Applying for a loan can be stressful. To help reduce stress, it helps to plan ahead so you have all the information you need to apply for a loan.
Before starting an application, here are the top five things to know before taking out a loan.
1. Decide how much you need to borrow
It’s super important to know you’re applying for the right amount. Working out the budget for your loan will help you decide how much you can apply for. The lender will also make an assessment of your income and expenses to determine whether you can afford the repayments.
Calculating your budget:
- List your total expenses for each pay cycle.
- Deduct that amount from the income of the pay cycle.
The difference is the amount of extra cash you are left with every pay cycle. The lender will determine if you have enough money left over to repay the loan. A buffer is usually built into their assessment to allow for a margin of unexpected circumstances so they won’t push you over the edge if something happens out of the blue.
If your figures are not lining up, consider reducing the loan amount or extending the loan term. This will lower your loan repayments.
2. Do I meet the requirements?
Different lenders may have other requirements, but typically the criteria are as follows:
- You must be at least 18 years old.
- You must be an Australian citizen or a permanent resident.
- You must be employed or receive a regular income in your bank account.
- You must not be going through the process of bankruptcy.
- You must have a good credit score.
- You must meet the minimum income requirements.
Some lenders expect you to be at least 21 years old, and it could be that different lenders have different minimum income requirements. You’ll need to double-check that you meet your chosen lender’s criteria. You must also declare what you intend to use the loan for.
3. The different types of loans
Before applying, you’ll need to check out what types of loans are available. There are different kinds of loans, so choosing a loan that suits you is important. There are auto loans, mortgages, and various types of personal loans.
- Secured personal loans
These are loans “secured” to an asset, meaning you have pledged one of your valuable assets, like a car, in case you can’t pay up.
This means the lender can claim the asset if you miss payments. Because these loans hold less risk for the lender, they can attract lower interest rates.
- Unsecured personal loans
These loans have no security linked to them, which means lenders charge higher interest rates. Borrowers who don’t own any valuable assets, or don’t want to provide security, may take out an unsecured loan.
- Payday loans
These are fast cash loans under $2,000 and are typically used to cover extra expenses until the borrower’s next pay date. Payday loans have incredibly high interest rates (up to 48% p.a.).
A history of payday loans may discourage lenders from approving applications for larger loans in the future.
- Car loans
A car loan can have a lower interest rate than an unsecured loan. This is because the car is the security (although the car should be under seven years old). This is a clever way of buying a new or second-hand vehicle without spending ages building up your savings.
5. Compare lenders and interest rates
Several types of lenders exist, from banks to building societies and credit unions. There are also retail lenders and specialist non-bank lenders. Banks are generally stricter with their screening process but often provide better interest rates than some cash loan companies.
You need to find out:
- Who offers the best interest rate?
- Who provides the repayment schedule that suits you?
- What terms and conditions work best for you?
Comparison sites can help you decide which lenders to approach. The criteria can differ from lender to lender, so do your homework. This can help you guess which lenders are more likely to approve your application.
If there are any black marks on your credit profile, you may still be approved by some lenders. However, being a higher risk means you may have to pay more interest.
Some lenders offer personalised interest rates. So don’t just go for the lowest interest rate. Instead, check out the big picture before making your decision.
Don’t apply with multiple lenders
Did you know that every application for credit goes on your credit report? However, the applications that complete a hard credit check can put a damper on your credit file. These “enquiries” can drop your credit score, making it harder to get approved.
Shopping around is fine, but make sure you’re only looking around. Don’t make multiple applications with different lenders. This may lower your credit score and your chances of getting a loan.
Plan your repayments
Planning your repayments can help you avoid extra costs. Decide whether you will be paying weekly, fortnightly, or monthly.
Also, do you plan to settle sooner than the loan term? A repayment plan helps you stay on top of your repayments and know how much interest you pay over time. This way, you can choose the right loan amount for your budget.
Now that you understand the screening process, you can show yourself in the best light possible! Credit24’s quick and easy application process will help you do just that.
