I Need A Loan: A Guide For Beginners

apIf your looking to purchase a home, car, or something of high cost in the near future you may have been asking yourself, I need a loan, but you may not know if you can get one.  So in this article I’ve put together a simple guide for beginners to help you get started down the right path, and in the end of this article you will be able to get a simple checklist to help you get started.

Why Do You Need A Loan

The first thing you need to do is question the reason you need the loan.  Often times we get a loan even when we really may not need it.  The first thing you must do is consider if you really need a loan now or if you can wait.

If you want to get the best rate and deal a little preperation can go a long way.  For example, currently I’m in the process of planning to build my own house, but before I considered buying some land I decided it would be much easier to save money first.  This way I will have more cash to put down when I buy, giving me a lower interest rate in the end.

The reality is saving money doesn’t cost you anything, but once you buy something using a loan it will cost you a monthly payment.  For example I recently had a conversation with a friend of mine who said he saved an extra $50 a week back into a car fund over a 5 year period.  By the end of five years he had around $13,000 to by a new car.  Doing this allowed him to buy a car with cash and avoid getting a car loan.

So before you say you need a loan now consider the option of saving first.

What Is Your Financial Situation

The next thing you need to consider is what your current financial situation is like.  This means reviewing you financial situation and looking at things like how much debt you have and what your current credit standing is.

First off when considering your debt situation, if you’re looking to get a loan you will not want to have any more than a 36% debt to income ratio.  This means when you divide the total amount of debt over the total amount of income you have you will not exceed 36%.

Next you need to consider what your credit report and score are.  Your  credit score will give you an idea of how good your credit really is.  Scores usually range from 400 to as high as 850,  however to get a loan you will need at least a 650 or higher to qualify.  The big benefit to having a high credit score is that it can get you a lower interest rate.

If your interested in checking out your credit read my article on how to get  a cheap credit report with Credit Karma.

Where You Should Not Get A Loan

Third, once you’ve saved up some money, checked your debt to income ratio, and looked up your credit report it’s time to start searching for a place that will give you a loan.  Howver before I cover the best places to get a loan I want to cover one place you should definalty stay away from, the monster mega banks.

The monster mega banks are the biggest banks in are country like County Wide, Bank Of Amercia, Fannie Mae, and Freddie Mac.  The reason I suggest you stay away from these banks is because they charge high fees for the little service they give.

For example back several years ago I refinanced with Country Wide and learned after the fact that the closing cost fees would run me around $3500.  This is a complete rip off.  My suggestion is to avoid them all together.

Where You Should Get A Loan

Now that know where we should not get a loan at, let’s look at a few places that would be the best place to get a loan at.

  • Local Banks. First, check out your local bank.  Local banks tend to have little more leeway when it comes to getting a loan.  For example, when I was getting a loan with my local bank they wanted  me to put 20% down on my home, however I did not have the full amount so they worked out a deal with me to cover it with a secondary loan in order to pay down the full 20%.  A bigger bank would have never done this.
  • Credit Unions. Second, check out your local credit union.  The great benefit about credit unions that they usually have very competitive rates and their closing cost can be extremely low.  On top of that as a credit union member you are also part owner as well giving you more authority and control.
  • Social Lending. Third and finally, a new option to consider is social lending such as Lending Club.  The great thing about social lending is that the laws are a bit more relaxed.  However their is one downside to this option though, and that is you can only barrow up to $25,000 to $35,000 in most cases. However if your looking for a car loan, doing a little remodeling or even a small business loan this option can be very promising even if you have bad credit.  To learn more about this option read my article on Lending Club to learn more.

The Checklist

Use this simple checklist to help you get started on the road to getting your first loan.

  • Do you need the loan?  Decide whether it’s better to save before you buy.
  • Check your debt ratio.  Divide your debt over your total income.
  • Check your credit score.  Check out Credit Karma for your free credit score.
  • Contact several lenders.  Contact your local bank, credit union, or even a social lender like Lending Club to see what you can qualify for.

Questions or comments?  Let me know below.

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