Have your eye on a shiny set of wheels, or a kitchen renovation, perhaps? Unless you’ve got a lot of cash on hand, you’re likely to consider a loan or line of credit to finance your big purchase. Before you apply online or discuss your options with a lender, you’ll want to be prepared. Here’s a list of what you’ll need:
1. An established credit history
You need credit to get credit, and a loan or line of credit should be easier to get if you already have a proven track record of on-time payments. You’ll also want an idea of your credit score, which will typically rank between 300 and 850.
2. A low debt-to-income ratio
Your debt-to-income ratio is your amount of monthly debt payments compared to your monthly income. Knowing this ratio can help you figure out how comfortable you are with your current debt, and lenders will use the calculation to figure out if you can afford another loan payment. While you want your credit score to be high, this ratio—measured on a percentage scale from zero to 100—should be low. To figure it out, add your monthly debt obligations (your rent or mortgage, plus any existing loans and minimum credit-card payments) and divide this sum by your gross monthly income (your income before taxes and other deductions).
3. A firm grasp on interest rates
Do your homework on current interest-rate trends to gauge what’s competitive. Visit your bank’s website to see the going rates for different types of loans and lines of credit they may offer, including home, auto and student.
4. An idea of what you can afford
You don’t want to bite off more than you can chew, like heading home in a full-size vehicle if you’re on a compact budget. Plan how much of your monthly income you’ll put toward loan or line payments, how long you’re giving yourself to pay it off and how much—if any—money you can put down. Search for online tools to help calculate monthly payments based on the loan amount.
5. All of your paperwork in order
Your banker will require a paper trail that tells your financial history. Make sure you’ve gathered up your last few paystubs, tax returns, W-2s and bank account statements. You may not need everything, but it’s better to come prepared.