Some people never think about borrowing money before they’re forced to do it. This might happen if you find yourself without an automobile. You’re sitting across the desk from a salesman who offers you a loan for an automobile you absolutely need to get to work. In the moment, your hands are tied, and you take the loan no matter what its terms are.
You might be forced into an emergency situation like this, but this is not the best way from a personal finance perspective to get the best deal on a loan. There is a lot of variety in the shortterm loans industry , and the quality of the loan you find will depend on your personal creditworthiness, as well as the extent to which you explored your regional industry, as well as the international lending options available in your area.
We’ll start with your personal finances. When a lender considers letting you borrow their money, they think about a number of things related to your personal finance history. Credit reporting agencies are companies which pay attention to how you use your credit cards, how you pay your bills, and generally whether or not you are responsible with borrowed money. If you are over reliant on credit, or if you are frequently tardy when repaying small loans like those related to your utility bills, you may have a low credit score.
This low credit score is a red flag for lenders. They see it and realize that if they lend you money, you might just neglect to pay some of it back. In this moment, they are faced with a decision. Do they lend you the money and charge you a ton of interest to make up for the money that might be lost if you default on the loan? Or do they just avoid the risk by denying you the loan altogether?
Neither outcome is good for you. If you are denied loans by most traditional lenders, you’ll find that most of the loans available to you will be at very high interest rates. These loans are not affordable to most people, unless they manage to pay them back incredibly quickly. That can be a sticky situation to find oneself in, so it’s better to focus on improving your credit before asking for a loan, if you can possibly wait.
You can accomplish this by paying off debt (anything over 30% of the credit limit of any one credit card, and any large debt balances from other sources that are too high in relation to your income), paying back unpaid bills, and correcting any negative items found on your credit report. Once you’ve polished your personal finances and your credit, your credit score will quickly rise. Once it’s above a certain point, you’ll find that there are many more lenders willing to let you borrow their money. These loans will also be more affordable than loans available to you when your credit was very poor. Keep up this habit in all of your future borrowing, and you’ll save a lot of money.