Applying for something as potentially impactful as a personal loan can be a little nerve-wracking at times, especially when you consider the effect it can have on your financial situation. So, it would make sense that your nerves might be a little more frayed if you’re applying for your first loan.
So, what happens if you’re facing an emergency expense, you don’t have the savings to deal with it, and you feel like a personal loan is a potential option, but you’ve never applied for one? Well, first off, don’t panic! While you may not have applied for a loan before, it doesn’t need to be an overly complicated process as long as you proceed carefully. The key is to understand what your needs are, what types of loans may be out there for you, and to make sure you’re properly assessing the situation.
A big help throughout the process of applying for your first loan is to make sure you’re asking all the right questions, both to yourself, and to any potential lenders you may be working with. So, to help provide some guidance, here are some important questions for you to answer.
4 Important Questions to Ask Yourself Before Applying for your First Loan
1. Am I Facing an Emergency Expense?
The first thing you should do before applying for your first loan is to really assess whether your situation is an actual emergency or not. While there’s no set list of scenarios that are going to be considered an emergency for everyone, some instances that might generally fall into the category of an emergency expense can be things like:
- Emergency medical expenses
- Essential home repairs
- Unexpected car repairs
Having said that, these things aren’t always going to be an emergency for everyone. You’ll still need to take the time to assess your personal situation. For example, if you find yourself with a flat tire and you don’t have the money saved to replace it, can you manage to get by without the car for a few weeks while you save up for the cost of the replacement, or would being without a car stop you from getting to work? If you’re in the former situation, you may not necessarily consider it an immediate emergency need.
2. Can I Afford the Cost of my First Loan?
Another important thing to consider is whether or not you can actually afford the cost of borrowing. Before you accept an offer for a loan, you should have all the details you need to have a clear understanding of how much a particular loan is going to cost. Specifically, we mean what the loan fees are going to be, if any, how much interest you’ll need to pay, and any other loan detail that could affect the cost.
For something like an installment loan, you should be able to see what your payment schedule is going to look like ahead of time. This may make it easier for you to incorporate your potential loan payments into your budget and get a better idea if you can afford it. You can also look online for a loan calculator to help you out.
3. How Much Money do I Really Need?
If you get approved for a loan, you’ll be offered a particular loan amount, depending on the type of loan. This could be a lump sum, like it is with an installment loan, or it could be a credit limit if you’ve applied for a personal line of credit.
Before you apply for a loan, you’ll need to figure out how much money you really need. For example, you might be dealing with a plumbing emergency that costs $700, but maybe you have a bit of cash lying around that could go towards this expense. So, you’ll need to assess your situation to figure out exactly how much you need to fill this gap.
Why is this important? Well, a financial institution might offer you more money than you need, but you can only get a sense of this if you know how much you need in the first place. Generally speaking, you shouldn’t take on more debt in this type of situation than you need to. Ultimately, you’ll be paying more total interest and certain fees could be higher than they would be if you were borrowing less.
4. Is this the Best Offer Available to me?
When you’re facing an emergency situation, you might be feeling the pressure to find the quickest possible solution. While speed is important, you’ll still want to take the time to assess your potential options. When it comes to online loans, the process of researching different personal loans that may be available to you is usually fast and easy. All the necessary loan info should be available on the websites of the financial institutions offering or servicing these loans, so you can compare your potential options and find what’s best suited to you.
4 Important Questions to ask a Lender Before you Borrow
Not only is it important to ask yourself the right questions, it’s also important to make sure you get the information you need from the financial institution that you’re applying for a loan with. A lot of this information should be readily available on their website and/or in your loan agreement, but either way, it’s important to make sure you’re able to make an informed decision when applying for your first loan.
1. What is the Annual Percentage Rate (APR) of the Loan you’re Applying for?
One of the single most important figures you’re going to want to know before applying for your first loan is what the APR is. The APR is the total annual cost you’re going to be paying, expressed as a percentage, including the interest rate of the loan as well as whatever fees that come with the loan. It’s an important number for you to know because it gives you a holistic way of comparing the cost of one loan versus another. While some financial institutions may make a point to advertise their low interest rates, there are typically more costs involved, so make sure you find out what the APR is of whatever loans you’re considering applying for.
2. What Fees Will I Need to Pay Outside of Interest?
Like we just mentioned, any fees or extra costs that you’ll need to pay should be encompassed in the APR. Having said that, it’s still a good idea to know what specific fees you’ll need to pay and how much they would be costing you. This can include things like an origination fee and/or other administrative costs, and it could also include any penalties you might face for things like missed payments. It’s important to know what you’re going to be charged and when, so you don’t run into any surprises down the road.
3. What are the Requirements to Qualify for my First Loan?
Each financial institution can be a little different in terms of what they’re looking for when determining someone’s creditworthiness. In most cases, your credit history is going to factor in, and different lenders will have different thresholds for different personal loans. On top of that, they may look at things like your income, employment status, residence, and more. It’s good to know what these specific requirements are going to be before you apply for your first loan so you can know whether or not you might qualify, and gather this information in advance.
4. How Will I Repay my Loan?
When you’re considering this question, this would involve the actual length of the loan as well as how you’ll go about repaying it. For example, with something like an installment loan, you’ll have a pre-determined payment schedule and your payments will generally be of equal value. The term of your loan can span anywhere from several months to several years.
With something like a personal line of credit, instead of being given a lump sump, you’ll get a credit limit that you can draw from. With these, there’ll typically be a billing cycle and you’ll be required to make a minimum payment to keep your account in good standing. However, keep in mind that it’s always a good idea to pay more than the minimum if you can afford to.
So, depending on the type of loan you’re applying for, the process of repaying it can be significantly different. On top of understanding how the repayment phase works for different types of loans, you’ll also want to find out things like whether or not you can set up automatic payments, if you can pay your loan online, etc.
Consider These Things Before Applying for your First Loan
If you’ve answered all the questions you need to ask yourself and gotten the information you need from the financial institution you’re applying through, you may be ready to finally submit an application for your first loan! Having said that, make sure to proceed with caution and keep your eyes open for any warning signs. You’ll want to look out for grand promises, vague loan details, and make sure that a lender never pressures you into a decision. If you spot any of these things, you should reconsider applying.