Loans: Mistakes and Best Practices (Loan Basics 3/3)
Meet Lucy. Lucy has been working at Corporate
Co. for the past three years. Lucy has just finished our two videos “Loans 101” and
“Credit Scores and Reports 101”, so she now has a good understanding of how loans
and credit scores work. However, as a first-time loan applicant, she’ll not really sure how
the process works. What should she do? Well, we’ve got her covered. Let’s walk
through four common loan application scenarios. Scenario 1: You have credit score of at least
640, and monthly debt payment to income ratio below 36%. You should have no problem getting
a good loan. Scenario 2: You have a bad credit score, but
you can’t raise it in time and you still want to reap the benefits of excellent credit.
In this case, you’ll need to find someone with great credit willing to cosign your loan.
Scenario 3: You can’t find a co-signer. Don’t worry, you can still apply for financing,
just be careful, your loan will be considered subprime and have a much higher interest rate.
Scenario 4: If even that fails, and you still need a loan, ask your friends and family for
money. While this may be painful, it’s a much better option that a payday loan, which
can easily charge an annual interest rate of more than 500%. Scary right? But let’s assume Lucy’s situation isn’t
so dire, and that she has the necessary income and credit to get a loan. This brings us to
a simple set of loan rules: Rule 1: Shop around for a loan with the lowest
fixed APR within 14 days. This ensures you’ll get a cheap and easy-to-budget-for loan without
butchering your credit score. As for where to look, we recommend not just at big banks,
but also online-only lenders and local credit unions, as both may offer you much lower rates.
Rule 2: If you can afford it, either select a short-term loan or pick a long-term loan
and exceed the monthly payment whenever possible. Both will ensure you pay down your principal
as fast as possible, minimize your interest payments.
Rule 3: Before signing on the dotted line, be sure to read the fine print of any loan.
Avoid those with pre-computed or add-on interest, or a prepayment penalty, as both can lead
to major expenses in the long-run. Rule 4: Always pay on time. Otherwise, you
risk incurring late fees and damaging your credit score. Should paying on time become
impossible, call your lender immediately and try to work a solution, such as a loan extension
or a partial payment. Rule 5: If you want to pay off your loans
and credit cards early, always start with the highest interest rate first. For more
details on this, be sure check out our video “Funding Your Future”.
Finally, Rule 6: If interest rates have seriously dropped since you got your loan, consider
refinancing. This is when you replace your current loan with a new, lower interest one,
and while this can be great, you have to be sure the one-time costs of setting up the
new loan aren’t greater than the money you’d save in interest. For more details, be sure
to check out our website’s refinancing calculator. Congratulations! You have finished our loan
basics curriculum! If you want more educational material on specific loans, like student loans,
or just great loan recommendations, be sure to check out our website.