5 Things to Know Before Taking Out A Loan
In the past year alone, nearly 83.5 million people in America have taken out loans. And, seeing as interest rates are so low right now, taking out a personal loan might actually make financial sense depending on what you plan to use the cash for.
Which banks offer the best rates on personal loans in 2020? Does Bank of America offer personal loans? How do you even go about budgeting the loan you take out? We’ve got all of the answers for you in our guide to the top five things to know before taking out a loan.
What to Know Before Taking Out a Loan
1. You Need a Good Credit Score for Good Loan Rates
Credit score matters when taking out a loan. While credit impacts a lender’s decision for something such as a mortgage loan as well, personal loans are a bit different because the bank or lender doesn’t have any collateral they can use if you fail to make payments. So, you’ll need to have a good credit score if you want to receive good loan rates. Those with poor credit scores can see interest rates rise up to over 35% APR depending on the personal loan bank you go with.
2. You Might Damage Your Credit with Another Loan
Depending on how many credit cards you have, how much overall debt you owe, and what your credit score currently is, taking out another loan can damage your credit score if you’re not careful. Many people assume that taking out a loan and paying it off on time will increase their credit ranking. However, if you’ve maxed out your credit limit and owe too much debt, adding more onto it will only further increase your debt to income ratio and, in turn, lower your credit score. Make sure you’re aware of this before taking out the loan; in some cases, the temporary hit to your credit score is worth the overall payoff of what you’ll be able to do with the loan.
3. You Have a Lot of Loan Options
That’s right, in 2020 you’ve got lots of different options for loans. A bank loan is perhaps the most traditional route, and personal loan interest rates are currently low. Bank of America doesn’t offer personal loans, unfortunately, but you can request another loan from them, such as a mortgage loan, auto loans, or even a business loan. Another common option is to take out a credit card with a 0% introductory APR and use the line of credit to finance whatever you need to finance or pay off.
4. Read the Fine Print for Loan Fees
Loans can sometimes come with additional fees, so be sure to read the fine print! Some of the most common loan fees include loan origination fees, loan application fees, and additional insurance policies that lenders might try to throw on last minute without you even realizing what you’re paying for. Be sure to ask about other things that might affect the overall total amount you owe for the loan, such as prepayment penalties. As part of this questioning, be sure to ask the lender how they’ll be calculating the total interest owed for various repayment schedules (i.e. what will the total interest be if you take out a $10,000 loan at a 4% interest rate and pay it off in three years?).
5. You Can Secure a Loan with Collateral
If you’re not able to get a good loan rate, you might be able to secure a loan with collateral to lower the rates. This is the idea of mortgage loans and auto loans, right? Your house is your collateral and your car is your collateral in case you don’t make your payments. Secured collateral loans are a bit different than normal personal loans, but the savings they offer in the long-run due to lower interest rates make them a great option for those who know they’ll be able to pay off the loan in time. Savings-secured loans and collateral loans backed by stocks or investments are two great places to start when searching for this type of loan.
Earn Extra Cash
Depending on the reason why you need to take out a loan in the first place, you might be able to finance whatever you need to pay for by simply earning extra cash elsewhere. Whether you decide to start a side hustle or consider paying with a card that’ll earn you cashback, it’s often smart to avoid taking out loans unless you have no other option.
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