First, Dispute Incorrect Credit Information
You need to make sure that you know what is on your credit report before proceeding with a loan. There could be all kinds of erroneous information on there that you can dispute. It might be legitimate information that should have dropped off your report by now or it could be completely inaccurate information, mistakes happen.
When pulling your credit, make sure that you get a report from every credit card bureau, there are three of them. They are Experian, Equifax and Trans Union. You never know which one that your lender will use so you need to make sure they are all correct. You are entitled to one free credit report every year from each bureau. To check your Experian report go here, to check your Equifax report go here and go here to check your Trans Union report. The free reports that you get from the bureaus will be complete but they will not contain your actual credit score. To get this, you can sign up for a free service like Credit Karma. Not only will you then get a credit score, but you will also get ongoing credit monitoring, all for free. Free in the sense that you do not have to pay for the service that is. Credit Karma will heavily advertise to you while you visit the website but I feel that it is worth it for the service they provide. Just ignore the credit card ads.
Once you have your reports in hand, you can dispute information that is not true or that should have been dropped. Most negative information is supposed to be removed after 7 years. If you do find information that “you feel” is not correct, you can dispute it by writing a letter to the credit card bureau. You can find form letters all over the internet to use , so just do a search for one. Once the bureau receives your letter, they will contact the creditor and open an investigation to see if the information is correct. If they can not prove that the information is correct within 30 days, it must be removed.
Because the investigation can take 30 days and then reports would need to be updated, it is best to pull your reports and start this process at least 2 months before you intend to apply for a loan.
Second, Pay Down Credit Balances
If the loan is not for an emergency, and you can afford to wait a bit, you should pay down your balances a bit. The reason for this is that it can dramatically increase your credit score. The higher your score, the lower your interest rate will be. Getting your credit cards down can easily add 20 points or more to your score which can dramatically lower your interest rate.
Balances should ideally be below 30%. If they are not, your credit score is not as high as it could be. To get your balances below 30%, the obvious solution is to pay down the credit card debt but there is another solution. Call your credit card company and ask for a credit line increase. If you have a $1000 card charged up to $500, you have a 50% balance. Get an increase to a $2000 limit and you all of a sudden have a 25% balance.
Third, Come Up With A Down Payment
If this is a home loan, you of course need a down payment. It it is an auto loan, you can usually get by without one and do a zero down loan but this might not be a good idea. The less that you put down, the riskier your loan will be for the lender. The riskier it is for them, the more you pay in interest.
So, how much should you come up with? For an auto loan, ten to twenty percent down will usually greatly improve your interest rate. This is because when you drive that vehicle off the lot, it immediately depreciates. This hurts your loan to value rating. If the lender would have to repossess the vehicle in the short term, they would stand to lose a considerable amount of money. A sizable down payment can allow your vehicle to be worth as much as the loan is worth, cutting your lenders risk and lowering your rate. As a side benefit, you can eliminate the need for gap insurance which can save you $500 to $800 right off the bat.
With home loans, the magic number is 20%. This can be a hard number to come up with but if you do, you will save a lot of money. Putting 20% down gets you qualified for more conventional financing with potentially lower rates. In addition, it eliminates the need for mortgage insurance which can add hundreds of dollars to your monthly payment.
Fourth, Add The Expense To Your Budget
You do have a written budget right? If not, prepare one and then add the expense of the loan to your budget. Use a loan calculator to come up with the projected cost of your loan and then see how it will affect your budget. Will you still have money to live normally or will the loan put an unneeded strain on your finances.
When adding the loan to your budget, be sure to add in the other expenses that will pop up with your loan. If you are getting a car, your auto insurance may increase due to the need to get full coverage and to the higher value of the vehicle. Call your insurance broker to get an estimate of the increase to your bill.
When getting a home loan, consider the costs that come along with home ownership. Electric bills, water bills and maintenance expenses such as lawn care can really add up. Also, make sure that you think about the home owners association dues and the cost of furnishing this new home.
Fifth, Gather All Your Documents
Depending on the kind of loan that you are getting, you might be required to come up with all sorts of documents. For your basic payday loan, you might not need to come up with that much but other loans will require some documentation.
Auto loans, for example, might require pay stubs from your employer. Try to save the last couple of pay stubs and if you get paid direct deposit, you might need to provide bank statements. Get it all together in advance just in case.
Home loans are another can of worms. You will have to provide all kinds of documents. Mainly bank statements for about 6 months. In addition, employer pay stubs can come in handy. If you are self employed, expect to be in document hell. You will need a lot of bank statements as well as a profit and loss and numerous other statements.
Sixth, Determine The Value Of The Loan
This means, figure out if it is worth taking out a loan. Loans are nothing to enter into lightly. If you can do without a loan, it is usually better to do so.
Some loans are, of course, unavoidable. This includes things like mortgages and, for most people, auto loans. These are purchases that require a loan because of the large amount of money being spent and the cost of having to do without if you were to have to save for the price of the purchase. It would not, for example, make sense to save up to but a home with cash. While you were saving, you would have to pay rent which would be wasted money that could go towards your home. .
Other loans, can be avoided. A good example is a vacation loan. This is a loan that can make for a nice trip but you would probably be better off just saving for the expense.
Overall, you should make sure that the cost of the loan is worth it and that you would not be better off just doing without.