Posted August 2017 by NZCU Baywide
Are you considering a loan? Maybe it’s finally time to replace that hunk of junk in the garage, or need some time away this weekend? No matter your reasons, we need to ask you a quick question before you hit ‘Submit’ on your lender's online application form:
How many questions have you asked?
Chances are you’ve asked more than a few, but do you know if you’ve asked the right ones? Have you asked yourself what the money will be used for? How much interest you’ll pay? Or whether you can afford the repayments? As you can see, there’s more to applying to a lender for personal finance than asking what lender is the best fit for your finances.
That’s why today we’re sharing our Q&A cheat-sheet, full of the questions you need to ask, and the answers you need to know, to ensure you come through the application process on the path to a better financial life.
To start, let’s ask the simplest question of all: what do you need the money for?
1. What is it for?
Long before you daydream of all the ways you’re going to spend your newfound cash, you need to answer the following question:
What is it for?
This might not seem all that important at first, but it’s one of the easiest ways to save yourself from unnecessary financial pain in the long run. You see, nebulous terms like ‘I just need the money!’, or ‘The cash could come in handy!’ can easily see you:
- Borrowing more money than you need.
- Spending the money on things you didn’t plan on.
The answer to this question? It’s simple! You need to clearly state from the outset, even if just to yourself, what the money is for. There’s little point, for example, in taking out a loan to cover emergency vehicle repairs, only to spend the cash on a holiday or a new television.
In setting clear boundaries, you’ll limit how much you borrow, and where this money ultimately ends up going.
2. Will I qualify?
So you know what you need this money for, but do you know what your chances of approval actually are? Maybe you have a bad credit rating? Or perhaps you know you’ll struggle to meet the monthly repayments? We’re not asking you to be pessimistic here, just realistic.
With finance available for everyone from self-employed Kiwis through to those carrying bad credit ratings, your chances may be higher than you expect. But this doesn’t necessarily mean you should apply.
Applying for finance that you know the lender won't approve you for could harm your financial standing, your credit score, and your chance of obtaining another one in the future.
Before you apply, take stock of your strengths and weaknesses as an applicant. Do you pay your utilities on time? Have you ever missed a repayment? Your goal should be to measure just how financially reliable you really are.
From these simple questions, you should come away with an honest appraisal of just how successful your application will be. If you carry a good credit score, are in a good standing with your financial institution, and are financially healthy, then your chances of success are higher.
If not? Then your best course of action would be to hold off, and instead look at improving your credit score. You see, a failed application will be recorded in your credit report, which could further damage your credit score and affect any future applications.
As we’ve discussed in the past, your credit score directly affects the application process, and the rate you end up paying.
3. How much do I need to borrow?
Whether it’s a touch of retail therapy or a big new purchase, it’s all too easy to overspend. Credit cards are one example of this, but if you’re not asking the right questions, a personal loan could quickly lead you down the same path.
Often seen as the safer, smarter option, this is only true when you know exactly how much cash you need. This is the best way to ensure any money you borrow is affordable and manageable, otherwise you could find yourself spending beyond your means.
Let’s consider, for a moment, that you want to finance a new vehicle. In this case, you’d put in the hours to come up with a figure that covers the cost of the car, insurance, as well as other bits and pieces, but not a penny more.
Similarly, perhaps you want to apply for a loan for some time away? Rather than asking for a lump sum, instead apply for what you’ll need to cover the cost of flights and accommodation, and then use the cash you’re carrying in your back pocket for spending money. If it’s your own cash, you’ll be less likely to overspend!
By borrowing only what you need, you’ll save yourself the hassle and headache of repaying more than you need to over the life of your loan.
4. What kind of finance is best for me?
Why you're applying to a lender, or how much you need to borrow, aren’t the only questions that should sit on the tip of your tongue. For example, did you know that there are many different types of finance available, each one boasting their own pro’s and con’s?
The question here is which is the best choice for you? The first of these is a secured individual loan, which uses personal property like your car as ‘security’. In agreeing to these terms, you’ll often receive a better rate.
