There are several intricate aspects revolving around borrowing money that you must consider before you decide to take a loan. These aspects help you to rank different loan offers. Some of these aspects, for example credit score, could actually be instrumental for banks to decide if you’re eligible for the loan at all. Let’s glance through some of these elemental aspects that govern the ways to borrow:
Credit score: Moneylenders go through your credit score before processing or approving any request you make for borrowing. The score is determined based on your credit history and record of payments. Based on this, banks or moneylenders determine the risk associated with approving a loan. You should strive to maintain a good credit score as it increases the chances of your requested loan being cleared. On the other hand, with a poor credit score, banks might even reject your application. Outstanding payments and defaults usually translate into a lower credit score. Ideally, to avoid such a situation, you must clear all your previous outstanding bills in full and on time.
Effective Interest Rate (EIR): This usually includes interest on the borrowed amount as well as other bank charges. This puts a cost on your borrowing, and it will help you understand which loan option will make you pay more to the bank. Most importantly, EIR is a direct comparison feature for different kinds of loans.
The right approach to borrowing
To kickstart things, it’s important to ensure that borrowing is the right option, and it will help meet your financial requirements. Loans come with an interest rate, which vary from one type to another. So, here you must see to it that you’re applying for a loan that best suits your requirements. Failing to do so will result in added expenses. Let’s take a look at some of the tips and tricks that will help you approach borrowing the right way possible:
The first step is to find the right type of loan. For instance, personal loans are unsecured type of loans and come with higher rates of interest, but, car loans are secured loan types and are characterised by slightly lower interest rates. So, if a car purchase is your immediate need, you must go for a car loan, and not a personal loan.
Once you have decided on the loan type to borrow, you must ensure that the loan doesn’t affect your monthly budget and you’re able to make monthly repayments on time, and in full. If you fail to do so, the borrowed amount will only add to your expenses, instead of helping you manage it. You will also end up with a higher debt than you originally started out with.
You should avoid defaulting on any borrowed sum, and ensure that you pay back any outstanding sum before you borrow a new amount. Credit scores get seriously affected when you default on a loan. This will reduce any credibility for borrowing in the near future and banks might disapprove your loan requests. So, go ahead only when you're absolutely sure that you won’t default on payments.
If you have accumulated several loans or lines of credit, you should consider consolidating them into one easy-to-manage loan. A Debt Consolidation Plan is the most ideal strategy to help this situation, where all your existing loans are combined into one single account. Moreover, debt consolidation also helps in reducing the overall rates of interest, thus giving you an edge in terms of saving money.
Lastly, it’s always better to check if you could borrow from family or friends, before you actually visit banks or moneylenders. Also, maintaining a good relationship with your bank can be rewarding in terms of getting you better offers in regard to borrowing.
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