Loans can be overwhelming. When you sign up for this large fund of money, you’re normally doing so to pay towards a large project, balance your finances or help you reach your next paycheck.
There are different types of loans that you can choose from., but the processes are all the same.
Make sure to apply for a loan using a well-known lender. This can help you avoid dramatic interest rates, as well as dodgy deals.
For example, Colorado has Payday loans which means you can get quick financial payments while also feeling secure in your documentation.
Step 1 – Collecting All Of Your Data
The first thing your lender will do is go through your documentation and credit history. Your credit history will show the lender how often you pay your debts late, how much you are currently borrowing from other lenders, and if you have ever been bankrupt.
Your documentation will confirm who you are, how much you currently earn, and how much you currently use for expenses.
The first set of data will be collected without any input from you. The second will need to be gathered using your information.
To do this, they will ask for your ID, your payment slips, and your banking information. Ideally, your credit score should be around 750 or above to be approved for a good loan. However, a lower score may be accepted but with a larger charge.
Step 2 – Calculating Risk
Once the data has been collected, the lenders can figure out how much of a risk you are. For example, if you are elderly, you may pass away before paying back the loan. If you have paid late in the past, you may not honor the agreement this time. And lastly, you may not be able to afford the repayments based on your income.
Once the lender can figure out your risk levels they can accept or reject your loan application. The application might come with terms such as a high-interest rate or a guarantor to ensure that multiple people are ready to pay off the debt.
Step 3 – Visitation
If you are using a loan for a business or buying a house, the lender may decide to visit the location. This visitation is designed to understand the risks at a realistic level. For example, if the building is close to a flood zone, and the house isn’t well-defended, then the loan may not go through simply because the lender doesn’t believe the building will last.
Another example is that the lender may not believe that the business will perform well due its location or lack of materials.
In these instances, you can attempt to disprove their worries. This could mean showing the up-and-coming defensive plans for the area, or your business model and how the loan will help buy the equipment needed.
Ideally, this detail should have been given in step 1, however, do not think that a “no” at this stage is permanent. You can argue your case and showcase your promise.
Not all lenders will follow this step, it all depends on the type of loan you are applying for.
Step 4 – Underwriting
The underwriting process is when the lender uses all of the data they collected and the risk they have weighed up, to write your application agreement.
This process might take a while as the lender needs to consult legal parameters, current interest rate expectations, and future financial effects.
Payday loans often follow the same formula but automatically assume you are high risk. This is why many lenders offer their agreement or rejection on the day of application. Larger loans such as mortgages or unsecured loans may need to make more adjustments before confirming any agreements.
Step 5 – Negotiations
Once the underwriting has been completed you can negotiate the terms of the contract.
For example, you may ask for a longer term time to extend the number of months or years before paying back the whole loan. You may want this option due to a predicted change in your business in the future.
For example, if you are a game company that focuses on Dungeons and Dragons, you may know that a new module is about to land, and this may cause a rift in your business. Asking for another year could help you prepare for this turbulence and find stability again after the change.
Once the loan amount, term, and interest percentage have been agreed upon, you can move on.
Step 6 – Signing The Contract
The financial world can be complicated, however, your loan agreement should be simple. During this stage, you should read through all of the details before signing the contract.
Once you are happy with the terms, put your name on the paper. This will bind you and the lender into the contract.
Step 7 – Set Up A Payment Strategy
Once everything has been approved and signed, you need to set up your payment strategy. For most people, this means creating a direct debit that comes out of their account days before the payment date. The payment will be for the exact and unchanging amount previously agreed upon.
This allows the borrower to budget for their fee without worrying about paying on time or not. Others might set up an app on their phone so they can manually send payments as their income is sent to them.
It doesn’t matter what system you go for, as long as you ensure that you don’t pay late.
Step 8 – Paying Off The Loan
When the end of your term comes up, you should have paid off your loan completely. Once this has happened, you will be released from your contract and will receive a letter from your lender confirming this.
If you pay off your loan early, you may be hit with an early payment penalty, but this will be cheaper than the total interest you would have paid anyway.
Summary
The loan stages are simple; data collection, risk assessment, agreeing to a contract, and then paying off the loan.
