Whether you’re looking to buy your first house, a new set of wheels, or trying to figure out the smartest way to pay off your student loans, now is a great time to look into loan options. Many people are taking advantage of low interest levels to improve their lives, but with so many options out there, it has never been so important to make sure that you are informed and making the right decisions that will affect you now and in the future. To jumpstart such an important decision, it’s best to understand a few key ideas and terms before rolling up your sleeves and making your dream become a reality. Let’s take a look at installment loans and why one may make sense for you.
What are installment loans?
Put simply, installment loans are scheduled loans in which you pay a certain amount over a set amount of time. They are often used for mortgages and car payments, which are considered secured loans, and also for student loans, personal loans, and debt consolidation, which are referred to as unsecured loans. Installment loans can be at a fixed interest rate, which will not change, or at a variable rate that is dependent upon interest rate conditions throughout the life of the loan.
How much and for how long?
Once you determine that an installment loan may be right for you, the next important step is to figure out your own budget and situation to determine what you can afford and under what terms. The first step you should take is to calculate your monthly expenses and figure out an installment amount that you can comfortably afford. Next, you’re going to need a little help in determining the duration of the loan. Online loan calculators are a wonderful tool to help you figure out which terms best fit you. It’s always a good idea to be very conservative on your projected interest rate in making these calculations; after making original projections, it’s a lot easier to adapt to better conditions than to have to make aversive adjustments. Do keep in mind that the vast majority of house mortgages fall in the 10-50 year range, with 30 years being the most common number. Also, most automobile loans are in the two to six year range. If you are looking at an unsecured loan, you should account for the fact that their interest levels will typically be at a higher rate than that of the secured variety. Having a game plan set in place before you start the actual process of looking for a lender and a loan cannot be emphasized enough.
What are lenders looking for?
Lenders look at numerous variables when determining whether or not to issue a loan, and, if so, at what interest rate. The “5C’s” are a common reference as to how lenders determine whether or not to issue a loan: Capacity (your ability to repay a loan, which ties into your credit score), Capital (the money that you currently have saved), Collateral (additional assets), Conditions (the What and Why you need a loan), and Character (your reputation, references, and impression that you make). A constant theme throughout the loan process is being prepared. Be sure you are ready ahead of time to produce documents that pertain to the “5C’s,” and you will help streamline the process.
What should I be looking for in a lender?
A lender-borrower relationship is a two-way street. As a borrower, you want to make sure that you do your research on finding an experienced, reputable lender who can best serve you and your needs. There are many options out there, but simply rate shopping, while disregarding other factors, is not a recommended approach to take. What do you value? Customer service, accessibility, reputation, options, dispensed advice, referrals, relationship, timing, and fees are but a few of the starting points that you should look at when looking for a good lender fit. Don’t be afraid to ask questions. Clear communication and trust is an integral component to any relationship.
The next step
OK, you have now found a good match, and you want to move forward. What is your next move? You will need to be pre-approved. You should note that this is not the same as being pre-qualified. Being pre-qualified is a fairly simple, non-binding classification in which a rough idea is given on how much you can afford for a loan based on what you tell a loaner. This contrasts to being pre-approved, which is much more comprehensive process in which you provide proof and establish your “5C’s.” Upon completion of this process, the lender will give specific figures in terms of total amount, monthly installments, interest level, type of loan, and all other conditions and information pertaining to your loan. This pre-approval is what will allow you to proceed with setting the financial parameters of your future home or automobile.
The final steps
As we discussed earlier, there are many reasons why a person may need a loan. The nature of your loan will help dictate the final steps of your financial decision. Additionally, your homework and diligence will greatly affect the backend of this whole process. Preparation and your careful choice of finding a quality lender will go a long way in making the process go as smoothly as possible. Building a strong relationship with your lender will prove to be the icing on the cake to making your dream become a reality.