If you are considering a loan, there is certain information you should take into account before applying. It may be that a loan is not right for your personal circumstances and, to avoid the disappointment of not being approved for a business loan, you should look into this before applying.
Types of Business Loan
Before embarking on your loan journey, the main decision you will need to make is the type of loan you want to apply for. You will need to understand the many different loan options available. Firstly, you will need to differentiate between secured and unsecured loans.
Secured loans are ones in which personal property or business premises are offered up as a form of collateral; this could be an option for those with less-than-perfect credit. Unsecured loans, on the other hand, tend to be based on credit scores and do not involve collateral. There are also more specific loan types such as business loans, student loans, equity loans and mortgages.
Credit Score And Credit History
The majority of lenders will want to look at your credit score and credit history to determine your creditworthiness; this shows lenders that you are able to meet payment obligations on time. If you have a good credit rating, you are more likely to be able to secure a loan and at the most favourable terms (for example, lower interest rates, higher loan amounts) which will save you money in the long run.
Before applying for a loan, you should check your credit score. If you are concerned that your credit score is not high enough, there are ways to boost your credit score before applying for a loan – this will improve your chances of getting loan approval.
Debt To Income Ratio
Your debt to income ratio refers to how much you earn on a monthly basis versus how much your monthly outgoings are, specifically ones you are obligated to pay. In general, the higher your income, the better chances you have of being approved for a loan as it shows your ability to repay a loan.
Loan providers will usually ask to see a proof of income such as pay stubs, a salary letter or W-2 forms. For self-employed applicants, they will need to prepare certain documentation including a minimum of two years’ worth of tax returns. Lenders will want to see how much you owe in debt per month and what proportion of your monthly income this figure represents. This will help them decide if you can afford to take on loan repayment.
If you are considering applying for a loan, you will need to compare and contrast different loans. The best way to do this is to look at the APR (annual percentage rate). This is the figure which shows the interest rate of the loan and any additional expenses such as handling fees.
When deciding whether or not to borrow, you will need to take these additional fees into account when assessing affordability of the loan as they represent the true cost of the loan. It is advisable to shop around for the most competitive rates as you could end up taking out the same loan amount but for a lower price in the long term due to a lower interest rate and lower fees.
Duration Of The Loan
Before applying for a business loan, you should consider how long you are wanting to borrow money for. The length of the loan will impact how much the loan will cost you in total as the longer the duration, the longer you will be making repayments (plus interest rates).
There are many different loan types available, all with different options of loan lengths, such as installment loans. Before applying for a loan, it may be a good option to speak directly with a bank or a financial institution to assess your options.
It should also be noted that some loans will charge you a fee if you wish to repay your loan early. If this is part of your long-term plan, you should always read the terms and conditions to check for this fee (sometimes called a ‘prepayment penalty’) before applying for a loan.