With student debt at an all-time high, loans have been getting a bad reputation lately. Yet, a loan can be a powerful tool to accelerate your wealth and standard of living if used correctly.
Loans are also useful for small businesses to grow and for investment. Loans can sometimes feel like a daunting and hopeless endeavor to get one. It can be this way because many applicants do not take the time to strengthen their application.
Banks and lenders look at your financial health including:
● your ability to pay
● your credit
● your collateral/capital, and
● your financial literacy.
Failing even one of these areas can mean an unsuccessful loan application. Here are some tips to get you in top shape before your first or next loan application.
Automate Your Finances
When you apply for a loan, your lenders look at your ability to pay consistency. If left up to us, we sometimes we forget to pay bills and credit cards on time. This comes back to bite us when we need a loan approved.
Before applying for a loan, spend a few months making sure all bills are paid on time. Use your online banking service to automate credit card payments, utilities, and other loans. Now you will have a paper trail to show the bank, and your discipline to pay on time has improved.
Fix Your Credit Score
Before you go to the bank to get a loan, you need to know your credit score. There are free resources online to show your rating. Once you have your score, go through it thoroughly. See where there are errors and fix them! For example, an old credit card that you closed years ago could affect your credit today.
Reach out to any company that is responsible and have them adjust it. You want the best possible score or the ability to explain to the lender why the score is the way it is, and the steps you took to fix it.
Invest in a CPA
A Certified Professional Accountant is an underrated resource. If you invest in one now, you can reduce the speed of a loan approval and increase the chances of success.
Let your CPA go through your spending, assets, and liabilities and formulate a financial history. This applies to both individuals and small businesses. Showing your banker a CPA reviewed statement improves success rates.
Increase Your Collateral
Some loans need little to no collateral (unsecured loans). Secured loans need assets as collateral. Collateral for personal loans can be real estate, investment accounts, equity in your house or high-value items. For Business Loans, it could be inventory, accounts receivables, or property. If you have no collateral, spend some time increasing your worth.
Open an investment account and start saving. Look at the stuff you’ve accumulated over the years. Can anything be used, like art or jewelry?
Have a Nest Egg
A great way to show your lender you mean business is to have an emergency fund set up. Have three to four months of living expenses, and the intended monthly loan payment in a fixed account.
This shows that you are financially intelligent. You’re primed for any surprises like a job loss and can weather the storm.
Applying for a loan could a stressful experience. You sometimes wait, breath held, to hear that your application was approved. Getting the important requirements of a loan covered increases your confidence.
If you exercise patience and work on these tips before you apply for a loan, you’re almost assured success.