There’s a real chance that the pandemic resulting from Covid-19 is putting a damper on your financial situation. You must know and do certain things if you are planning on applying for a loan. Some actions and knowledge, in particular, will be required of you by the financial institution.
Other aspects empower you and make you a better, more informed consumer. Some of these things you may know immediately off-hand, like your income and expenses—other information you may need to look into before you apply for your loan. To help you with this process here are five things you should do before applying for a loan.
1. Check your credit score and credit history.
Your credit score and credit history are metrics that lenders use to gauge the risk of lending your money. You don’t need to have perfect credit to secure a loan. You do need good credit to secure a loan with a lower interest rate, however.
The best terms can save you thousands over the life of your loan. For clarity, this is what a one or two percent difference in interest can mean for your finances on a $40,000 loan paid over 48 months (four years):
1% Interest: $40,000 x 1% (.01) = $400 48 mos. = $1,600
2% Interest: $40,000 x 2% (.02) = $800 48 mos. = $3,200
Before you apply for a loan, know your credit score and run your credit reports to check for inaccuracies that could pull your score down. If your credit isn’t in great shape, wisdom suggests holding off on applying for a loan and work to improve your credit standing. This could save you thousands of dollars. If you have good credit and you’re worried about your partner’s credit considering running a free government background check.
2. How much do you make?
The amount of money you make affects your ability to pay off a loan, so you’ll need to have proof of income for your application. If you work for an employer, then you’ll need your pay stubs, W-2 forms, and a wages letter from your employer. In some cases, your application may also require a personal reference.
Keep this in mind as your character may also influence how lenders work with you. If you’re an entrepreneur or business owner, you’ll need your tax returns for the past two-plus years and possibly invoices and receipts.
3. How’s that break down monthly?
Your salary is only part of the equation; it’s also essential to know your monthly payment obligations. If your salary is $3,000 a month, but your payment obligations are $2,999 a month, you won’t be able to pay off a new loan. A loan application will likely require you to list financial commitments so that you can accurately forecast your repayment process.
4. Assets vs. Liabilities
Your lender may review your net worth or your assets minus your liabilities. Assets are the things that you own that are worth something, like investment accounts and properties. Liabilities are the financial obligations you have, such as your student loan debt, mortgage, or car payment.
Knowing your net worth is vital for personal knowledge as well. The loan you’re applying for will become a liability, which you may be used to purchase an asset. Calculate your net worth—as well as how it will change when you get the loan—as a means to keep your finances in check. If math isn’t your strong suit, you can calculate your loan here, loan calculators.
5. Who do you work for?
Banks will undoubtedly ask for your current employer’s contact information and maybe a past employer’s information. Your current and previous employers will be contacted as references or to verify income and employment dates. So, have those things prepared prior to their request and it will make the process of applying smoother.