What Young People Need to Know About Qualifying for Their First Loan

At some point early on in your lifetime, you’ll need to go to another to get funds for a purchase. Whether it’s your first nice vehicle or a new home, there are many lenders out there that can give you the money you need to make that purchase. However, being qualified for a loan is a whole other story. Here are some things that you definitely need to know about qualifying for your first loan.

You Need Income to Show You Can Repay the Loan

It’s important to note that you must have a steady source of income to show the lender before they’re ever going to qualify you for a loan.

They’re not just going to give you a loan without knowing that you’re financially capable of repaying it.

In this same respect, the size of your income is going to determine your maximum loan amount.

Lenders will take into account how much you can afford to repay each month and give you a maximum loan amount that you’ll be qualified to borrow.

Your Credit Score Matters

Every adult is given a credit score from the three major credit bureaus.

These are Equifax, Experian, and TransUnion. The higher the number, the better borrower you are and the more desirable a lender such as federal credit union will find you.

When you’re a desirable borrower, lenders will offer you better rates than those who are less desirable.

This means more savings on your loan. So, understanding your credit score and where it ranges on the scale of poor to excellent is a must before applying for your first loan.

You’ll Likely Need Collateral

Collateral is a financial term that is used to describe a physical property that is used as security for the repayment of a loan.

For example, when you get a car loan, the car will be used as collateral to ensure repayment.

In the event that you don’t pay back the loan, the lender will take legal possession of the car because it was the collateral for the loan.

Most loans will require that you put up some form of collateral as insurance for the lender that you’ll actually pay them back.

Your Debt-To-Income Ratio Matters

When you apply for a loan, you may be asked to share your existing payment obligations.

In many cases, the lender will pull this information from your credit report.

A lender will look at your existing debt payments each month and compare that amount to your monthly income.

This is called your debt-to-income ration. If this ratio is too high, then the lender will not qualify you as they can tell that your income is unable to support a combination of your existing debt payments and your new payment.

Getting qualified isn’t overly difficult to do.

When you understand the basics of what lenders are looking for you can better situate yourself financially to be a desirable borrower.

Realize that a loan is a big commitment for both you and the lender.

They want to ensure that you’re going to be able to repay them the borrowed funds before they lend them to you.

Tags: car loan, First Loan, Qualify for a Loan

Category: Loans