Anyone at any time may need to apply for a loan. Even wise investors who accrue a fortune in the stock market may find themselves in a sticky situation without access to the funds they need in an emergency (and most people want to avoid using credit cards for high dollar expenses because of the huge interest rate).
Whenever anyone approaches a lender and asks for a loan, the borrower and the lender will generally follow the same steps as they develop a loan agreement. The loan agreement process is often the same, whether a person or business wants a mortgage loan, credit card loan, vehicle loan or otherwise. Here’s a brief overview of the loan agreement process that borrowers need to be aware of if they want to really know how to get a loan:
Loan agreement—Step 1: Borrowers ask a lender for a loan
If an individual or entity (borrower) wants to make a purchase but does not wish to pay with cash, the individual or entity can appeal to a lender for money. In some cases, a borrower may not have enough cash to make a purchase. In other cases, the borrower may wish to keep its cash rather than spend it.
Loan agreement—Step 2: The lender assesses the borrower’s credit history and credit score
A lender can choose whether or not to lend a borrower money. Often, the lender makes its lending decisions based on the level of risk associated with lending money to a particular borrower.
In order to determine the risk of lending to a particular borrower, the lender will want to learn more about the borrower’s financial history and current financial situation. Assessing the financial history may help the lender to understand the borrower’s financial habits and level of demonstrated financial responsibility. A credit score provides a quick snapshot of a borrower’s financial history.
Loan agreement—Step 3: The lender determines interest rate and loan terms
If a lender chooses to lend money to a borrower, the lender will generally attach an interest rate and other terms to the loan. The interest rate is a percentage of the total loan amount, as compounded over the life of the loan.
Other loan terms may include payback deadlines, prepayment penalties, late payment fees, and more. The lender will base the interest rate and loan terms on the borrower’s credit score and credit history. Borrowers with good credit are likely to get lower interest rates and more favorable loan terms than borrowers with poor credit.
As a business or personal borrower, one of the best things you can do to secure a loan is to keep an eye on your credit score and maintain a high credit score. Be sure to make wise financial decisions that can improve your chances of getting a high credit score—and maintaining it.