Content of the material
- Asking family for a loan is not without risks but can save you in a financial pinch
- 7. All of your personal financial details
- What it is
- 5. Will the money help my business grow?
- How long does it take to get a loan?
- What are the different types of personal loans?
- Make sure you have a plan
- Apply for the Loan
- Know Your Rights Under Regulation Z
- Collateral and personal loans
- 6. Does the personal loan have fees?
- 5. Make sure your bank offers personal loans
- Michigan Motorcycle Helmet Laws
- 8. Do I have all the documentation I need to apply for the loan?
- Why it matters
- 2. If something looks amiss, pull your credit report
- 4. How much will I pay in interest?
- Terms to watch for in a business loan contract
- Tips for speeding up the process
- 4. Complete details on Accounts Receivable
- Achieve Your Business Goals with Landmark National Bank
Asking family for a loan is not without risks but can save you in a financial pinch
We all need money from time to time and it’s not always easy to come by if you don’t have perfect credit. Sometimes asking family or friends for a loan may be your only option.
Even with all the risks, it might also be your best option.
Asking for a loan from friends or family can save you from sky-high interest rates, loan sharks and a debt trap from which you might never escape.
Borrowing from family has the advantage of flexible repayment terms, low or no interest, and maybe even being able to defer payments and pay it off later. There’s also the stigma and embarrassment of asking for a loan and the risk of not being able to pay it back though.
Let’s look first at five questions to ask yourself before asking for a loan. Then I’ll share four steps to asking family for a loan that will put everyone at ease.
7. All of your personal financial details
This includes social security numbers, net worth, details on assets and liabilities such as your home, vehicles, investment accounts, credit card accounts, auto loans, mortgages, the whole thing.
For businesses with multiple owners, or partnerships, the bank will want financial statements from all of the owners who have significant shares.
And yes, as I implied in the introduction to this article, that’s leading to the personal guarantee. Expect to sign a personal guarantee as part of the loan process.
What it is
Capacity is an indicator of the probability that you’ll consistently be able to make payments on a new credit account. Lenders use different factors to determine your ability to repay, including reviewing your monthly income and comparing it to your financial obligations. This calculation is referred to as your debt-to-income (DTI) ratio, which is the percentage of your monthly income that goes toward expenses like rent, and loan or credit card payments.
5. Will the money help my business grow?
If you’re borrowing $10,000 for payroll or other routine operating expenses, you’re not generating more revenue from the loan and could find yourself in the same spot three to six months from now. Instead, you should put borrowed dollars into the parts of the business that will generate more revenue over time and help reduce future borrowing needs, Gass says. “If I take that dollar and leverage it, put it into sales and marketing and drive more revenues — $1 driving $5 — then it’s worth it. It’s all about growing the business.”
How long does it take to get a loan?
The time it takes to get a loan will largely depend on the type of loan you're getting, how much you need, your financial situation, and the lender you use. The underwriting process for an auto loan or personal loan can be as quick as a day or two, but the process for a mortgage can take a month or more. Getting pre-approved before you actually make your purchase can help speed up the process.
What are the different types of personal loans?
The different types of personal loans are:
- Debt consolidation loan: rolls multiple debts into one new loan
- Co-signer loan: a loan that you need a co-signer to qualify for
- Secured and unsecured loans (unsecured are more common)
- Fixed- and variable-rate loans (fixed are more common)
Make sure you have a plan
As King mentioned above, you don’t want there to be any more hurt feelings or tension than is necessary. That’s why she suggests you: “Develop a plan that is beneficial to both parties – one that will help you out without hurting the family member or friend. And then aggressively plan on paying back the money before anything else.”
She even offered a personal example from her own family: “Many years ago, my mom borrowed money from her dad to buy her first car. She was supposed to pay him back a small amount each month until it was paid. She actually paid him off every week and paid him much more than agreed upon. To her, paying my grandfather back was the most important thing right behind housing.
