Getting a loan can be a tedious process, but if you’re well-prepared and equipped with the necessary knowledge, you may be able to complete the process faster. But how should you prepare, and what are the things you need to know in the first place?
If you’re applying for a loan for the first time, chances are you don’t have a credit score yet, which lenders look at before deciding if they’d approve your application. It is a three-digit number that is based on your credit report, which records all the debts you’ve acquired. A good credit score indicates that you’re on-time with your repayments, while a bad credit score signifies the opposite.
But how will have a credit score if the loan you’re about to apply for is your first one? In that case, lenders will use your nontraditional credit data to evaluate you. However, it may affect the types of loan you can qualify for, as well as the interest rates you’ll be subject to.
That said, here’s a detailed outline of everything you need to know about being a first-time debtor:
- Your Take-home Pay is Crucial
Before discussing credit further, let’s tackle your take-home pay first, which is highly crucial in your loan application. It determines your ability to repay a debt, so if creditors deem it insufficient, then your application will be turned down. To show them your take-home pay, present your proof of income, and if you’re an employee, bring your pay stubs, W-2 forms, and/or salary letter as well. If you’re self-employed, show them your tax returns for the past two years or so, along with invoices and receipts.
You can also determine if your take-home pay lets you afford a loan’s monthly payments. Just calculate how much of your net monthly salary are you able to save, and if you’re considering a mortgage, for example, use a reliable mortgage calculator to see if you can buy a home now.
- Your Monthly Expenses Matter
To qualify for a loan with nontraditional credit, the general requirement is to have made 12 months of timely payments for at least two to three types of essential financial obligations, like utilities, housing, or insurance.
That means your rent, internet, and cable connection, water bill, and electricity bill payments may be assessed by your prospect creditor. If all your documentation shows that you never missed a beat in your payments, your chances of being approved for a loan will increase.
- Your Prospect Creditor Will Assess Your Net Worth
Your net worth is calculated by subtracting your liabilities from your assets. Assets are properties that are worth something, like a house and investment accounts. Liabilities, on the other hand, are financial obligations, like rent.
The loan you’re applying for will become another liability, which you may use to buy an asset. You can also calculate your own net worth to find out early on if you can afford to be in debt.
- You Can Build Credit
You don’t have to wait for loan approval before building your traditional credit. Consider starting out by applying for a secured credit card, or a credit-builder loan. The former is backed by a cash deposit, while credit-builder loans hold the amount you borrow in a bank account. You won’t be allowed to access the account until you’ve repaid the loan.
By consistently making timely payments, keeping your credit balances below 30% of your limit, and maintaining a mix of accounts, your credit score will build up. Aim for a score of at least 700, which is considered good credit. Having only 630 on a scale of 300 – 850 is considered bad. Though some mortgages approve scores of 500 to the low 600s, they’d increase the interest rate, which they won’t do to borrowers with higher scores.
So start building your credit now, and keep this information in mind before approaching a lender. When you’re well-prepared, you can qualify for the best loans, despite being a first-timer.