11 loan lessons
learned—before
you apply

By Roxanne Hawn

I got my first credit card and my first student loan when I was 18 and a freshman in college. I learned a lot from both. Yet, years later, I found myself a little shocked by how personal loans are different. While credit card companies practically begged me to sign up on campus, my hometown bank rejected my personal loan application — even though I got a great job after graduation.

It turns out that all credit isn’t created equal, and being an attractive borrower is about developing good habits.

“Personal finance isn’t rocket science. It’s a lot of basic, common sense things. It’s just that younger folks haven’t had exposure to it yet,” says Chad Jones, CFP, financial education adviser at Colorado State University’s College of Veterinary Medicine and Biomedical Sciences.

It also helps to watch for common mistakes that can cost you more money and put your loan repayment at risk. Here are 11 tips to follow before applying for a personal loan.

1. Think about what you’ll give up

Zina Kumok, author of Debt Free After Three, a blog about paying off her student loans quickly, says: “When you’re considering getting a loan, consider what you’re using it for and what else you could do with that money. Getting into debt means giving up something else, which could be working at a job you love that pays less or taking an overseas vacation. Saying yes to debt could mean saying no to something you want more.”

2. Budgets don’t work, unless you already understand your spending habits

Jones recommends tracking every dollar you spend, on paper, online or in a spreadsheet for at least three months before taking out the loan. “In my 20 years or so of doing financial planning,” Jones says, “I’ve never seen a budget work when people start from scratch and say, ‘Going forward, I’m going to spend X number of dollars.'”

3. Know what lenders want — mainly to get paid back

“If you walk into a lender, and you have some of the ammunition you know you’re going to need, the information they are looking for, at your fingertips, that sends a clear signal that you’re on your game and you’ve thought about how you’re going to pay this back,” says Mike Schenk, senior economist for the Credit Union National Association.

4. Consider credit unions or community banks

Schenk explains that smaller financial institutions offer more flexibility and personal service. They make loan decisions locally as well, not from an HQ many states away. “You’re going to get a better deal, more than likely, and you’re also more likely to get the loan because of that flexibility,” says Schenk.

5. Try a credit-builder loan first

Schenk says that some lenders offer tiny personal loans (example, $500) to people with no credit or bad credit so that they can create a credit history in anticipation of bigger loans later.

6. Make pretend payments for a while

If you feel nervous about the realities of monthly payments, do what I do and put your anticipated monthly payment amount into your savings account for a while. It’s good practice. It takes the money out of your normal cash flow. Also, you can either use the money you save as a down payment so that you can borrow less, or you can keep it in your rainy-day fund in case you need it to make a loan payment later.

7. Understand what interest is and how it works

Jones coaches many veterinary school students on how to read their loan terms and documents so that they grasp both the total payoff of the loan and just how much of each payment goes to interest versus principal. Hint: The longer your loan lasts, the more of your early payments goes only to interest.

8. Avoid super-low teaser interest rates

Some lenders lure people with wildly low interest rates, but those rates often only last for one year. According to Jones, your interest rate can go up dramatically, costing you much more money. Once the super-low promotional rate ends, a much higher rate often kicks in for the rest of the loan’s term, or you could get stuck with a variable rate, meaning it could change several times before your loan is paid off. Keep in mind that you could end up with a payment beyond your reach in a case like this.

9. Pick a good due date for yourself

Some lenders let you choose your payment due date. Really think about how often you get paid and when the bulk of your bills come due. For example, you probably don’t want your rent and loan payments due at the same time. “I think that’s a great piece of advice for a young person who maybe has not had credit in the past,” says Schenk. “Their focus is going to be, ‘Oh my gosh, I just want to get this loan,’ and it may not even be on their radar screen [that some loan details are negotiable].”

10. Don’t let stupid mistakes cause late fees

I once got dinged with a late fee because I forgot to write the loan number on my check. Even though I mailed the payment on time, even though I included the loan payment coupon, my lender claimed it took longer to process my payment — making it post to my account late and causing the late fee.

11. Watch out for early-payment penalties

Read your loan papers before you sign, and particularly make sure there is no penalty for early payments on the principal, which is the actual money you borrowed. Why does that matter? If you get a windfall, and you want to pay some or all of the loan off early, you want to make sure that a) you aren’t paying interest, and b) you aren’t paying a penalty fee.

Remember, loans are meant for big, important purchases. If you can save enough to buy something with cash, do it. If not, then practice good money habits so that the loans you really do need will build your future — not hamper it.