Your credit score and employment history are significant elements in determining whether or not the bank will approve your loan. But your expenses, the interest rate and other factors will decide whether or not you’ll be able to afford the monthly loan payment. Here are a few things to think about before taking on a new loan.
Check Your Credit Report
Knowing what’s included in your credit report is the optimal first step to securing approval for a new loan. A solid credit score can help lock in a competitive interest rate and more favorable terms.
When you check your own credit report from the three credit bureaus, it doesn’t impact your score and can indicate where you stand. Making sure your history reflects you’re making payments on time is one of the best ways to care for your credit.
Add Up Your Monthly Expenses
First you’ll need to take a look at your current income and expenses before you can decide the amount of the payment you can afford. Add up your costs, including rent, student loans, utility bills, groceries, and transportation. Then deduct these costs from your monthly income.
Now it’s time to evaluate what you’ll do with the remaining funds. While it’s important to know whether or not this amount covers the new loan payment, additional considerations should be made, like ensuring you can continue saving money and contributing to your other financial obligations.
Estimate the Interest Rate
Be sure to carefully read the terms and conditions for the loan you’re applying for and know whether your rate is variable or fixed, and the interest is reasonable.
Figuring out the cost of a potential loan can help you estimate the monthly payment, but interest charges can significantly add to your overall expense. Keep in mind that a strong credit score may give you more power to negotiate your rate with the lender, so work for the lowest rate you can.
Check the Flexibility of the Loan
Sometimes life throws obstacles your way and you may find yourself unable to cover the loan payments. It’s extremely important to plan for the worst and have a plan in place should you change jobs, move or incur another financial emergency.
Before you commit to several years of payments, it’s vital to verify the flexibility of the loan. Some lending institutions offer repayment plans when you face financial difficulties but they will be much more willing to work with you if you’re a responsible borrower and communicate your hardships up front rather than wait.
Be sure to know that even after deciding if you can really afford a loan, taking on too much debt with this new monthly payment may impact your credit score because of your new debt-to-credit ratio. Contemplate your new ratio with the potential additional expenses to determine whether or not this new loan will overstep your current financial goals.
This article is provided for general guidance and information. It is not intended as, nor should it be construed to be, legal, financial or other professional advice. Please consult with your attorney or financial advisor to discuss any legal or financial issues involved with credit decisions.
Published by permission from ConsumerInfo.com, Inc. © 2013 ConsumerInfo.com, Inc. All rights reserved.
About the Author:
Today’s guest post was written by our friends at freecreditscore.com. freecreditscore.com has articles on monitoring and understanding credit, calculators and Score Planner™, a credit resource that is free for both members and non-members, helps you learn how changes in your life can impact your credit score.
