These five questions will help make sure you get the best loan deal for your financial goals.
We’ve all been on a rollercoaster over the last 12 months in multiple areas of our lives.
For some, it’s been the emotional turmoil of feeling disconnected from friends, family and routine. For others, it’s been the adjustment of working from home while caring for and teaching our children, or just being at home full-time because our jobs aren’t available. And for others, it’s the financial strain following an economic downturn.
No matter what category best describes you, if you are considering a loan for a new home, thinking about a refi for your current vehicle, or taking that dream vacation to get away and just go anywhere that’s not your house, then there are five loan questions you need to ask.
1. What are my financial goals, and will this loan help me achieve them?
This is one of the most important loan questions to ask. It’s critical to have a clear goal in mind for your money. Ben Franklin said it best: “If you fail to plan, you are planning to fail.” If you need help, one of the free services available through Kelly Community is financial planning with one of our certified financial planners. Knowing the plan will help you determine the answer to this question. Look objectively at your finances and determine if this is a “yes” and move on to the next question.
2. How much can I afford to borrow?
Congratulations on making it to the second question! As a savvy money manager, you need to figure out what you can comfortably afford. A good rule of thumb is that your living expenses such as mortgage or rent and utilities plus credit card and loan debt should not exceed 40% of your take-home pay. If you’re able to answer this question with a yes, then you’re ready for our next one!
3. How much will my monthly payment be?
Great question! And it’s an important one, too, since you have to make this work in your favor to achieve those financial goals from question #1. Before you can answer this question, you will need to determine what kind of loan you are looking for. Will the loan be secured (collateral loan) or unsecured (also known as a signature or personal loan)? Typically, a secured loan is offered at a lower interest rate. Knowing the type of loan, the amount and the interest rate will help you determine the payment amount. Most financial organizations provide loan calculators to help you determine your monthly payment. Check out our loan calculator.
4. How long will I be paying on this loan?
The answer to this question also determines the answer to question #3. The longer the term, the lower the payments. Conversely, the longer the term, the higher the interest rate you will pay. If you opt for a shorter term, then you will have higher payments and a lower interest rate. Another factor that will also affect this area is your credit score. Your credit score is also key in how the lender will determine what interest rate is applied to your loan. The better your score, ranging from 350-850, the lower your rate. You can check your credit score for free and see where you stand.
Loan repayment terms can range from 12 months to up to 10 years for some higher priced auto loans. Financial experts caution against a 10-year loan as most people tend to change vehicles every three to four years, and this loan could result in the precarious position of owing more than the vehicle is worth should you decide to sell early.
5. Where should I borrow this money from?
Another great question! We confidently recommend visiting your local credit union. Credit unions are the original financial cooperatives that are member owned. If you become a member, you have the same voting rights as all the other members. Typically, credit unions offer lower rates and because they are often smaller than banks, they take a more personal approach to lending. They take into consideration your credit history and factors that others won’t take the time to explore with you. Also, their loan terms tend to be more flexible and their credit requirements are not as stringent.
Now that you know what loan questions to ask, you’re well on your way to achieving your next financial goal.
If you are thinking about a loan, or just want to visit and map out a financial plan to reach your personal goals, give us a call or contact us here. It’s been our goal for the past 58 years and still is our focus: we are here to help you save more, earn more, and do more financially.
This week’s financial tip is brought to you by Rae Quezada, our Marketing Director.