7 Terms You Should Understand Before Getting a Loan
The financial world can be a very confusing place. It’s filled with jargon you’ve never heard of until your financial advisor mentioned it to you. Heck, you might not even have a financial advisor and you’re heading straight to the lender to apply for a loan.
If you have no idea what the terms are, you could potentially be getting the worst deal. You don’t want to miss the opportunity to save thousands of dollars. One of the best pieces of advice a friend of mine gave me when I was going through financial hardships was to speak to the right professionals, who would be able to help me get my financial life back on track. I was advised to look into something like credit unions around me, where I was able to start getting all the right information about my financial needs.
That’s why there are certain terms and information you need to understand before getting a loan. Here are the most important ones you should know.
1. Credit score
A credit score is crucial to getting approved for a loan. Before you even decide to get a loan, make sure your credit score is taken care of. You can call credit bureaus Experian, TransUnion, and Equifax to check what your credit score is.
Don’t be afraid to dispute if you find any errors in your record. These institutions make mistakes too. So if you find any, bring it up to the bureau and they might just be able to correct it. If you do find that you have a poor credit score, don’t worry. It’s not the end of the world. You can still take out a Payday Loan no matter what your credit score is, but of course, that’s not the kind of financial situation any of us want to be in. In fact, there are steps you can take to improve your credit score.
2. Debt-to-income ratio
Lenders will look into how much you earning vs. the amount of debt obligations you have. This is what they call the debt-to-income ratio and it helps them determine whether you are able to take on more debt or not.
There are several things you can do to improve your debt-to-income ratio. First, pay off your loans and get them as low as your finances will allow. A good place to start is with your smallest loan, like your credit card. Once you’ve lowered your debt, you can then consolidate your remaining debts. This allows you to simplify your loans and pay a lower amount every month.
3. Pre Approval
A pre approval is verification that you can afford to pay a certain amount during a fixed period of time. This makes you more attractive to home sellers and increases your chances of getting approved for a loan. Before you get pre approval, determine first how much you want to borrow then back it up with supporting documents like income and asset information. Your lender will also check your credit score to see if your rating can potentially match the amount you’re applying for. If you’re planning on buying a house with your loan, it may be worth finding out more about FHA loans at https://homeloansmatcher.com/fha-loans/.
4. Fixed rate mortgage vs. Adjustable-rate mortgage
A fixed-rate mortgage often comes with a high starting rate but you get peace of mind knowing that you are paying for the same rate all throughout your mortgage. Meanwhile, an adjustable-rate mortgage depends on the house market’s fluctuating rates. Some days, mortgage rates will be low while on other days, it could spike sharply. Will you be financially ready to take this risk if it ever happens? Find out what you’re comfortable with before deciding whether to take a fixed-rate or adjustable-rate mortgage.
A downpayment is the amount you pay upfront when getting a loan. The rate varies from 3% to 20%. Some programs don’t even require that you give a downpayment to get a mortgage. While this may be ideal today, it’s not always the best option because it only means you’ll be paying more money in the future. If you really want to get a good deal, pay as much downpayment as you can. That way, you only need a smaller loan and get lower interest rates.
6. Prepayment penalties
Prepayment penalties are fees you incur for paying your mortgage off too early. Yes, it does happen. Some loans actually charge you a fee for that so be sure to check with your lender. If you plan to pay off your mortgage loan aggressively, consider getting a shorter mortgage term. You don’t want to pay extra fees for a loan that you’re paying promptly.
Refinancing a mortgage means that you are switching your old loan for a new and better one. This often happens when you find a mortgage loan with better rates and less risk. The situation can vary so you may want to speak with your financial advisor on the best step to take.
What other information about loans do you have a hard time understanding? Write down your questions in the comments below and we’ll do our best to answer them!