Preparing to Borrow
Borrowing money is
a part of almost everyone's financial lives. Mortgages, auto loans and
college loans enable us to afford things that are beyond our current financial
reach. Credit cards provide convenience in our daily lives that many find
essential. But borrowing money also carries serious responsibilities and
too much borrowing or the wrong type of borrowing can cause many problems.
Before applying for a loan or a credit card, here are some things to consider:
- Why are you borrowing?
Borrowing for things that provide long-term and lasting value should
come before borrowing for things that provide only momentary or limited
enjoyment. It is much easier to justify borrowing for a home or a college
education than borrowing for a great vacation or a great outfit that
you may only wear occasionally.
- Do you understand
your responsibilities? Remember that any money you borrow must be repaid
along with interest. Be sure you can afford the payments that the borrowing
will require. Also, spend some time to find the loan with an interest
rate and terms that best fits your situation.
Before sitting down to fill out a loan application or arranging a meeting
with a loan or mortgage officer, here are some items you may want to have
- Your credit
Most lenders will automatically order a credit report and you should
know what it contains. For a small fee, you can order your credit report
from the three large credit reporting agencies by calling them:
- Experian - 888/397-3742
- TransUnion - 800/888-4213
- Equifax - 800/997-2493
- Proof of income.
Depending on the type of loan, you may need to provide a copy of a recent
payroll check stub or a W-2 from the prior year.
- Tax return.
If you are applying for a mortgage or a large personal loan, you will
probably need to supply copies of at least one federal tax return.
- Personal financial
For mortgages and other large loans, lenders may require that you supply
a financial statement listing all your assets and liabilities. It is
also a good idea to prepare a personal financial statement annually
as part of managing your finances.
What lenders are
Remember that lenders are loaning you money that they want repaid along
with interest. This is their business and they want to make sure that
you will be able to live up to your repayment responsibilities. Along
with the items mentioned above, they will be looking at other aspects
of your finances in order to approve your loan.
- Stable employment.
Having a steady job can help give lenders confidence that you will have
an ongoing income to repay your loan. If you have a history of several
job changes, it may raise a yellow flag so be sure you can explain them.
For example, if you have frequently changed jobs for better opportunities,
be sure to mention it.
- Stable residence.
Lenders like to see at least six months of residence at the same place.
- Responsible handling
of other debts. Having a solid history of timely and regular payments
on other borrowing also helps give lenders confidence that you will
be able to handle this debt in the same manner.
The decision to borrow money or to apply for a loan is serious and you
should thoroughly understand your side of the transaction. Spending a
little time to think about borrowing and being properly prepared will
make the process easier and may improve your chances of getting the loan
approved and being able to get more favorable terms.