Some people associate the term “loan” with negative connotations. However, the truth is that, when used wisely, a loan is actually a useful tool that can help you in achieving your financial goals.
The keyword here is “wisely” because you have to exercise caution before taking out a loan. If you aren’t able to pay it back on time, you’ll have to pay additional fees and this can further hurt your finances. What’s more, your creditworthiness will take a hit. This will make it more difficult for you to take out loans in the future.
So how do you ensure that you’re prepared to take out a loan? Here are some crucial questions to ask:
How Much Do You Need?
One of the first things you need to figure out before taking out a loan is how much you need. Remember: different lenders have different minimum and maximum loan amounts. In particular, if you take out a loan online from digital lenders, you’ll have a lower borrowing limit. Meanwhile, banks can lend you up to a million pesos or more.
The purpose of the loan will usually determine how much you need and from where. If you only need to cover the remaining amount on your child’s tuition fee, it’s better to get a cash loan from fintech companies or other alternative lenders. On the other hand, if you’re aiming to purchase a car or renovate your home, your best option is a loan from a bank.
How Much Are You Going to Receive?
Some lenders deduct a few charges, like a processing fee or a closing cost, before they disburse the loan proceeds. This is usually a small percentage of the loan amount. For example, if you borrow Php 10,000, the processing fee may be Php 1,250. Thus, the final amount you will get is Php 8,750.
As such, you need to figure out how much these charges are before you proceed with your loan application. If you need Php 10,000 but will receive only Php 8,750, then you may need to increase the amount you will borrow. An alternative is to find a lender that charges lower fees or doesn’t have these charges at all.
What Are the Loan Terms?
The loan term is the schedule or period in which you have to pay the amount you borrowed. The shorter the loan term, the lower the interest but the higher the monthly (or weekly) payments. Meanwhile, a longer loan term means you have more time to pay in smaller installments but you’ll end up paying higher interest.
Also, take note that most cash loans have shorter loan terms. This is due to the lower loan limits they offer. Usually, you also have the option to pay earlier for lower interest. Make sure to confirm with the lender so you can adjust your budget accordingly.
What Do You Need to Apply?
While it’s easier to apply for a cash loan from alternative lenders than for a personal loan from a bank, this doesn’t mean that you don’t have to submit requirements. At the very least, you’re going to need an ID with your picture as proof of identification. If you can provide a government-issued ID, much better. You also need to present a proof of address.
Most lenders will also ask you to provide a few details regarding your employment. This is to ensure that you’re earning income so that you can pay your dues.
What Are the Penalties, If Any?
As much as possible, you need to settle your loan payments on time. However, there could be unexpected circumstances that may prevent you from doing so. If this is the case, you need to confirm with the lender if there are any penalties that you have to pay.
For example, you may pay a higher interest rate if you aren’t able to settle the balance. Some lenders may charge a certain percentage of the principal per day that you aren’t able to pay. You may also be asked to pay a one-time penalty that’s like an overdue fee.
Again, it’s best to avoid this situation as much as possible; that said, it’s also good to know what you might face in case unwanted scenarios occur.
Is the Lender Credible?
Finally, you need to ensure that the lender you’re borrowing from is a credible one. With banks, this isn’t so much of an issue; for fintech companies and other digital lenders, make sure to check if they’re properly accredited.
You should also take a look at their terms and conditions. If you have any questions, get in touch with their customer service team. You may also want to ask for advice from people you know who are more familiar with loans. Some of the red flags you should watch out for are unclear fees and too-good-to-be-true offers.
Again, loans aren’t inherently a bad thing. You just have to be particular with all the details so you won’t be misled. You should also be honest with yourself with regard to your financial maturity.