Knowledge is power and the more you know before applying for a loan, the better. Having important information in your back pocket can help save you a lot of time, money and inconvenience down the road.
The items that follow are what we consider the top 5 things that are most important to know before filling out that loan application. There are others, of course, but these 5 lead our list. You can also use much of the information below when applying for credit in general, for example: a credit card or retail card.
Whatever type of credit you’re looking for, keep in mind it’s always best to:
1. Know Your FICO® Score
Used by 90% of top lenders to assess a consumer’s creditworthiness, your FICO® Score can make or break your ability to get a loan. Creditors want to feel secure that you’ll be able to pay them back. Your FICO® Score provides them with insight in a single glance.
If your FICO® Score is low, you might want to consider holding off on that loan or line of credit until you’ve had a chance to raise your score. Why? Typically, the lower your FICO® Score, the higher your interest rates and overall borrowing costs will be.
In addition, your score may lower with every credit inquiry. So, if your initial application is denied and you apply to other creditors who must also inquire into your credit, these inquiries will appear on your credit reports and continue to lower your score.
2. Know Your Credit Report Information
Check your credit reports, preferably from all three credit reporting agencies, to make sure all information is correct. There are changes made to credit reports every day so errors may occur. What if the home address on the reports don’t match the forms of ID you bring to the lender? Or, what happens if one of the reports shows a loan you never opened?
Checking your credit reports is important to do at least once a year, not just when applying for a loan. It helps you catch problems due to an error and/or identity theft sooner rather than later… something that can make life that much easier.
3. Know Your Borrowing Costs
Interest rates, closing costs, penalties… the list of potential costs to borrow money can get very long. Knowing and understanding these costs before applying for a loan can help you make the best choice among lenders.
For instance, if you know the prevailing interest rate (also known as the “current market rate”), you can compare the APR (Annual Percentage Rate) of different lenders in order to get the best possible deal. Since the APR shows you the total amount of interest and other costs as a yearly percentage, you can shop around with more confidence.
Be sure to know if the loan is a fixed or adjustable rate loan since that will affect the amount of money you’ll be paying in the long term.
4. Know How Much You Can Afford
Although this might sound like it should go without saying, we’ll say it anyway. Before applying for any type of loan, know how much of a monthly payment you can afford.
What’s your current monthly budget? Is there a maximum monthly payment you can make without going over that budget? Once you’ve crunched the numbers and know how much is available to repay the loan, get a loan agreement that allows you to pay the money back as fast as possible without going over your budget.
5. Know What Documents You Need
You’d be surprised how many loans are rejected because the applicant didn’t have the proper paperwork or all the required documentation. To get the loan arrangement (and interest rate) you deserve, the lender needs to know and understand your entire financial picture.
Before meeting with a potential lender, find out all the documentation you’ll need. Some of these might seem obvious, but here a just a few:
- Identification (typically a state ID and/or your social security card)
- Proof of income
- Employer contact information
- Contact information (telephone and address)
- Most recent tax returns (some lenders may ask for several years’ worth of tax returns)
- Proof of assets that relate to your ability to pay, such as a 401(k) or other investment assets
- A completed application
- Information regarding all of your bank and credit accounts…
…and anything else the lender requires to make an appropriate decision regarding your loan.
At the myFICO forum, members talk about their loan experiences – the good, the bad and the ugly. See them for yourself before you apply for your loan.