Borrowers can use loans for all sorts of things, from emergencies and large purchases to refinancing and consolidating existing debts. But you must know the basics about loans before taking one out for yourself, especially as costs continue to increase in 2022. Doing this will help you minimize costly mistakes and avoid falling into debt. Let’s dive deeper into four things borrowers should know before getting a loan in 2022.
1. There are many types of loans
For one, you can choose between secured and unsecured loans. Unsecured loans are loans that don’t require collateral, such as installment loans and cash advances. Secured loans are often easier to get and offer better loan amounts and rates, but they require you to put down collateral. The lender can seize this collateral if you fail to repay the loan. This is what lets them offer better terms.
There are plenty of secured loan types. For example, car title loans use your vehicle’s title as collateral if you own it outright and have no liens on the title. With this type of loan, the lender will offer you cash based on your car’s value.
2. Loans often come with credit checks
Many loans will check your credit as part of the application process. No credit check loans may be hard to find, but many lenders have less strict requirements. For instance, title loans and cash advances generally don’t require you to have a good credit score to get approved. Lenders offering these loans will look at your income or the value of your collateral in addition to credit score when making an approval decision. Shopping around and offering collateral may help you get a loan with more lenient requirements.
3. You’ll need to provide personal and financial information
Lenders gather several pieces of information to process your loan application and make an approval decision. They may ask for personal and financial info like:
- Date of birth
- Social Security number
- Bank account (to deposit loan proceeds)
- Annual income
- Proof of employment
- Debt-to-income ratio
You may need to find documentation proving some of the financial information, such as pay stubs, tax returns, and employment verification letters.
4. You may have to pay fees
Loans may charge fees along with interest. For example, some installment loans charge an origination fee when you take out the loan. They may also charge late fees for late payments and returned check fees if you don’t have the cash to cover the payment.
Also, be careful about paying off a loan early. Some lenders may charge prepayment penalties for early loan payoff. Check the fine print before signing any loan paperwork to try and avoid these.
The bottom line
Knowing some basic facts about loans makes the process go smoother and reduces the chance that you make a costly mistake. Understand what kinds of loans are available to you so you know what fits your needs and credit score. Then, ensure you can provide all the information the lender needs to make their approval decision and be aware of any fees before signing the paperwork. With this knowledge in hand, you’ll be easily able to find a loan that fits your needs and budget.