What is Needed to Apply for a Loan?
Changing your car, undertaking home renovations, addressing emergencies, or making repairs—there are many reasons why people decide to take out loans. However, before going to the bank, it’s important to consider the financial health of each individual: crunch the numbers and check if the requirements for a loan are met with confidence.
There are always unavoidable expenses that can represent a significant outlay. Using a credit card without prior planning or resorting to fast loans with very high interest rates are not the most advisable options to handle them. Avoiding overindebtedness is especially important in times when many households may be facing financial difficulties. This is what is called financial health, and it’s time to keep an eye on it.
Can I Afford It?
It’s worth noting that a loan is a contract in which the financial institution provides a person with a sum of money in exchange for repayment within a specified period, meeting agreed conditions, and paying the corresponding interest. Therefore, before requesting an amount of money through this channel, it’s essential to carefully determine the needed sum without asking for more and calculate the interest and fees associated with the transaction.
Another crucial factor is to determine if the money can be repaid within the agreed-upon time. It’s important to be realistic about meeting deadlines because a delay in paying installments could lead to some form of penalty, thereby increasing the debt.
Is It a Justified Expense? Once it’s verified that the loan can indeed be repaid, it’s necessary to consider to what extent it’s worth getting into debt for what one wants to achieve. If it’s something that can be dispensed with or a luxury, it would be preferable to set it as a savings goal and, in a planned manner, set aside a certain amount of money periodically to achieve it.
When there is no other option, either due to the urgency of the expense or because a reduction in income doesn’t allow saving enough, resorting to debt is possible, but always in a responsible manner.
What Requirements Need to Be Met?
Before granting a loan, financial institutions usually require a series of conditions and guarantees to check the customer’s solvency and verify their borrowing capacity. These may include being of legal age, having previous loans, and having stable solvency and income. To check this last requirement, it’s common for institutions to request documents such as work history or the latest income tax return, among others. The review and approval process may take a few days.
It’s advisable to perform this assessment of our financial health on our own before applying for a loan, asking ourselves how much we have, how much we earn, and how much we can spend. In short, knowing how to assess our borrowing capacity or, in other words, the amount of debt we can take on without falling into the risk of defaults. It’s recommended that the debt level be between 35% and 40% of monthly net income.
What if I Turn to “Fast Money”?
Haste is not a good advisor. Some people prefer to bypass deadlines and prerequisites and turn to entities that offer immediate loans without requiring payment guarantees.
It’s essential to be very careful with these loans as they often come with high fees and interest rates. When reviewing the terms of the transaction, it’s crucial to pay attention to the Annual Equivalent Rate (AER) or Effective Annual Rate, which is the interest rate that will actually be charged annually and includes the nominal interest rate of the transaction, the frequency of payments, bank fees, and expenses.
Despite their drawbacks, these types of transactions are common in times of crisis due to the urgent need of users to obtain money. The Spanish Organization of Consumers and Users (OCU) warns in a study about the danger of these products “which are the most direct path to the overindebtedness of families in situations of economic vulnerability.” Therefore, it recommends not being seduced by products that offer money without demanding guarantees and never exceeding the capacity for indebtedness.