10 Essential Loan Questions to Ask Before You Borrow
January 17, 2020 by Daniel Azzoli
Taking out a loan may help you face an unexpected expense with greater confidence. But no matter how helpful a cash loan may be, it’s still a big decision. Don’t rush through the process to get your money as quickly as possible. Slow down long enough to ask yourself some questions.
If you want to borrow your money online, scroll through this guide. Asking these loan questions now, before you fill out an application, may help you understand what’s to come.
1. What Type of Loan Do You Need?
There’s a difference between knowing you need to borrow money in general, and knowing what type of loan is best suited to your situation. The thing is, there are a lot of different kinds of loans, and each one has an express purpose.
- If it’s an unexpected emergency expense you need help with, an installment loan may be the ticket.
- If it’s a new vehicle you want to buy, a car loan is likely up your alley.
- If you want to take equity out of your home, you’ll probably want to take out a home equity loan.
These are just a few general examples of loans. There are plenty more personal loans to choose from.
More still, some personal loans have sub-categories that offer different rates and terms depending on your financial profile and lender.
2. Why Do You Need Your Cash Loan?
There comes a time and place for every kind of personal loan. But that being said, there are ‘good’ reasons to borrow money and then there are ‘bad’ reasons to borrow money.
When it comes to short-term online installment loans for example, they’re designed to help you cover unexpected emergency expenses. Take a look at the table below to see what that means.
‘Good’ Reasons to Borrow
An unexpected auto repair
Your fan belt wears out suddenly, and you don’t have any savings left to cover the parts and labor, but you risk missing shifts at work if you don’t get your car fixed right away. You may decide to use an installment loan to help pay the cost of the repair.
An unexpected medical bill
A trip to the doctor’s office can rack up serious bills. Between these bills and losing pay from missed work, you may need extra help covering the unanticipated costs of getting sick.
Unexpected emergencies come in all shapes and sizes, so your reasons to borrow may not be on the list above. As long as you are borrowing for an unexpected emergency expense that you can’t ignore, taking out an installment loan may be a possible cash-flow solution.
But it isn’t always the right choice. Learning the differences between needs and wants may help you understand this distinction.
Generally, consider putting your installment loan on hold if you’re thinking of borrowing for any of the reasons in the table below.
‘Bad’ Reasons to Borrow
A splurge at the mall
With your eyes on a new pair of sneakers but no cash to make them yours, you may consider using a personal loan to cover the bill. But this is one of the worst reasons to borrow money.
Going on a trip
If it’s been a while since you got away because you don’t have the cash for a vacation, you might be tempted to get a loan to pay for your next trip. But savings always trumps borrowing when it comes to financing a holiday.
Keeping up with expected bills
Your rent is a fixed expense you can rely on to arrive at the same time each month. If you find yourself consistently coming up short, you may believe a cash loan will help. But you should never take out an installment loan to cover your basic needs every month.
There’s nothing inherently wrong with buying new shoes, taking a holiday, or paying rent. But it does spell trouble for your finances if you take out a loan to pay for these things.
3. How Much Money Do You Need?
Knowing how much you need to borrow is essential to the borrowing process. “As much as you can” may be a convenient answer, but it’s not always the right one.
A lender’s maximum lending amount comes with larger payments. Once you get to a certain size, you may struggle to keep up with them and continue to pay all your other financial obligations.
While paying your loan on time is important, it’s not your only financial priority. You have to be able to juggle everything in your budget, including the addition of your loans.
The importance of living within your means extends to taking out a loan, too. As a general rule, borrowing more than you can afford to repay is a mistake. Rather than opting for the most you can get, apply for the amount that will help you cover your emergency.
4. How Quickly Do You Need it?
The timing of the borrowing process is a crucial detail of taking out a loan in an emergency. You need to know how long it will take from the moment you fill out your initial application to the hour you receive your funds.
The answer could make or break your decision to go with one lender over another. Every lender has its own unique procedures to review and approve applications.
Some online direct lenders allow their borrowers to submit information online at any time of the day or night. Once a loan specialist reviews your information, you may be approved in minutes and receive your cash as soon as the next business day.
For instance, as a direct lender of installment loans, we have a convenient online application process, too. And not just for installment loans. You may apply online for a line of credit depending on the state you live in. Our Customer Care team works tirelessly to provide friendly and efficient assistance that keeps up with our speedy digital service.
5. Do You Qualify for an Installment Loan?
Taking out a loan is a big decision for everyone involved — whether it’s the borrower or the lender. For example, lenders of installment loans want to see you meet specific criteria before they’re ready to lend you cash.
Here are some of the questions asked when applying for an installment loan:
How Old Are You?
Lenders have to check if you’re old enough to borrow money. Typically, you must be the age of majority or legal age to contract — which is 18 in most states.
