If you’re a young professional looking to make a big purchase or immediately clear a pending balance, then applying for a loan is a reasonable step to take.
That said, many folks in this demographic may find themselves unprepared to face the nuances and complexities involved in the loan application process.
From vetting various lending companies to finding reasonable terms, the early stages of loan acquisition can be understandably hard to navigate for novices to the scene.
Furthermore, missing loan repayments can have a significant impact on Gen Z individuals, especially since many are still early in their careers and may not have a stable or high income yet.
But for many Gen Z folks, taking out a loan is something they must do to alleviate the individual financial pressures that they may be facing. And if you fall under this demographic, then you’re in the right place.
This article will highlight some tips to help Gen Z individuals make the most out of their upcoming loan application. Without further ado, let’s uncover seven of the most crucial steps to follow when applying for a loan.
1/ Research Different Loan Types
Before signing up for the first loan deal you find, it’s vital to know beforehand what type of loan you want to get. There are multiple lending options that Gen Z people can consider pursuing: personal loans, student loans, and credit lines are some popular loan types, to name a few.
Each loan type may appear uniform on the surface (that is, they each provide you a lump sum), but each serves a different purpose and comes with different repayment terms and interest rates, more often than not. If you need a lead, you can find a variety of loan types with Azora’s loan options.
For instance, personal loans can be taken from friends and family and have more informal and flexible terms depending on your relationship with them. On the other hand, credit lines may be secured and would need collateral for the lender’s protection. Some loan types may also consider one’s credit score before they approve or deny applications.
In any case, going through different lending options can help lead you to the best one that suits your specific needs. This allows you to align your financial goals with the most suitable loan structure, ensuring you get the benefits with little compromise.
2/ Define Your Loan’s Purpose
In any stage of adulthood, it’s important to clearly define your financial goals to ensure that you’re setting yourself up for success later in life.
With loans playing an integral role in either making or breaking your financial balance, it’s crucial to pinpoint their exact need in the greater scheme of your lifestyle and weigh their overall significance.
You shouldn’t take out a loan with no actual reason—this could put you in financial trouble if you fail to make any payments on time. This is especially true if you lack control of your money and are easily swayed to make impulsive purchases from time to time.
Instead, you should strive to remain objective and tie the loan’s value to something useful and fruitful. This could be something like education, a business venture, medical bills, or a major acquisition.
By having a clear plan for your borrowed funds, you can maximise the value of the lump sum without jeopardising your own financial welfare. This, in turn, helps ensure your financial safety.
3/ Scrutinise The Fine Print
Loan agreements may look attractive on the surface, but it’s crucial to scrutinise the tiny details before affixing your signature to the contract.
Some lending agreements may offer attractive terms but hide miscellaneous fees, absurd penalties, high interest charges, or other undesirable conditions that could make handling monthly repayments a living nightmare.
Moreover, even some reasonable contracts could include clauses that you simply can’t afford to cover, like a variable interest formula that’s bound to increase and exceed your monthly allowable spending for the loan.
In any case, it’s essential to look at every angle of the loan agreement before fully getting on board with it. You may contact a lawyer or financial consultant to help you digest the contractual information. This way, you’ll know for certain what you’re getting yourself into.
4/ Watch Your Credit Score
Your credit score is an essential measuring factor that lenders use to evaluate your overall profile. If the score is low or substandard, these lenders may not be willing to give you favourable interest rates or may require you to hand out a large collateral for security.
On the other hand, if you have a good credit score, you’ll be able to access lower interest rates or may be exempted from giving personal guarantees to access the loan.
To grow your credit score, you have to build multiple positive habits consistently. This includes paying your credit card bills on time, submitting accurate credit reports, and not maxing out your credit cards.
If you maintain a good score over multiple months, then your credit reputation can grow significantly, boosting your chances of accessing more favourable lending rates and terms.
5/ Consider Your Cash Flow
Before taking out a loan, it’s important to assess your ability to pay it back. Don’t just look at it from a short-term perspective; evaluate your ability to pay it back over the entire length of the loan.
Generally speaking, allocating 20% of your monthly income to debt repayments is a reasonable amount. This keeps your finances flexible with little risk of overborrowing or running out of funds later on.
That said, if you currently live a lifestyle that’s paycheck to paycheck, it may be best to hold off on loaning any money. Take care of your immediate needs first, build up savings, and stabilise your cash flow.
Once you have an emergency fund that covers at least three months of living expenses, then you can look towards lending money.
6/ Be Careful Around Marketing Advertisements
Gen Z’ers, take this as a rule of thumb: if something appears too good to be true on paper, it usually is. Unfortunately, this holds true for most loan agreements.
Loan ads that promise things like low rates, fast approval, or no credit score checks can seem enticing at a glance. However, don’t fall for them—they could be a trap.
These offers may have higher interest rates or a plethora of hidden fees that exceed the amount found on traditional lending agreements. Some lenders may also be unscrupulous and shady, which can put you at risk with few protective measures on your end.
As much as possible, refrain from dealing with lenders that advertise these enticing deals and stick with trusted institutions instead. By remaining cautious and rational, you can get the benefits of a lump sum payment without dealing with a trail of attached risks.
7/ Research the Lender
Another tip Gen Z folks should follow is to take the time to thoroughly research the lender that they’re considering.
In Australia, lending companies need to have both an Australian Credit Licence (ACL) and an Australian Financial Services Licence (AFSL). These licenses allow companies to engage in credit services legally. These licenses also imply that the company is strictly regulated by the Australian Securities and Investments Commission, or ASIC.
Besides looking at the regulatory credentials of the lending company, research how customers perceive the company as well. Look at past customer reviews and derive insights on their services.
Do most customers complain or praise the company? What are the company’s strengths and weaknesses? Are they consistently offering reliable and quality services with few issues regarding transparency? Do they have a good customer service policy?
By getting a closer look at the company’s credentials and reputation, you’ll more confidently put your trust in them. You will also be able to rest easy knowing that you won’t be shortchanged by them.
We hope these tips will serve you well when finding your next lending partner. All the best!