“What she did 50 years ago still works great today. If and only if you must borrow from a friend or family member, ask as little as possible, go in with a payment plan, and then make it a priority to pay back.”
Apply for the Loan
You’re ready to get your bank loan once you’ve:
- Spruced up your credit
- Settled on a loan amount
- Picked the best type of loan
- Shopped the competition
- Run the numbers
At this point, you can go to your chosen lender and apply. The loan application process is easy to start: Simply tell the lender you want to borrow money, and tell them what you’re going to do with the funds (if required). They will explain the next steps and how long the process will take.
When filling out an application, you'll provide information about yourself and your finances. For example, you'll need to bring identification, provide an address and social security number (or equivalent), and supply information about your income.
Before you apply, make sure you can provide proof of a consistent income to boost your odds of being approved for a personal loan. If your income (or credit score) isn't sufficient, look for a co-signer (a family member, for example) with a higher income and credit score than you have.
Know Your Rights Under Regulation Z
In 1968, the Federal Reserve Board (FRB) implemented Regulation Z, which, in turn, created the Truth in Lending Act (TILA), designed to protect consumers when making financial transactions. Personal loans are part of that protection. This regulation is now under the auspices of the Consumer Financial Protection Bureau (CFPB).
Subpart C–Sections 1026.17 and 1026.18 of the TILA require lenders to disclose the APR, finance charge, amount financed, and total of payments when it comes to closed-end personal loans. Other required disclosures include the number of payments, monthly payment amount, late fees, and whether there is a penalty for paying the loan off early.
Collateral and personal loans
Collateral is an asset, like a car or home, which might be used to pay back the loan if you are unable to send in payments for a long time.2
If a loan does require collateral, it’s called a secured loan. A home loan or a car loan would be considered a secured loan. How do they work? Well, for example, when you take out a mortgage, the home is usually used as collateral. If you miss too many mortgage payments, the financial institution that lent you the money could take your home in return for the money you received and weren’t able to repay.
Personal loans that don’t require collateral are called unsecured loans. But without collateral, the interest rate on the loan may be higher.3 Interest is a fee for using the bank’s money. That interest is typically included in your monthly installment payments.
6. Does the personal loan have fees?
Personal loan lenders may charge a sign-up, or origination, fee, but most don't charge any fees other than interest.
An origination fee is a one-time upfront charge that your lender subtracts from your loan to pay for administration and processing costs. It's usually between 1% and 5%, but sometimes it's charged as a flat-rate fee. For example, if you took out a loan for $10,000 and there was a 5% origination fee, you would only receive $9,500 and $500 would go back to your lender. It's best to avoid origination fees if possible.See our top picks for personal loans:
Select's list of the best 5 personal loans
5. Make sure your bank offers personal loans
To get a personal loan from a bank, you’ll generally need to be an existing customer with good credit. Some banks don’t offer personal loans, so you’ll want to find out what your bank does offer.
If your bank doesn’t offer loans — or even if it does — you may want to get quotes from online lenders and credit unions. These options can be an alternative to bank loans, or a basis for comparison.
After you’ve checked rates offered by online lenders and credit unions, see if your bank will offer you a better deal.
Michigan Motorcycle Helmet LawsIn Michigan, motorcyclists over the age of 21 can opt out of wearing a helmet if they have the proper coverage and have passed a motorcycle safety course.
Rob ShapiroFeb 25, 2022
8. Do I have all the documentation I need to apply for the loan?
Arora says some studies have shown that as many as four in five loans never close not because the business didn’t qualify, but because of the paper chase. When applying for a business loan, you will need a lot of documentation. For example, if you’re seeking an SBA loan, Arora recommends you provide the last three years of business and personal tax returns, personal financial statements and financial projections for the next 12 to 24 months. “If you go to the [lender] and aren’t fully prepared, not only does it make you look unprofessional,” he says, “but by the time you get the documentation in place, it might be outdated.”
Why it matters
Collateral is important to lenders because it offsets the risk they take when they offer you credit. Using your assets as collateral gives you more borrowing options ― including credit accounts that may have lower interest rates and better terms.
