Opening a business or buying property is usually something that we are not able to do by ourselves. Because of the high amounts of money that are needed, for some of us, the only option is to apply for a loan. Because of the instabilities of the current market, most banks are becoming stricter and asking consumers to go jump through dozens of hoops before they approve. But the first step for any loan will be to gather and analyze information about the applicant. Do you know what they check? Here are some highlights:
General Information / Assessing Character
Banks need to assess character before lending you money. So they will look for general information such as your job history or success in running a business. If you want to have a deeper look into what they may find, go to checkpeople and run a quick and easy background check on yourself. Some things that you may do to improve your chances of a good character assessment are:
- Correct mistaken or mixed up information from your background check. Mixed up records can have important consequences, and you are the sole responsible for fixing the mistake.
- Get involved in community activities and volunteering
- Get professionals to review your proposals and ask them for references
- Ask for referrals from respected community members
Before approving a commercial or personal loan, banks need to assess your payment capacity and money management skills. To do so, they will run a credit background check, in which they will be able to see your debt and payment history. If something on your credit history prevents the bank from giving you a loan, they are required to disclose it. They should give you a copy of your report and explain your rights. You are entitled to one free yearly credit report check from the main credit reporting agencies. We recommend that you ask for your report and assess your chances of getting the loan. If you have a very low credit score or a problematic credit history, your chances are extremely low, and it’s better to improve your credit before asking.
A bank will also pay close attention to bankruptcies and judgments as indicators of your likelihood of default. They will also try to determine your ability to pay by analyzing your debt to income ratio. Finally, avoid too many hard inquiries. A hard inquiry is a note left on your report every time you ask for a loan, and it remains on your report for two years. While their negative impact diminishes over time, too many hard inquiries are detrimental to your chances of approval.
It is extremely important to educate yourself on aspects surrounding privacy and the treatment of your information. For example, take a look at regulations emanating from the Fair Credit Reporting Act. Understand and exercise your rights.
Financial advisors suggest thinking twice before asking for a loan. American people have an important history of being bad at managing their own debt (especially younger generations). Avoid putting yourself in a vulnerable and complicated situation and always consider:
- The length of the loan and the possibility of early repayment without penalization
- Interest rate. Because of the volatility of our current economy, it is recommended to stay away from variable interest rates. Some credit cards, for example, have extremely high-interest rates-
- Analyze your current financial situation and current debt to understand your payment capacity. Some financial institutions (such as credit card companies) may give you a loan regardless of your payment capacity, and you may end up paying a lot more on interest rates and late fees as a result.
- Read the contract in its entirety before you sign it. Some banks add what’s known as “hidden charges” such as early payment penalties.
While loans can be extremely helpful (for example, to pay for college), a bad decision may lead to very difficult consequences. If you don’t want to deal with collection agencies and the possibility of losing all your assets, don’t take out a loan unless you are sure you can repay it. Learn to live below your means, budget, and factor in market changes and personal emergencies.