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While getting approval for a loan feels great, that initial relief and excitement can wear off over time. Your bank may be prepared to loan you some cash, but that arrangement places a hefty financial responsibility on your shoulders. Before agreeing to a new lending arrangement, make sure you haven’t fallen victim to any of these common mistakes.
Getting a big loan seems great — except that you will eventually pay more for this money than what you’ve received. If you borrow more than you can afford, you will end up in an even bigger hole. You should have a plan of action to pay off the loan as quickly as possible, so you don’t end up with a multi-year commitment that drains your household budget for much longer than you’ve anticipated.
There is substantial fine print in any loan agreement, whether it’s a mortgage or personal loan. Understand things like interest rates, fees, and what happens in the case of default. If you miss payments, it may be as simple as a mark on your credit score or as serious as repossession of the security. Late payments may result in a higher interest rate that costs you more in the long run. Understand your responsibilities in the agreement and if in doubt, ask the loan officer to walk you through it.
Your lending institution will offer you a better deal if you are a lower risk to default on the loan. That’s where your credit score comes in. If you have had a few late payments on previous credit accounts that are showing on your report, consider taking some time to try to improve your score before borrowing money. Your bank may give you a loan at a lower interest rate if you have better credit, which means it’s quicker to pay off.
In the case of a business loan, or even personal loan, you should have a clear budget for the money. Otherwise, you risk borrowing more than you need — and paying interest on money you didn’t have to borrow to begin with — or borrowing less than you need and ending up behind the eight ball both for the original expense and the loan payments. Have a specific purpose for the funds and devote it to that purpose, so money spent to pay it off will be well-spent.
Get the most out of your loan. Borrow sensibly and remain diligent when paying off your commitment. It’s for the benefit of your financial health.