Unsecured individual loans, on the other hand, don’t require any form of security. As they’re riskier for the lender, you’re often charged a higher interest rate, but in exchange they’re also easier to get.
Each of these carries its own advantages and disadvantages, which is why it’s important to ask yourself which is best for you, and choose one that fits you and your financial situation.
5. Can I afford to repay the money I borrow?
When it comes to making decisions, there’s a popular quote that goes a little something like this:
“Your scientists were so preoccupied with whether or not they could, they didn't stop to think if they should.”
Sure, this may be the oh-so-iconic line from Jurassic Park, but it has more in common with the next application you submit to a lender than you might think. You see, just because you're elligible, doesn’t always mean you should apply for one.
This may sound a little backwards, but it makes great financial sense: you can borrow money, but have you considered whether you’ll be able to pay it off? And would you be able to do so comfortably, or would it put you under severe financial stress and strain?
Before you jump head first into the application process, sit down and examine your finances. Take a look at your budget, and factor in hypothetical repayments. Would they take a big chunk out of your finances? Have you considered the interest? If it looks like a struggle, then a loan may not be your best option at this point in time.
6. Do I have all the documents I need?
When applying for personal finance, many financial institutions will require information about your income and expenses, your current financial situation, as well as personal details like your address and marital status.
Information like this helps the lender to build a picture of who you are, as well as your overall eligibility. From here, they can make an informed decision on how much to lend you, and the interest rate you’ll pay.
Some of the information you’ll need to provide includes:
- Full name and residential address
- Date of birth
- Current employment and financial information
- Proof of your income, including payslips.
- Any outstanding loans for consolidating debt, for example, as well as other expenses.
This is just a snapshot of the information, and documentation, you’ll need on-hand in order to apply for personal finance. For a detailed list, check out our FAQ page on the topic - What information do I need to apply for an individual loan?
7. What fees & charges are involved?
Interest rates are important, but they’re not the only thing you need to consider when applying for a loan: it’s often the hidden fees and charges where many financial institutions attempt to ‘make up the different’.
From late fees to repayment penalties, you need to know exactly what the lender charges, when they charge it, and how much this will cost you, long before you sign on the dotted line.
Does the lender clearly list their range of fees and charges? Will you be hit with penalties for a late payment? Some lenders even charge for paying it off early. These are the questions you need answers to before you decide a loan is right for you.
8. How long will it take to repay?
Whether you can afford to repay a lender is one thing, but how long it'll take you to make these repayments is another important question you’ll need to answer. Remember, the length of your loan directly impacts how high your monthly repayments will be, so based on the amount you plan on borrowing, you’ll need to choose a term that suits.
So, how long will it take you to pay this money back? Go back to your budget, and calculate whether or not you’re looking at a quick repayment where you can keep costs to a minimum, or a longer term where you’ll likely face years of interest, fees, and charges.
While keeping one eye on the present, cast the other to the future. It’s impossible to predict what’s coming next, but do your best to consider how your life and finances could change over the next two, three, or even five years. Comfortable repayments today could become difficult repayments tomorrow, so be sure to account for this when budgeting for a loan.
9. Do you need a guarantor?
Are you carrying a bad credit score? Or maybe you’re just looking for the lowest rate on your next personal loan? If this is the case, then you may want to consider a guarantor.
New Zealand banks and credit unions often offer the ability to increase your chances of approval, as well as the opportunity to land a lower rate, by having a third-party such as a friend or family member act as a guarantor on your loan application.
Sounds great, right?
The truth, as always, is a little more complex than that. Before you ask someone to act as a guarantor on your application, you need to be aware that there are a number of risks involved.
First and foremost, if you default, fail to make a payment, or otherwise don’t fulfill your agreement, then your guarantor could be left with the burden of a debt they can’t manage. There are scenarios where a guarantor makes sense, you just need to ask yourself if this is one of those times.
Ask questions now, not later
There’s a time to ask questions, and that’s well before you sign on the dotted line and apply for a personal loan. By staying in-the-know and asking questions early on, you’ll ensure you know exactly how much you need to borrow, how much you’ll be paying, and, ultimately, whether a loan is the right choice for you.