Insufficiency of fund to get all the things you need and do all things you have to is a real problem. It’s often a problem that arises from earning a low income. When there’s no immediate chance of a spike in income, the common alternative is to take a loan.
Many loan applications are rejected. The reason is usually the inability of applicant to meet lenders’ conditions for approval. In cases, where a loan application is approved, the beneficiary may default in repayment.
Sometimes, vague understanding of actual impact of interest rates, fees and other terms on the borrower’s financial health at the point of application may create problems later.
Therefore, it’s important to understand few basics about loan application, approval and repayment before taking a loan.
- What is your income?
You have to put your income side by side the amount you want to apply for. Then do an objective appraisal to know if your income would be enough to meet obligations (repay principal plus interest) as they fall due within the allowed payback period (tenor).
Failure to do this or do it in an unbiased manner may cause financial distress in other competing areas that demand financial attention during the loan repayment period. How?
After the agreed periodic loan repayment amount is deducted, you may be left with an amount that’s is not enough to pay other necessary bills
You should know that lenders will always, give terms and conditions that minimize the risk of ending up with a bad debt. So as a condition, they would propose a periodic repayment amount that will be favorable to them but which may not be favorable to you.
2. How much do you need?
You should know for certainty, how much ‘you need’ and not how much ‘you want’. How will you know this?
You will have an idea of how much you need by knowing what you need a loan for. When you know the amount you really need, you will be in the best position to apply for and receive an amount that will be sufficient to take care of your need.
The benefit is the avoidance of applying for an amount that would either be barely enough or in excess of the amount needed. The aim is defeated when the loan is not enough. If it’s more than needed, the excess could be blown away on frivolous expenses.
3. What do you want to do with the money?
As mentioned above, before you take a loan, it pays to know what you need the money for. It’s not a good financial advice to take a loan to finance consumption.
When you set out to take a loan, always have it at the back of the mind that you will pay it back (amount plus interest). This is a fact.
Therefore, it makes sense to get a loan for the purpose of investing it in a profitable venture. A portion of the returns on investment should be used to defray the loan.
4. What are your assets and liabilities?
Assets are those things you have ownership of. They include your debtors (people who owe you). Your liabilities are what you owe. They include your creditors.
You should know the value of your total assets and total liabilities before you take a loan. Why is this important? Your assets represent future economic benefits which would be set-off against future obligations, your liabilities which the loan is going to be a part of.
The future economic benefits should be in excess of the future obligations to guarantee a hassle free loan repayment.
5. What is your credit score?
The success of your loan application will depend to a large extent on your credit score. A credit score shows your credit worthiness. The higher it is, the higher the chances of getting your loan application approved.
Your credit score is determined on the basis of your credit history.
6. What is your credit history?
What does your credit history say? Does it show that you met past loan obligations as at when due? If it doesn’t tell a story of your ability and responsibility to loan repayment, it’s highly unlikely that a lender would approve your loan application.
A lender would also want to know from your credit history, your regularity of payment of bills, your outstanding indebtedness, the percentage of your credit line so far used and the recent credit inquiries you made.
7. What is the interest?
A loan is repaid at an amount that’s made up of the principal (actual amount received) plus the interest (the cost). Lenders are at liberty to quote different interest rates for loan requests for the same amount.
While some could quote higher rates, some may quote lower rates. As a potential borrower, you have the right to know the interest rate before you decide to accept or reject a loan offer.
The knowledge gives the opportunity to negotiate for a lower rate or go to another lender where you can have a better deal.
8. What is your repayment plan?
Before you take your next loan, make sure you have a repayment plan in place. A typical repayment plan would include a periodic repayment amount you would be comfortable with and the length of time you can conveniently pay off completely.
It should also show your expected cash inflow and cash outflow; sources of inflow and items of expenditure.
9. What is the loan tenor?
The loan tenor is the range of time between the first payment on the loan and the payment of the final installment amount that completely clears the indebtedness on maturity. It’s the payback period.
It’s helpful to know the loan tenor because it’s a critical part of your loan repayment plan.
10. Will the loan affect your credit score?
If the loan was granted would it affect your credit score negatively in the short term? If it would, your chances of accessing additional credit while still repaying the existing loan would be diminished.
11. Do you have alternatives?
Are there some other ways to raise money to take care of the need for which you’re seeking a loan? There could be, it may just be a matter of thinking outside the box and seeking the counsel of those financially wiser than you.
Getting a loan should always be the last resort.