Loan is a form of debt incurred by an individual, either an asset like car or a house, or sum of money borrowed that is expected to be paid back with interest. It can either be a short- or long-term loan.
People get loan/s either to get extra cash to augment living during unexpected situations and emergencies just like this Covid-19 pandemic. Or, in order to put up properties like a car or a house. Loan providers can be the government or private entities like banks and lending institutions.
Almost everyone needs a loan and not only individuals apply for it but also companies, corporations, and governments; but not everyone is qualified. Below are some info for you to know if you are a good candidate for a loan.
Loan applicants should determine first or assess their own financial standing and capacity to pay. Assess your overall monthly income and expenses. If you consider applying for a personal loan or a long-term loan for housing or car, make sure that the excess in your monthly income after the “expenses for your needs” would be enough in paying for it.
There are a few documents you have to prepare when making a loan. One is the loan application which is submitted to the lender to begin the lending process. Make sure also that you have proof of identity, usually at least two government issued ID. Another one is the proof of address which can be your current utility bill or a copy of your lease or rental agreement.
For employed individuals and first-time borrowers, the standard reference of lending institutions are valid ID’s and proof of income of the borrower (ITR or pay slip). They normally conduct credit investigation on the borrower. They may reach out to the Human Resources of your employer and/or the reference persons you put on your loan application. Income requirements are imposed by lender to ensure that the borrower has means to repay a loan.
For non-first timers, lending institution also checked on the history of your past paid loans, looking at your credit score. The score you have here depends on how you repay your previous loans. The more that you pay on time or before due dates on our past loans, the higher your score on this will be.
Requirements differ for self-employed individuals and business owners. Loans for self-employed individuals (entrepreneurs and business owners) fall under the secured type of loan, usually backed by some form of collaterals. Collaterals are existing assets of the borrower, offered to the lending agency as a security payment just in case borrower failed to settle the obligation.
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Your credit score and history have a big role to play when securing for a loan. It is actually the most important factor that a lender considers and evaluates. To qualify for a loan, most lenders require a credit score of 600, the higher – the better.
Another factor that a lender considers is the applicant’s debt-to-income ratio. DTI is the percentage of a borrower’s gross monthly income that goes towards paying their debts. It predicts the borrower’s ability to make payments on new and current debts. The ideal DTI ratio is 36% or less.
The simple rule of thumb before jumping into getting a loan: Plan it off, draft a worksheet. Make sure you can pay regularly based on the terms you agreed upon with your loan provider.