Just about every telemarketer or loan ad out there today will talk about how applying for a loan is easier nowadays than it’s ever been. They’ll typically emphasize their financial institution’s quick and easy application process or low-interest rates to entice potential applicants. Many lending organizations now also process payments and applications through online platforms to maximize user convenience and appeal to digital natives.
Borrowing money isn’t necessarily bad. In fact, taking out loans can help you manage some of your life’s biggest and most important expenses more easily, such as paying for education, travel, or property. Before you borrow, however, it’s important to ascertain that you’re doing so for a good reason. You should also make sure that you have a solid plan in place for paying the money back.
If you’re currently on the fence about taking out a loan for a major expense, the following steps can help you think through your decision:
Discern Whether You Really Need a Loan
Before all else, it’s important to think about what you need the money for. Are you thinking of borrowing to pay for something non-essential, like a vacation, a designer bag, or a new gadget? Bear in mind that repaying a loan will require you to pay back the interest in addition to the amount you borrowed. It also helps to consider that the funds you’ll end up spending on interest could have gone toward your savings, investments, or other more necessary expenses.
It’s rarely the best idea to borrow money for non-essential purchases. Saving carefully for things you really want may take longer, but it’s often the more financially responsible thing to do in the long run. If you’d like to treat yourself to something expensive, note it down as a short-term financial goal and start saving for it in advance. Set aside a small portion of your income for it every month and you’ll be able to afford that new phone or overseas trip sooner than you think.
Assess Your Current Financial Situation
If you do decide that you have to apply for a loan, you’ll need to figure out how much you can afford to pay back monthly, which in turn will help you figure out a manageable amount to borrow. A good way to start is by looking at your monthly and annual budgets to see how you’re currently spending your income. Block off as much of your income as you need to for bills, debts, and everyday essentials. From there, look at what’s left and figure out how much of that you can dedicate to loan repayments.
It’s especially important to consider any outstanding debts and other financial obligations you have before applying for a loan. A high debt-to-income ratio will hurt your chances of lenders approving your application, as many lenders won’t risk lending money to someone who may not be able to pay it back. It generally helps if you’re spending no more than 43% of your income on debt payments.
Check Your Credit Score
Lenders tend to favor borrowers with good credit scores and credit history, as these are usually reliable indicators that someone will repay credit card bills and other outstanding debts on time. A good credit report will often not only make you more likely to get your loan application approved but may also help you secure the best possible terms for your loan. Since good loan terms can save you thousands of pesos in interest, it’s worthwhile to build up your credit score before applying for one.
Before you file your loan application, you can check your credit score by requesting a CIC credit report in person or online. Immediately report any discrepancies or errors that can hurt your score. If your credit score is not doing as well as you’d like, it’s probably best to hold off applying for a loan and work on improving it first.
Determine the Type of Loan You Need
There are many types of loans available, and knowing which type best suits your needs and current financial situation will help you get the funds you need more easily. The following examples are among the most common loan types:
- Auto loan – An auto loan or car loan will let you borrow the price of a vehicle you intend to purchase, minus any down payment the dealer may ask you to put down beforehand. The car acts as collateral for your loan and will be repossessed in the event that you can’t pay it off. An auto loan from a major bank in the Philippines can come with a repayment term of 12 to 60 months for a brand-new car or 12 to 48 months for a used car.
- Housing loan – A housing loan enables you to borrow the price of a particular property, such as a vacant lot, a house and lot, a townhouse, or an apartment. Similar to auto loans, the lender has the right to foreclose your property if you prove unable to pay off your debt. Home loans typically have longer terms and can be repaid over periods of up to 20 years.
- Student loan – A student loan is taken to pay for undergraduate or graduate education. The amount borrowed usually covers tuition fees, miscellaneous school fees, books and supplies, student accommodation, and other necessary student expenses. Student loans in the Philippines are offered by government organizations, banks, and private lending organizations. Most of these lenders will allow borrowers to pay off their student loans once they’ve found employment after graduation.
- Personal loan – Unlike the previously mentioned loan types, which are used for specific purposes, you can use the money you get from a personal loan for anything you choose. Large undertakings like weddings or home renovations are common reasons for taking out a personal loan. Some people also use them to pay off debts or cover emergency expenses. Personal loans don’t typically require collateral and instead are granted depending on the borrower’s credit score. You can usually repay them over a variable period ranging from a few months to a few years.
Research Interest Rates and Hidden Fees
Once you’ve decided on a type of loan, you’ll want to apply for it at a financial institution that offers a low-interest rate. Banks and credit unions will generally be competing with each other for customers, so it’s worth shopping around for the best possible interest rate available for your chosen loan type. Having a good credit score and choosing a shorter loan term will also help you net lower interest rates.
Lenders may also charge additional fees on top of interest, such as origination fees, appraisal fees, underwriting fees, processing fees, and others. These will usually be bundled into your regular payments and can significantly increase the amount you have to pay monthly. In these cases, it may be better to opt for a loan with slightly higher interest and fewer upfront or monthly fees.
Draw Up a Clear Repayment Plan
It’s best to have a plan in place for repaying your loan before you even apply. Whether you end up putting aside a portion of your primary income, routing income from investments toward repayments, or using some other approach, calculate your monthly installments in advance and plan accordingly.
In general, loans with long payment terms will have smaller payments per month, but they also typically have the highest interest rates. Shorter loan terms, on the other hand, have high monthly payments but generally lower interest. Choose whichever approach makes the most sense given your particular financial situation and money management style.
It’s also important to be aware of the potential consequences if you make your loan payments late or fail to make them at all. For one thing, your lender will likely charge you additional interest or penalty fees. Additionally, late or missed payments will reflect poorly on your credit report, which will make it difficult to apply for mortgages or other loans in the future. An unfavorable credit history may also affect your promotion prospects if you work for a regulatory organization, the financial sector, the police, the military, or similar industries.
Don’t Fall for Gimmicks
When shopping around for loans, be wary of offers that promise extremely low-interest rates or gimmicky repayment schemes. These loans may come with floating interest rates or hidden fees that will end up costing you substantially more than you were prepared to pay. At worst, you may find yourself caught up in a loan intermediary scam.
Exercise vigilance when engaging with telemarketers and hold off giving them money or sensitive information. Verify that they’re really affiliated with the bank or financial organization they claim to work for by calling the institution in question and inquiring about the call’s authenticity. Note that banks will never ask you for money or personal data over the phone.
Limit your search for lending institutions to reputable, dependable banks or credit unions if you decide you really need a loan. And even when you have a running list of reliable places to borrow, make sure you compare their rates and read their terms and conditions thoroughly.
Loans can help you navigate major life milestones and cover important expenses you couldn’t otherwise afford. Like pretty much any financial product, however, it’s best to go in with a plan. Doing your research and considering your options carefully will enable you to maximize the benefits of taking out a loan while minimizing the risks.