When asking a bank for a loan, be prepared to explain your existing debts. Barely keeping your head above water with the mounting bills on your desk will not look good to a potential lender. They will want to know how you can afford taking on another expense.
Before taking the plunge, examine your debts carefully to know the likely outcome before you ask for money. Avoid the embarrassment and frustration that goes with being turned down. Here’s what you need to know about different types of debt and how they impact you.
The Big Ones
There are different kinds of debt, so find out what types you have. Do you have a car loan or another mortgage? These kinds of debts are called secured debts. A secured debt is one that has some sort of backer; it provides collateral if you cannot make necessary mortgage payments.
Let’s pretend that you fall behind on your car payment. A month or two isn’t a big deal, and the borrower will likely give you a grace period. However, if you get way behind on your bill, a fancy repo truck will show up at your house. They will tow your vehicle away as you sadly watch from the window.
Secured debts are typically large amounts with low interest rates. The reason you receive better rates on secured debts is due to the fact that the borrower can repossess the item to recover their money.
The Little Guys
Unsecured debt is a little different. Think about credit cards, personal loans, and medical bills. There is no way a loan officer can get anything from you if you don’t pay these debts. You racked up your credit card eating out and buying fancy clothes. They aren’t going to come to your house, raid your fridge, and empty your closet.
These types of loans come with higher interest rates, because the lender is taking a greater risk. They are going by the honor system in hopes you will pay what you owe.
What It All Means
Who cares what kind of debt it is? Your credit score does. A lender will review not only the number on your report, but why the number is what it is. An unsecured debt that isn’t paid back will be a blemish, but eventually it disappears.
Secured debts are much more serious. If a bank sees you have already failed to pay on a large loan, like a car or home, it will show in bold letters, “foreclosure” or “repossession.” This is a huge red flag! Most loan officers will be leery giving money to someone who doesn’t have the best track record.
What to Walk Away With
Even if you have the worst kind of debt, a home loan is not impossible. You are responsible for your future, and it’s up to you to prove you can handle the payments.
Want some help? Talk with one of our credit repair specialists today. Do you have a story about receiving a home loan with less than desirable debt? Share your story with us in the comments below.