Before agreeing to any loan, you must ask these 8 questions.
Are you thinking about getting a loan?
Perhaps it’s time to replace that hunk of trash in the garage or take a weekend trip?
Whatever your motivations, here’s something to think about before hitting the ‘Submit’ button on your lender’s application form: How many inquiries have you made?
You’ve probably asked a few questions, but do you know if you’ve asked the appropriate ones? Have you considered how the funds will be spent? How much interest will you have to pay? Or whether you’ll be able to make the payments?
As you can see, applying for personal finance with a lender entails more than simply determining which lender is the most excellent fit for your needs.
We’re offering our Q&A cheat sheet today, which includes all of the questions you’ll need to ask and the answers you’ll need to know to get through the application process and onto the path to a better financial future.
Let’s start with the most basic question: why do you need the money?
1. What is its purpose of it?
Before you start daydreaming about how you’ll spend your newfound income, you must first answer the following question:
What is its purpose of it?
This may not appear to be significant at first, but it is one of the most straightforward strategies to avoid avoidable financial hardship in the long run. ‘I just need the money!’ or ‘The cash could come in helpful!’ are hazy statements that can easily see you:
- Take out a larger loan than you require.
- Spending money on stuff you didn’t intend to spend it on.
The answer
What is the response to this question? It’s that easy! Even if it’s just to yourself, you should say explicitly what the money is for right away. Taking out a loan to cover essential auto repairs, for example, is pointless if the money is spent on a vacation or new television.
You’ll be able to control how much money you borrow and where it goes if you set clear boundaries.
2. Do I succeed?
So, you know why you need the money, but do you know how likely it is that you will be approved? Is it possible that you have a poor credit score? Or maybe you’re well aware that you’ll be unable to keep up with your monthly payments? We don’t want you to be pessimistic; we want you to be realistic.
Your prospects may be better than you think, with financing accessible for everyone, from self-employed New Zealanders to those with poor credit ratings. However, this does not mean you should apply.
Applying for a loan that you know you won’t be approved for could hurt your financial situation, credit score, and ability to get another one in the future.
The answer
Make a list of your strengths and weaknesses as an applicant before applying. Do you make on-time utility payments? Have you ever been late on a payment? Your goal should be to determine how financially trustworthy you are.
You should be able to honestly assess how successful your application will be based on these fundamental questions. Your chances of success are better if you have a strong credit score, are in good standing with your financial institution, and are financially sound.
If not, why not? Then the best course of action is to wait and work on boosting your credit score instead. A failed application, for example, will be noted on your credit report, potentially harming your credit score and affecting future applications.
As we’ve previously explained, your credit score directly impacts the application process and the rate you’ll pay.
3. How much do I require?
Before you go to the bank, make sure you have a solid idea of how much money you’ll need. Making a monthly cash-flow prediction is the easiest method to find out. For example, if your customer pays you in 60 days but you have to pay your vendors in 15, you may require some additional funds to get by.
“If you come into the bank asking for $50,000 and they ask you to generate a cash-flow estimate, you’ll look bad,” says Adam Hoeksema, co-founder of ProjectionHub, web software that helps entrepreneurs make financial projections. “Before going to the bank, you should know how much money you’ll need and how you’ll utilize it.”
The answer
Let’s pretend you want to buy a new car and need to finance it. In this situation, you’d set aside some time to calculate a figure that includes the cost of the car, insurance, and other miscellaneous expenses…but no more.
Or perhaps you’d want to apply for a vacation loan? Rather than asking for a flat payment, apply for the amount you’ll need to cover the expense of flights and lodging, and then use the money in your back pocket for shopping.
You’re much less likely to overspend if it’s your own money!
You’ll avoid the inconvenience of extra repayments during the life of the loan if you borrow only what you need.
4. What type of financial arrangement is suitable for me?
Questions like why you’re applying to a lender and how much you need to borrow shouldn’t be the only ones on your mind. Did you know, for example, that there are numerous sorts of finance available, each with its own set of benefits and drawbacks?
The Answer
The question is, which one is better for you? The first is a secured personal loan, secured by personal property such as your car. You’ll generally get a better rate if you agree to these terms.
Individual loans that are not secured, on the other hand, do not require any collateral. Because they’re riskier for the lender, they usually come with a higher interest rate, but they’re also easier to obtain.
Each has its own set of benefits and drawbacks, so you should consider which is ideal for you and your financial circumstances.
