Loan : Mistakes and best practice

how loans and credit scores work.

However, as a first-time loan applicant, she’ll not really sure how the process works. What should she do? Well, we’ve got her covered. Let’s walk through four common loan application scenarios. Scenario 1: You have credit score of at least 640, and monthly debt payment to income ratio below 36%. You should have no problem getting a good loan. Scenario 2: You have a bad credit score, but you can’t raise it in time and you still want to reap the benefits of excellent credit. In this case, you’ll need to find someone with great credit willing to cosign your loan. 

Scenario 3: You can’t find a co-signer. Don’t worry, you can still apply fort financing, just be careful, your loan will be considered subprime and have a much higher interest rate. Scenario 4: If even that fails, and you still need a loan, ask your friends and family for money. While this may be painful, it’s a much better option that a payday loan, which can easily charge an annual interest rate of more than 500%. Scary right?

But let’s assume Lucy’s situation isn’t
so dire, and that she has the necessary income and credit to get a loan. This brings us to a simple set of loan rules:
Rule 1: Shop around for a loan with the lowest fixed APR within 14 days. This ensures you’ll get a cheap and easy-to-budget-for loan without
butchering your credit score. As for where
to look, we recommend not just at big banks, but also online-only lenders and local credit unions, as both may offer you much lower rates.
Rule 2: If you can afford it, either select
a short-term loan or pick a long-term loan
and exceed the monthly payment whenever possible.

Both will ensure you pay down your principal as fast as possible, minimize your interest
payments. Rule 3: Before signing on the dotted line,
be sure to read the fine print of any loan.
Avoid those with pre-computed or add-on interest, or a prepayment penalty, as both can lead to major expenses in the long-run. Rule 4: Always pay on time. Otherwise, you risk incurring late fees and damaging your credit score. Should paying on time become impossible, call your lender immediately and try to work a solution, such as a loan extension
or a partial payment. Rule 5: If you want to pay off your loans and credit cards early, always start with the highest interest rate first. For more details on this, be sure check out our video “Funding Your Future”.
Finally, Rule 6: If interest rates have seriously dropped since you got your loan, consider refinancing. This is when you replace your current loan with a new, lower interest one, and while this can be great, you have to be sure the one-time costs of setting up the new loan aren’t greater than the money you’d save in interest. For more details, be sure to check out our website’s refinancing calculator. Congratulations! You have finished our loan basics curriculum!