Consider why you need the money and if there are any alternatives.
Well, obviously, you already have a pretty good idea of why you need a bank loan, to begin with. However, when there is a financial emergency, most people tend to panic, and you might not be thinking clearly. So, take a breather! Sit down and appraise your situation objectively. A bank loan is a big decision, and if you play it wrong, you might end up in more trouble than you were originally in.
Around half the people that take out loans do so to cover a personal emergency like a huge and urgent bill. Examples would be medical fees, flood repairs, or vehicle repairs/ replacement, however, getting into debt over stuff like that is terrible in the long run. You would be smart to have an alternative game plan.
In plain English, you need to build up an account for emergency savings. Learn how to do that in this helpful guide. Having said that, the vast majority of Americans have less than the basic $1000 hauled away for a rainy day, and sometimes a bank loan is really your only way out of a pinch. But is the pinch worth it?
Most personal loans are being taken out for buying vehicles, which is really not an emergency, no matter how much more practical or convenient it might make your life. If you can grit your teeth for just a few months and save up that money in chunks, do it. It will save you both cash and headaches in the long run.
Consider how much you will actually be able to pay back.
If taking out a bank loan is definitely your best (or only!) solution, then stop to calculate the affordable amount. How much will you be able to pay back without drowning in interest rates?
Even if you can afford the monthly payback fees, affording maintenance of whatever you bought (e.g. a car) is a different pair of shoes – and if that lies beyond your wallet, well, that makes it a wasted investment. Basically, you will have put yourself in debt for nothing.
When you talk to your loaner, ignore the APR (annual percentage rate) that they tell you. As important as that number is, keep in mind that it is still a selling point, and not your most critical information right now. Getting fixated on an APR value is the easiest way to get tricked.
You need to know the TAR (total amount repayable) in order to know if you can afford the entire loan – what you borrow plus the interest that piles up over time. To learn more about how loans work in real-life, check out this article: https://www.thebalance.com/how-loans-work-315449
Consider your credit history and your credit score.
In other words, time to figure out what exact kind of loan you might be eligible for. If your credit score is no good, you can forget about any formal bank-based savings, let alone favorable loan rates.
Some surveys have shown that about a third of the entire populace have no idea where their credit scores lie, and especially college students – which is messed up, since college kids are typically at the start of their credit history, so you would think they would take the chance to establish a baseline for their adult-life finances.
Fortunately for all of us, though, this type of financial information is easy to get a hold of. There are a bunch of online tools that you can use to figure out your “credit profile”, but if you trust a bank more than a random app, have no worries! As a consumer, you have the absolute right to have a free credit report copy each year, one from every one of the three credit bureaus: TransUnion, Equifax, and Experian.
Consider all the minutiae of your loan, including “hidden fees”.
That tired old adage of “It’s the fine print that ruins your life” rings all the more true in the world of finances. Before you sign your new loan contract, read everything thoroughly and attentively. We know it gets really tedious really fast, but you are entering a legally binding relationship. You have to understand everything expected of you.
We already mentioned APR and TAR. In addition, get informed on how your interest rates work. Will they be compounding monthly, or even daily, stacking on top of the previous interest and accumulating over time?
Or maybe it will be a pre-calculated type? In that case, the interest is included in your monthly payment, so paying more or earlier may not necessarily save you any money.
More importantly, make sure to read carefully and spot any hidden fees. These nasty buggers pop up at you over the life of the loan and make it cost you significantly more than you thought. Read this to learn how to avoid them, and here are some of the most common ones.
Late payment fees are exactly what the name says, and you might think they make sense – after all, you have to make your payments regularly, right? But how late is late enough to slam you with them?
The majority of lenders will charge you this if you are even one day late, and sometimes a day is less than 24 hours, so be careful. Some of them will let it slip as a one-off courtesy, but only once, so forget about relying on those good graces.
Failed payment fees get charged if there is not sufficient money in your account to cover your payment when it comes time to make it. Instead of just giving you a “failed payment, no funds” notification until you refill your account pool, some lenders actively charge you more for this discrepancy.
Prepayment penalty fees are ugly. They get charged if you pay off your loan early. This is a hypocritical way for lenders to make sure that they can milk you for every drop of interest they can. Avoid this like the plague.
Finally, loan origination fees are typical for mortgage arrangements but also pop up with personal or other loans. You have to pay for your application to be processed. Usually, this will be 1% of the total loan value, which may not sound like a lot, but consider it. If you want to borrow $30,000, it will cost you $300 just to apply – and then what if you are not approved?
Consider the various options of where to get the loan.
The smartest thing to do is to compare a range of lenders and see what your best option is. Depending on what exactly you need the loan for, there will be quite a few choices.
The easiest thing to do is go to your own bank’s local offices. Since you already have a working relationship, they might approve it right there, and having all your finances in one place is definitely more manageable.
However, avoid being fooled by convenience. Making a bigger payment for the sake of proximity is bad business, so look online and ask for recommendations. Brick-and-mortar banks are not your only option, so shop around!