5. Can I afford to repay the money I borrowed?
When it comes to decision-making, there’s a famous saying that goes something like this:
“Your scientists were so focused on whether or not they could that they didn’t think about whether or not they should.”
Sure, this is the oh-so-iconic sentence from Jurassic Park, but it has a lot more in common with your next loan application than you might think. Just because you’re eligible for a job doesn’t mean you should apply.
The answer
This may seem counterintuitive, but it’s wise financial advice: you can borrow money, but have you considered if you’ll be able to repay it? Would you be able to do so comfortably, or would it put you in financial trouble?
Sit down and analyze your finances before diving headfirst into the application process. Examine your budget and account for potential repayments. Would they eat up a significant portion of your earnings? Have you considered the possibility of interest? If it appears to be a struggle, a loan may not be the best decision at this time.
6. Do I have all the required documents to apply for the loan?
According to surveys, four out of five loans never close due to the paper chase, not because the business didn’t qualify. You’ll need a lot of documentation when applying for a business loan.
Suppose you’re applying for an SBA loan, for example. In that case, Arora suggests submitting the previous three years’ business and personal tax returns, personal financial statements, and financial predictions for the next 12 to 24 months. “If you go to the [lender] without being fully prepared, not only will you appear unprofessional,” he says, “but the paperwork you have in place may be outdated by the time you get it in place.”
The answer
- You’ll need to submit the following information:
- Full name and residential address
- Date of birth
- Information on current employment and finances
- Bank records are acceptable proof of income.
- Any outstanding loans, such as debt consolidation loans and other expenses.
This is just a sampling of the information and documentation you’ll need to apply for personal financing. Check out our FAQ page on the topic – What information do I need to apply for an individual loan? For a complete list.
7. What are the fees?
Interest rates are significant, but they’re not the only factor to consider when applying for a loan: many financial institutions try to make up the difference’ by charging hidden fees and penalties.
Before you sign on the dotted line, you need to know precisely what the lender charges, when they charge it, and how much it will cost you, from late fees to prepayment penalties.
The answer
Are the lender’s fee and charge schedule clearly stated? Will you be penalized if you make a late payment? Some lenders may even charge you a fee if you pay it off early. These are the questions you should ask yourself before deciding whether or not a loan is good for you.
8. How long will it take to pay back the loan?
It’s one thing to determine whether you can afford to repay a lender; nevertheless, you’ll need to determine how long it will take you to make these installments. Remember that the length of your loan directly impacts the size of your monthly payments, so choose a term that works for you based on the amount you expect to borrow.
The answer
So, how long do you think it will take you to repay this loan? Return to your budget and determine whether you want to make a speedy return to keep prices low or a more extended repayment that would likely result in years of interest, fees, and charges.
Cast one eye to the present and the other to the future while keeping one on the present. It’s hard to know what will happen next, but think about how your life and money might alter in two, three, or even five years. Remember that today’s comfortable repayments may become tricky later when budgeting for a loan.
9. Is a guarantor required?
Do you have a low credit score? Or perhaps you’re just looking for the best deal on a personal loan? If this is the case, you might think about getting a guarantor.
Banks and credit unions in New Zealand frequently provide the option of having a third-party, such as a friend or family member, act as a guarantor on your loan application to boost your chances of acceptance and get a better rate.
Isn’t that fantastic?
The answer
The truth is a little more complicated than it always is. It would help if you were informed that there are a lot of hazards associated before asking someone to act as a guarantor on your application.
First and foremost, if you default, fail to make a payment, or otherwise fail to meet your obligations, your guarantor may be left with unmanageable debt. There are situations when a guarantor is appropriate; you have to ask yourself if this is one of them.
10. Will the funds help in the expansion of my company?
Suppose you borrow $10,000 for payroll or other ordinary operational expenses. In that case, the loan will not generate additional revenue, and you may find yourself in the same situation three to six months from now. Instead, Gass recommends investing borrowed funds in areas of the organization that will generate more significant revenue over time and lowers future borrowing needs. “It’s worth it if I leverage that dollar, put it into sales and marketing, and drive greater revenues — $1 driving $5.” It’s all about expanding the company.”
The Answer
Obtaining a loan might be beneficial to a successful business. Increasing access to working capital can be a significant aspect of growing a firm, but it is often assumed that a loan is only required when profits are low.
According to the 2016 Small Business Credit Survey, many small businesses were profitable but had financial difficulties, and they frequently relied on personal money to bridge the gap. Using an alternative lender can improve a company’s chances of obtaining the money it needs and allow it to expand.
