Questions to Ask Before You Apply for a Loan

Questions to Ask Before You Apply for a Loan

BIG Ideas:

  • Borrowing less and having a shorter loan term can help you reduce interest fees and save money.
  •  Interest rates vary by lender and may be fixed or variable depending on the loan.
  • A good credit score is critical to qualifying for a loan and getting the best rate possible.

Borrowing happens. With the high cost of college tuition, cars, and housing today, there’s a very good chance that at some point in your life, you’ll need a student loan or other loan to help you reach your goals.

When managed properly, loans can be very powerful financial tools. But, they can also cost you if you don’t understand your options and needs. To help with that, we’ve put together the following important questions to ask yourself – before you borrow:

  • Why do I need to borrow? There are many reasons to borrow – to help reach a goal like buying a home or consolidating debt. Think about your specific goal and evaluate whether it’s worth the expense of a loan. For example, getting a loan to invest in a college degree is a good reason to borrow. Borrowing money for Spring Break, not so much.
  • How much money do you need? You may absolutely need to get a loan for college or to buy a house. What you don’t need to do, though, is borrow too much. Calculate the minimum amount you need and only borrow that much.
  • How do you want the money? Do you need the money from your loan in a lump sum to make a one-time purchase? Or will you borrow overtime to pay for ongoing expenses? If it’s the latter, you’ll want to apply for a line of credit (like a credit card), which lets you borrow and repay funds over and over again. If, however, you need the money all at once, a personal loan makes sense.
  • What’s the interest rate? Interest rates vary significantly from lender to lender, so make sure you shop around. Also, determine whether the loan will have a fixed or variable interest rate.

    • With a fixed rate, your monthly payments will stay the same for a fixed period. This makes it easier to budget. A variable rate (often available on credit cards and lines of credit), however, is tied to an index and can make your payments go up or down depending on the rate environment. Keep in mind though, that with a line of credit or credit card, you only pay interest on the amount you use, not the amount available to you.

  • When do I have to pay the loan back? This is known as the term of your loan. The shorter the term, the less interest you’ll pay overall. Conversely, the longer the term, the more interest you’ll pay.
  • What will my monthly payments be? Once you know the amount you need to borrow, the term of your loan, and the interest rate and type (fixed vs., adjustable), you can estimate your monthly payments using online calculators for your specific type of loan, such as auto loans, a mortgage and student loans.
  • Can I afford the monthly payment? If you haven’t done so already, create a monthly budget with your income and expenses to help you determine if you can afford the loan payment. Need budgeting help? Check out these budgeting apps.
  • What is my credit score? To approve you for a loan and determine the interest rate, lenders will consider your credit score. The higher your score, the lower the rate you’ll get and the more money you’ll save. Also, it’s important to understand that every time you apply for a loan, the lender will make a hard inquiry on your credit, which can result in a drop in your credit score. Learn more about ways to boost your credit score.

Tips to Borrow Smarter

In summary, here are some ways to help you be a better borrower:

  • Borrow only what you need.
  • Choose a shorter loan term (if your budget permits) to help you lower interest fees.
  • Shop multiple lenders for rates and terms.
  • Make your loan payments on time, every time.
  • Work on improving your credit score or get a co-applicant with a strong credit score.

Brazos is Here to Help You Master Student Loan Borrowing

For more than 40 years, Brazos Higher Education has been helping make education more affordable for students.

As a Texas non-profit, we offer great rates and no fees on private student loans to help fill the gap where federal loans leave off. Contact us to learn more.