People take out finance for any number of different reasons – perhaps a home extension or to start a business or even just to see them through more difficult times. We’ve all come across lean times through our lives but knowing how to approach a lender to ask for a loan can sometimes seem quite daunting, particularly if finances are tight.
Unfortunately, one of the first things a lender will want to establish is whether you have the ability to pay them back. So, you must do a little preparatory work to help convince the lender you’re worthy of their investment. Here are just a few of the necessary questions a lender might ask.
How much do you need to borrow?
It might sound an obvious consideration, but the first thing you need to decide is how much you need to borrow. This figure will vary depending on your circumstances or what the loan is for, but you should have a firm idea in your head of the amount you need to borrow before approaching a lender. This, after all, will form the basis for all further conversation with any hard money lender.
Why do you need the money?
A lender won’t sit as judge and jury on your reasons for borrowing – however, they are far more likely to back you if they can see the money is to be used for some form of investment. For example, taking out a loan for home improvements will let the lender see their money is being used for positive effect and is likely to increase your wealth at the same time. On the other hand, borrowing for a trip to Vegas is somewhat less positive (although this wouldn’t necessarily mean you wouldn’t get the money). Having a good reason for borrowing will help the lender make a clear and quick decision as to whether or not the lender thinks they should give you money.
How do you intend to pay back the loan?
The primary concern for any lender is your ability to pay back the money they lend you. You will need to provide concrete evidence that you’re good for their money – including any charges and additional interest levied. A lender will also need convincing that, no matter what troubles might come your way, you will still stay true on your promise to repay. Prepare a comprehensive breakdown of your current income and expenses and make a plan showing how structured repayments will fit into your financial situation. If need be, include details of savings, collateral or assets you already have which can substantiate your validity to make the repayments.
Consider adding collateral into the equation
Depending on your current circumstances or the amount you need to borrow, you could consider guaranteeing your loan with collateral (for example, your home). Remember, doing so will put you at risk of losing your house should you fail to make the repayments, so be prudent before including this type of backing.
How good is your credit history?
Having a poor credit history is, unfortunately, one of the most significant warning signs to a lender. Having a history of defaulted loans doesn’t look great. However, you can’t hide this information and every lender will check your credit scores – both personal and business. If you have defaulted on loans in the past, be prepared to explain why and how these problems arose. Bad credit history is the number one reason most loans are refused. Nonetheless, a lender may still consider you if you’re frank and honest, so be prepared to discuss your financial history openly.