2. If something looks amiss, pull your credit report
Your credit score is three-digit number that measures your likelihood to repay a debt. It’s based on the information contained in your credit report, which monitors all of your credit-related activity.
You can find your credit report for free on annualcreditreport.com from any of the three major credit bureaus weekly through April 20, 2022. While this report won’t give you your credit score, it will show you information about your credit and payment history, which lenders use to decide whether to give you a loan. Reviewing your credit report can help you know what you need to improve.
4. How much will I pay in interest?
Your interest rate depends on a number of factors, including your credit score, loan amount and your term (length of time you'll be paying the loan back). Interest rates can be as low as 3.49% and as high as 29.99% or more. Typically, you'll get the lowest interest rate when you have a good or excellent credit score and you choose the shortest repayment term possible.
According to the Fed's most recent data, the average APR for 24-month personal loans is 9.39%. This is often well below the average credit card APR, which is why many consumers use loans to refinance credit card debt.
Personal loan APR is most often fixed, which means it stays the same for the life of the loan.
Terms to watch for in a business loan contract
Besides the type of loan you apply for, consider the details of the loan. Each loan comes with its own interest rate and loan term, among other points of consideration that are as equally important as the type of loan you take on. It’s important to read the contract in full to make sure there aren’t hidden terms or fees.
When applying for a bank loan, check the following:
- Rates: Aside from the amount of money you wish to borrow, the loan rate – otherwise known as the interest rate – is something you absolutely must determine. Loan rates differ based on the type of loan you’re seeking, the bank you’re borrowing the funds from and your personal credit score, among other things. When seeking out a business loan, you want one with a low interest rate, if possible. Depending on the type of loan, you may see rates range anywhere from 3% up to 80% annual percentage rate.
- Term: A business loan’s term is the length of time you have to pay the loan off. Like the loan rate, you generally want a shorter loan term if you can afford the payments. The longer your rate is, the more interest you will pay over time and the more your loan will cost overall.
- Banking relationship: To be considered for a bank business loan, many institutions require that you have an existing relationship with them first. If this is not the case, you’ll need to open an account with a bank and establish a working relationship with it over time.
Key takeaway: Carefully consider the type of loan your business will need, along with the type of agreement you will have to enter once approved.
Tips for speeding up the process
If you’re looking for a personal loan, you likely want to get your hands on the money as soon as you can. These tips can help you avoid delays when applying for a personal loan”
- Check your credit report before applying. Know where your credit stands before shopping around for personal loans. Good credit can make it easier to qualify for a personal loan at a lower interest rate. Furthermore, spotting and correcting errors immediately is a simple way to avoid issues later on when you’re applying for a loan. Pay off debt. If you have debt and you don’t need the loan funds urgently, paying some debt off can raise your credit score and lower your DTI ratio, which can increase your chances of approval.
- Talk to your existing financial institution. Banks and credit unions might be more willing to consider a personal loan application from a customer with whom it’s had a positive, long-standing relationship.
- Get prequalified. Some lenders have a prequalification process that you can undergo without a hard credit check. You can also get an idea of what your loan rates and terms may be before you apply to determine if moving forward with the lender is worthwhile.
- Consider online lenders. Many online lenders offer next-day loan decisions, and funds may be deposited into your bank account within a few days after applying if you are approved.
- Pick loan funds up in person. If your lender has a brick-and-mortar location, ask if there is an option to pick funds up at the branch so you can get the money faster.
4. Complete details on Accounts Receivable
That includes aging, account-by-account information (for checking their credit), and sales and payment history.
Achieve Your Business Goals with Landmark National Bank
At Landmark National Bank, we want you to feel confident presenting your loan request to one of our commercial bankers. Aside from preparing the proper documentation and information for your meeting, it is important to remember to just be yourself. We enjoy doing business with honest, hard-working people who are passionate about their goals. For more information on what we require for your loan request meeting, feel free to find a Landmark National Bank location near you or give us a call today.