Where Do You Live?
Many lenders require their borrowers to be a US citizen or permanent resident. They will also likely need you to be a resident in the state where loan is available.
What Are Your Finances Like?
Before granting you a personal loan, many lenders want to test your creditworthiness. Traditionally, this comes with a credit check to see how you’ve borrowed in the past.
But it’s not the only way all lenders determine your creditworthiness. They may also check your income and pay schedule to see if you’re able to afford a personal loan.
Do You Have a Bank Account?
Another one of the questions asked when applying for a loan may include whether you have a valid bank account. This ensures you have an account to receive your cash loan.
6. How Much Will Your Installment Loan Cost to Pay Back?
This may seem like a trick question. Isn’t the cost of your loan the amount you borrow?
Well, yes. But also no. Don’t worry — it’s not as complicated as it may seem.
For example, when it comes to taking out an installment loan, your payments generally consist of these basic components.
- Interest and/or fees
The first one is your loan principal or the amount that you borrow. Your goal is to pay down this principal until there’s nothing left. Once you do, you can close your loan account. Yay!
Until that day comes, you may also have to pay interest. Interest forms the second half of your payments, as do any potential finance charges and fees.
These fees add to your principal, accruing over the term of your loan.
Knowing how interest and other fees may compound is crucial to understanding the true cost of your loan.
Your lender should make it abundantly clear. If they don’t, you won’t have a good idea of how much you’ll spend on this loan, which is a bad idea all around!
7. What Are Your Loan Terms?
Your terms are a crucial and unique detail of your online loan. It lets you know how long it will take you to pay it all off.
Generally, a personal loan falls into one of two categories: short-term and long-term loans.
Long-term loans usually help people make large, planned purchases. They tend to go hand in hand with larger principals, so they may take several years to pay off. A prime example is the student loan, which takes the average grad a little over 21 years to pay off.
Short-term loans tend to wrap up much faster. In some cases, a cash advance could be due by your next payday.
These fast-tracked options are generally best used in times of crisis. They’re designed to cover smaller, unplanned but essential purchases, like an emergency visit to your mechanic’s garage.
If applicable, your repayment schedule may be detailed in your loan agreement. If it’s not applicable or it’s included and missing key details about how your interest/fees factors into these payments — this is a warning sign. If a payment schedule is required to be included and lenders do not share this information, they may not be transparent with your terms and conditions.
When it comes to taking out a loan, your repayment schedule is important. Knowing when and how often you make payments is essential to understanding whether your loan is an affordable option.
Will it be a one-time lump sum payment, as with many payday loans? Or will it involve several payments spread out over multiple weeks? Do these payments coincide with your payday, or are they due between paychecks?
Find out; it’s your right to know!
8. Is There an Additional Payment Penalty?
Generally, paying more against your loan will work in your favor. It may help lower what you owe and reduce what you pay in interest/fees.
But that’s only if your lender is like us. You won’t be charged extra for making payments above and beyond your scheduled payments for loans offered through MoneyKey. In fact, we encourage customers to make early or larger payments against their lines of credit and installment loans.
Some lenders may charge a fine if you make any additional payments.
Before you make an additional payment, check in with your lender to understand the rules. Weigh up the cost benefits against any possible fees to determine if it’s the right option for you.
9. How Will Your Lender Protect Your Information?
This may seem like this doesn’t belong with the rest of these loan questions, but there’s a reason why you might want to know the answer. In filling out an application and receiving your funds, you’ll share your personal information with your potential lender.
This information, in the wrong hands, can be used to open fraudulent accounts under your name.
10. Can You Afford to Repay Your Installment Loan?
Here, at the end of all these loan questions, you should be able to answer whether, for example, your installment loan is affordable.
If the answer is yes — and you’re satisfied with all the other answers to the previous loan questions — then apply.
But if the answer is no, you’ll have a follow-up question: what will you do instead?
If you’re looking for an installment loan, you may want to shop to see if installment loans offered by other lenders are more affordable. Or perhaps another financial product would be better suited for your needs.
You may also want to revisit your budget. One of the benefits of budgeting is balancing your needs vs wants, so you can afford to cover essential bills or loan payments, like your installment loan.
If you’re able to cut spending from non-essential purchases, you may drum up the cash you need to cover your loan repayments. Here are some budgeting tips you should learn if you want to free up some cash.
Ask Loan Questions Now Rather Than Later
When it comes to taking out a loan, it’s always a good idea to get more info. Being informed means you’ll have a better idea of whether your loan is something that can help or worsen your financial situation.
Taking out a loan is a big decision, after all. Even if it’s a wise approach to an unexpected cash-flow emergency, any loan may put pressure on your budget and make it hard to make ends meets.
Getting to the bottom of these loan questions may help you avoid this.