3 Things You Need to Know Before Applying for a Loan

It’s important to know the advantages and disadvantages of each type of loan for you to identify which one will suit your needs. Some of the most common loans are:

1.     Secured loans

• Requires you to pledge a collateral. A collateral is the lender’s guarantee in case the borrower fails to pay off the loan. E.g. car, house, savings accounts
• Often comes with lower interest rate

Examples of secure loans: title loans, home equity loans, pawn shop loans, secured personal loans

TIP: Taking secured loans runs a risk of you losing the property you offered as collateral. Make sure to keep up with payment schedules to avoid this from happening.

2.     Unsecured loans

• Does not require any collateral
• Commonly used for a variety of reasons. E.g. weddings, education, home improvement
• Best for those who want to pay off high-interest credit card debt
• Example of unsecured loans: Personal loans, payday loans, credit card cash advances

TIP: Taking unsecured loans requires responsibility. Even if unsecured, this loan will still have an impact on your credit score, which would determine the ease of your access for more capital moving forward.

A credit score is one’s ability to pay for credit on time. Your credit score is not just based on your income, assets, age, gender, affiliations, and non-credit banking information such saving accounts, checking accounts, etc. It is primarily calculated based on your credit payment history, the amount you owe or credit utilization ratio, length of credit history, types of credit used, and new credit.

Credit scores usually range from 300-850 with the latter being the highest. If you have a higher credit score, the better chances you have of having your loan approved. Banks and other financial institutions use credit score to identify whether a borrower is eligible for a loan or not, that’s why it’s important to keep your credit score as high as possible.

Naturally, borrowing money comes with necessary charges and fees. These fees are allotted for certain services you avail when getting a loan as well as to compensate lenders for the risk of lending you money. It’s best to know the additional expenses that come with borrowing money. Here are some of them:

1. Processing fees - the amount of money lenders charge in exchange of processing your loan application
   
   
2. Monthly interest - this is the interest rate applied to the total amount of money you borrowed and unpaid fees and charges. Borrowers pay for this until they have paid their loan in full.
   
   
3. Documentary Stamp Tax (DST) - a government mandated fee deducted from the loan proceeds. 
   
   
4. Disbursement fee - a fee charged each time the loan amount or a portion of it is given to you. To avoid additional disbursement fees, cash out your loan proceeds at once.
   
   
5. Late payment and early payment fees - Lenders usually charge 3%-4% of the overdue amount or P300, whichever is higher for late payment. In the Philippines, lenders usually charge 4%-8% of the outstanding balance for early payment fees when you pay for your loan earlier than your tenure.

Overall, getting a loan entails certain responsibilities that can be detrimental when overlooked. It’s best to do your research first to get an idea of what are the things you need to prepare for when getting a loan.