Factors to consider before applying for a short-term loan

In 2018, the amount of money borrowed through personal loans reached a record high of $138 billion, which marked a 17 percent rise since the previous year. With these financing options becoming more and more popular, it has become even more important for us to understand the dynamics of this business and how lenders operate.

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One important element of this dynamic is the factors that lenders take into consideration before approving or rejecting a loan application. While we will be discussing these factors, it is also just as important to discuss the factors that borrowers should consider before they apply for a personal loan or any loan for that matter.

Today, we will be discussing factors that consumers should consider before applying for a loan and factors that lenders consider when reviewing a loan application. Hopefully, by the end of this article, we will have given you the necessary information needed in order to make a calculated and low-risk decision. 

FACTORS FOR CONSUMERS

WHAT LOAN IS RIGHT FOR ME?

First and foremost, you need to be aware of the different financing options available in the market and then judge what type of loan fits your needs.

Different types of loans have different requirements and formalities, some of which are vital in order for the loan to be approved. For example, when people apply for a short-term personal loan, lenders will mostly only ask for collateral to be deposited with a third-party or an escrow account.

On the other hand, if you were applying for a business loan, you need to submit documentary evidence, such as bank statements, undertakings, and no-objection certificates, along with the requirement of placing security or collateral against the loan. It’ll take a little bit of research, but you should be able to find all this information with relative ease by using Google.

INTEREST RATES

Your interest rate makes a direct impact on how much money you will have to pay back.

A simplified formula for how much you need to pay back is the amount of money borrowed plus the percentage (interest rate) of the borrowed amount. Therefore, the higher your interest rate, the more money you’ll be paying back, which is why it’s important to compare interest rates among different lenders to find the best deal.

HOW LONG IS THE PAYMENT TERM

This factor can work both ways when you are deciding on borrowing money. EMIs, or Equated Monthly Installments, are the amount of money you will be paying on a monthly basis until the entire loan amount (added with the interest) is paid in full. Short term loans will have a low-interest rate but a high EMI, whereas long term loans usually have a higher interest rate and smaller EMIs.

Many prefer not to have a long term payment plan, even if the EMI is high, whereas others would choose to go with a long term payment plan provided the EMI is lower as well. In order to conclusively judge how this factor will affect your borrowing and repayment, you will need to check what types of loans are available with a specific lender and what interest rates are being offered.

CAN I AFFORD THE MONTHLY INSTALLMENT

Before you apply for a loan, you’ll be discussing your options with different banks and lenders.

Make sure to get exact quotations on the EMI from your lender so you can judge whether you can make the requisite monthly installment and adjust it in your monthly budget. Missing payments will result in a late payment fine and could adversely impact your credit rating as well. So make sure you are able to make your payments before applying for your loan.

CHECK FOR HIDDEN CHARGES

Many lenders claim to have no hidden charges, but when you add all your EMIs, you’ll see it goes beyond just the borrowed amount and applicable interest rate. This is due to several hidden charges which aren’t really disclosed prior to the paperwork being signed. It is vital that you discuss such charges with lenders. Although, when doing so we advise you refer to these charges as “additional charges” rather than “hidden” as the same would imply something nefarious. Make sure to get everything from your lender in writing.

DOWN PAYMENTS

Depending on the type of loan you are applying for, a down payment may be required. When applying for a mortgage or car loan, you will most definitely have to pay some form of down payment, whereas when it comes to easy loans, a down payment will not be a requirement. Some lenders will offer full financing but it will often be against a higher interest rate. Make sure to check with your lenders on the different financing options available.

CREDIT RATING

A bad credit rating will almost certainly result in a higher interest rate. This is especially true for short term loans. In the event you have a bad credit rating, then work on bringing your credit rating to a more acceptable level before applying for a loan. Your tax consultant should be able to advise you on the best way to do this.  

SECURED LOAN vs UNSECURED LOAN

Secured loans involve lending an amount of money against some form of security or collateral being deposited with the bank. Unsecured loans are where full financing is offered without any security or collateral and are usually given at a higher interest rate. Both have different impacts on the EMI, payment terms, and credit requirements, and either can only be judged as being better or worse depending on individual circumstances. You will need to speak to lenders to see which option is best for you based on affordability and accessibility.

SHOULD I CONSULT WITH A BROKER?

Loan brokers can be a huge convenience as they can help you find the best borrowing options from a wide range of lenders. However, it is important that you use a reputable broker as there are a number of scam artists in the market today. It would be best to use a broker through the reference of a friend or family member or, alternatively, do your research thoroughly before going to any broker.