CREDITCOLLEGE

Tips and Tricks for Your First Loan

Taking out your first loan can seem overwhelming, especially since you’ve never gone through the process before! With all the different terminology used in loan documents and the many types of loans available, it can be difficult to understand what will be best for you. There are a lot of different aspects that go into the loan process, and being educated with tips and tricks can help you navigate it confidently.

Monitor Your Credit

When looking to get approved for a loan, it’s important to review your credit report for accuracy. You can check your credit report at all three credit bureaus through AnnualCreditReport.com. This website allows you to check your credit weekly to ensure there are no mistakes on your credit report. If you haven’t built any credit, it’s still important to check your report to make sure no fraud has occurred in your name.

Budget Wisely

When looking to get your first loan, consider your budget. Account for the additional expenses that will come with opening a loan. For example, with an auto loan, it’s important to budget for your monthly loan payment and auto insurance costs in addition to gas and any maintenance. Establishing an emergency fund before taking out a loan can be helpful in case you need a buffer as you adjust to the new expense. Keep in mind you may be approved for a decent chunk of change. Can you afford the loan payments associated with the amount you’re approved for? It may be best to choose the most affordable option for you rather than accepting the exact amount you are approved for, especially if those payments are out of your budget.

Proof of Income

To show you can pay for the loan, you will most likely need to have proof of income. Paystubs, W-2 forms, or salary letters are ways to prove your income. In addition to reviewing your credit report, having proof of income is pivotal in the loan approval process.

Consider Your Options

It’s important to compare interest rates of different products and services available to you. Credit card and loan rates vary depending on the type of loan and the financial institution providing it. There are a variety of different cards and loans available to you, so do your homework to find the best option for you!

Read the Fine Print

Lenders are required to state every detail of the loan in a section of the loan agreement called the Schumer box. The box outlines the term of the loan and the interest rate you are paying. It also includes a breakdown of the fees associated with the loan, such as an annual fee or any transaction fees. Review this information to make sure the loan details align with your needs.

Pay on Time

Payment history makes up the biggest part of your credit score. Making consistent, on-time payments – whether for loan payments or the minimum payment for a credit card – is very important to maintaining your credit score. Try setting up reminders on your phone or putting payment due dates on your calendar to ensure you’re paying on time each month. This will help you prepare and set you up for success before taking out a loan.

Keep Credit Utilization Low

With credit cards, it’s important to keep your credit utilization below 30% if possible. For example, if you have a credit card with a limit of $10,000 and you used $3,000 of that, you would be using 30% of your credit limit. Going above 30% – especially if you are not able to pay off the full amount at the end of the month – will likely have a negative effect on your credit score. This tip will help you manage your credit card usage and credit score.

Don’t Apply for New Credit if You Don’t Need It

A common misconception when starting to establish credit is to apply for or take out multiple loans or credit cards at once. Opening multiple loans or lines of credit less than six months apart can cause your credit score to drop. It’s typically more beneficial to open one loan or credit card and make consistent, on-time payments to establish a positive credit history. So, only take out a loan when necessary or when it makes sense and avoid taking out a loan just to build credit.

As you navigate the loan process, use these tips and tricks to review your options and find the best fit for you! Preparation may help you feel more confident. Remember to take your time and avoid situations where you may feel pressured into signing on the dotted line before you’ve been able to conduct your own research.

Sources: https://www.creditkarma.com/personal-loans/i/take-out-loan

https://www.cnbc.com/select/questions-before-taking-out-personal-loan/

https://www.nerdwallet.com/article/loans/personal-loans/5-things-to-know-before-first-loan-application

https://www.experian.com/blogs/ask-experian/what-are-good-credit-habits/

https://www.forbes.com/sites/jaimecatmull/2021/11/12/7-things-to-look-for-when-getting-a-personal-loan/?sh=79f4fb2870e8