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Getting a Loan 101

By Jodi McDermitt

If it’s time to get a new vehicle or make some home renovations and you don’t have the extra money available, you might need to borrow the funds from your financial institution. If you’ve never taken out a loan, or if you’re looking at a large dollar amount, it can be intimidating. Don’t be afraid to ask questions before you go through the loan application process.

When it comes to borrowing money, lenders take several factors into consideration, like length of employment and income, how long you’ve lived at your residence, whether you own or rent, and your monthly housing payment, and more. Most lenders like to see at least 12 months of job time and residence for stability.

Other factors are debt ratio of income vs. expenses, credit report, and the 4 Cs of Credit: capacity (the ability to repay the loan), collateral (security for the loan), capital (assets), and character (willingness to repay the loan). The higher your credit score, the lower your interest rate will be.

When planning renovations, a home equity line of credit may be just what you’re looking for if you have the available equity in your home. The formula to determine equity is the appraised value of your home minus the mortgage balance. Most financial institutions will lend up to 85-90% loan to value.

When buying a car, it’s a good idea to get preapproval before you start shopping. This will prevent the dealerships from pulling your credit multiple times. Something else to keep in mind: not only do you need to consider your monthly car payment, but other expenses like insurance, regular maintenance costs, and weekly gas fill ups.

Use the loan process as an opportunity to build a relationship with someone you feel comfortable talking to at your credit union or bank. And if you need help fitting a new loan into your budget, call to make an appointment with one of our Certified Personal Finance Counselors: 877.717.2271.

 

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