.
One of the essentials before you kick off the loan application process is running some numbers to calculate the requisite loan amount. It is always better to make notes of what you will need before going to a lender.
Good Debt vs Bad Debt
You need to clearly define what you need the loan for. It’s wise to ask a third party to identify for you whether the debt you are going to incur comes in the category of good debt or bad debt. If you are acquiring loan for your business, equipment, home, or for a college degree, it can be categorized as a good debt. The reason is the surety of return that can be provided upon these loans.
In contrast, a bad debt can be anything whose value cannot be predicted over time and where loss maybe more than gain. Personal loans such as loan for car or loan for paying bills are in the category of bad debts.
Even if you are applying for a small loan, make sure that the creditor sees the worth of your loan. Even if you have a history of incurring bad debts, the creditor will be skeptical about granting you a loan on terms beneficial for you.
You know what you need the loan for but it is always better to define the loan category for your creditor. You must state clearly what you need the loan for. Furthermore, it makes your search for the right creditor easier than ever. Not every lender deals in every kind of loan, therefore, by ascertaining the loan category you will be narrowing down the field for your loan applications.
This is a must before any loan application. You must run some numbers yourself and calculate how much loan you require. This is essential because it would make it clear for you the following items.
- The creditors you would be going to
- The time period you will need to pay back the loan
- The interest rate you can accept without a loss
- Have a thorough plan of work so you do not run out of finances
- What kind of collateral you may need for your application
You can ask for expert help for loan calculation or there are a number of online calculators or online services such as business loan interest calculator that can help you with calculating the loan amount according to your needs.
When banks or private lenders are reviewing your loan applications, they do not only consider what you need the loan for. Most often than not, they carry out a thorough scrutiny before approving a loan. You have to make sure that you put in realistic goal and that your loan amount is in accordance with the current market trends. There are greater chances of your application being rejected if you ignore the market trends in your loan application.
The lender takes into consideration the following factors before deciding on its acceptance or rejection.
- Credit history: Your credit score must be in accordance with the loan you are applying for. A low credit score in face of a high loan will result in rejection of your loan. You have to make sure that your credit history is in accordance with your loan requirement.
- Debt to income ratio: Another important factor in any loan application is the debt to income ratio. You have to ascertain how much you can pay comfortably. Lenders usually expect a specific ratio in accordance with the loan amount. Your loan amount must not exceed this ratio as it cannot only put you in a difficult position with the lender but your day-to-day activities and quality of life may also get affected.
- Financial Statement: Your business and personal financial statements must be in order for your loan application to be considered. Your loan amount must be in accordance with your financial statements. If your loan amount is more than your financial history shows you can manage, then there is a great chance the lender will not grant you the loan.
- Tax returns: The tax returns must be in order for the loan to be accepted. If you do not have the history of your tax returns, many a lenders will not be willing to lend you the required amount.
It sometimes happens that people apply for a loan that is well above their requirement by putting up a huge collateral. The reason can be anything from not being able to pay the loan as per requirements or just keeping the loan amount more than the requirement in case of emergencies. Having a huge collateral such as your house or even your business can provide you protection but it can result in a whole lot of other problems that can be equated to as that of a fish out of water. A borrower should always be realistic about the loan and look for lenders who can lend you the capital without a collateral. Even if you have a collateral, your loan amount should not exceed your requirement.
Fluctuating Interest Rates
Another reason your loan should not exceed your requirement is the fluctuating interest rate. The interest rate in the market keeps fluctuating and with higher interest rate every year, you may end up paying a lot more than what is beneficial for you. You should not have to pay interest on an amount that is for safekeeping purposes and is not the actual need for which you acquired the loan at the first place. This can also damage your credit history and impact any future loans you may need from creditors.
Living within means should not only be applicable to our day-to-day life but it also needs to be practiced in our financial dealings. Thinking that the excessive amount can be paid along with the rest of the loan is not a smart strategy and can end up causing more harm than good, whether it is a personal loan or a business loan. The loan that you apply for must only be to cover the specific needs and shouldn’t exceed the threshold.