The Benefits Of Taking Out Personal Loans

Discover Personal Loans has recently completed a survey into personal loans in 2017. They found that 68% of people who took one out found that it enabled them to reach their financial goals. Furthermore, 70% said they felt more financially responsible as a result. Mainly, the survey showed the importance of trust.

“Trust in your lender is key when shopping for a personal loan. The first step to building that trust is education and there are multiple, credible sources where borrowers can gather information.”

The survey also looked at what the benefits of these loans were. The two main ones were revealed to be:

1. Lower interest rates, which was cited by 22% of those surveyed
2. Having access to funds quickly, which was cited by 21%

Other benefits included fixed monthly payments, fixed interest rates, and not requiring collateral.

How to Use a Personal Loan

The study also found that 38% of those surveyed have had a personal loan. Among these: 26% were for paying a major medical expense; 22% were to consolidate other debts; and 13% were used to set up a small business. The study also showed that less than 50% of them had more than $5,000 in savings. Hence, unexpected expenses often have to be covered by loans.

Interest Rates Matter

People think about a number of different things of importance when taking out a loan. The survey showed that:

• 43% wanted to know the interest rate before applying.
• 16% wanted to know the repayment terms before applying.
• 15% wanted to know the monthly repayments before applying.

Interestingly, all age groups believed that interest rates were very important, if not the most important thing, when considering a personal loan. Hence, they wanted to know how banks set interest rates.

“Banks are generally free to determine the interest rate they will pay for deposits and charge for loans, but they must take the competition into account, as well as the market levels for numerous interest rates and Fed policies.”

However, with other factors, there were significant differences between age groups. Specifically, those aged between 23 and 29 looked at fees (19%) and loan amount (18%) when choosing a lender. Yet those aged over 65 only looked at the fees or loan amount in 12% of cases.

Trust Is of the Greatest Importance

The most important consideration of all, it appeared, was trustworthiness. In fact, 18% of respondents said that they chose lenders based on how much they trusted them. This is something that has long been suspected, which is why PricewaterhouseCoopers has built a model on measuring trustworthiness of financial institutions.

“It is possible to measure and then proactively manage your trust levels. We did so by creating Trust Profiles for our Building Trust Awards finalists. These trust profiles are a significant part of Pwc’s Trustworthy Organisation framework, which tells us there are three different types of trust that consumers and investors look for.”

What the study showed was that people were influenced by their level of trust in a lender before applying for a loan. Additionally, it showed that people now educate themselves on their financial decisions. This means that they look for credible sources in a variety of locations to find out the actual status of different lending organizations. There has been a significant increase in the number of people who read financial blogs, for instance, and particularly if those offer important educational resources. Across the board, it appears that people want to be able to make informed decisions. They also want to feel that the lenders are customer-centric, focusing on providing information instead of selling products.

Understanding The Mortgage Approval Process

The mortgage approval process is quite complicated and hard to understand. Getting approved for a mortgage is down to a lot of different things. It is important that you understand the process, however, as this will increase your chances of getting approved.

The Process of Getting Approved for a Mortgage

When you put in an application for a mortgage, the lender you are working with will send the application itself and all the supporting documentation to an underwriter.

“An underwriter is an entity, typically a company, that is accountable for analyzing and assuming the risk of another entity. Underwriting typically happens behind the scenes, but is an important aspect of mortgage approvals. The mortgage underwriting process has 5 key steps: verification, appraisal, title search and insurance, flood certification, and surveying.”

The underwriter is responsible for looking at the scenario you are proposing and will determine whether it meets their guidelines. They will ultimately decide whether or not you meet the necessary qualifications for a loan. There are a number of specific criteria that they will look at, the most important one being whether you will be able to pay the loan back.

The Debt-to-Income Ratio

To determine your ability to repay a loan, the lender will calculate your debt-to-income (DTI) ratio

“To calculate your debt-to-income ratio, add up your total recurring monthly debt (such as mortgage, student loans, auto loans, child support and credit card payments) and divide by your gross monthly income (the amount you earn each month before taxes and other deductions are taken out).”

Most of the time, the DTI should be no more than 36%.

Credit Score and Other Factors

The second thing they look at is how likely it is that you will repay your loan. This is determined by looking at your current credit score and your payment history. This will determine how risky you are as a borrower.

Next, they look at the value of the home that you want to buy. They will use information provided by a professional lender to determine how much the house is actually worth. All lenders have a maximum loan-to-value (LTV), which is usually between 80% and 95%. The higher the value of your home and the lower the amount you borrow, the lower the LTV percentage is.

Finally, the underwriter will look at whether you can make a down payment. If this is lower than 20% of the value of your home, it is likely that you will also have to pay for private mortgage insurance (PMI), which will increase the cost of your monthly payments on the mortgage itself.

“PMI is arranged by the lender and provided by private insurance companies. PMI is usually required when you have a conventional loan and make a down payment of less than 20 percent of the home’s purchase price. If you’re refinancing with a conventional loan and your equity is less than 20 percent of the value of your home, PMI is also usually required.”

Once the underwriter has collected all this information, they will review all the documents that you have provided. They will also look at your ability to pay for the closing costs of the mortgage itself. You may also have to demonstrate that you have at least two monthly mortgage payments, sometimes more, in reserve. This will prove that you can pay for your mortgage for a certain period of time in case of unforeseen events or other emergencies.

Clearly, getting approved for a mortgage is down to a lot of different things. Besides your debt, income, down payment, credit history, home value, and personal savings, you also have to meet the different guidelines put in place by the lender.