A personal loan can be the ticket for all the challenges life throws our way. Whether we are moving across the country, setting up a new business or needing to pay off debts, a personal loan is a credible and well used option.
Most personal or cash loans are unsecured, meaning they don’t require collateral such as a house or car, so it’s always good to browse the market for the best deal. Loan amounts range from $1,000 to over $50,000 and are paid back in fixed monthly payments, typically over two to five years, but this is dependent on the lender’s terms and conditions.
As with most things credit related, it relies heavily on your credit score. Those with healthy scores will be able to access the best deals available with lower monthly payments and lower interest rates. Those with bad scores will still be considered for some loans but at a higher cost, though you should only take out the loan if you can manage the payments outlined by the lender.
Here is your step by step guide on how to get that personal loan you’ve always wanted, but never known how to go about getting it:
1. Be aware of your credit score
The general formula here is the stronger your score, the better your deal when it comes to applying for your personal loan. Assess your creditworthiness by checking your free credit score. In general, scores fall into the following categories:
- 720 and higher: Excellent credit
- 690-719: Good credit
- 630-689: Fair or average credit
- 300-629: Bad credit
Before approaching loan providers, it’s always best to take some time out for some credit score housekeeping, or in some cases, heavy damage control. The biggest factors affecting your credit score are on-time payments and the amount of credit you use relative to credit limits. You can request your credit score free of charge and don’t be afraid to challenge anything that may be incorrect, even computers can make mistakes.
2. Consider Other Credit Options
You’re probably thinking, can I get a better deal than a personal loan? The answer might be yes. Some credit cards offer packages of 0% interest for a specified welcoming period. If you need the loan for a one off purchase, it may be cheaper to a credit card of this description. However, if you have any doubts that you won’t be able to pay off your debt before interest is added, this isn’t the option for you.
Another avenue of credit to explore would be a secured loan. If your credit isn’t great, you may get a better interest rate with a secured loan. The downside of this loan is that it requires collateral in the form of assets. If you are certain you can make the repayments, then secured loans are comparably a lot cheaper than unsecured loans.
Another option to consider is to add a co-signer into the mix, which may be the only option for borrowers who don’t qualify for a loan on their own. The lender considers the credit history and income of both the borrower and co-signer in approving a loan and may offer better terms.
3. Check if you’re eligible
After deciding to get a personal loan, it’s now time to get pre-qualified for a loan. This is done by visiting a credit-check website, such as Experian, and performing a soft credit check. This explores your eligibility for the loan without affecting your credit score.
During pre-qualification, you may be asked for this information:
- Social Security number
- Monthly debt obligations (rent, student loans, etc.)
- Employer’s name, work address and phone number
- Address, email, phone number
- Previous addresses
- Date of birth
- Mother’s maiden name
- College name and major
Unfortunately, you may not pre-qualify for a loan. Besides a low credit score, reasons for being denied include being on a low income, short work history, high debt in other areas and enquiring about too many credit channels in a short space of time.
4. Compare the Market
Now you know your credit score and you’ve been pre-qualified – it’s clear sailing from here. You’ll have a range of offers available to you and we advise that you take your time and review your options carefully in order to get the best deal for you. It may also be a good idea to consider your local credit union or bank. Credit unions may offer lower interest rates and more flexible terms, especially to borrowers with bad credit. They are also the best lenders for amounts under $2,500.
5. Check the terms and conditions
The moral of this section is to make sure you go through the terms of your loan with a fine tooth comb and be inquisitive, if you don’t understand any parts of your agreement, ask your lender questions, as you could be stung with the following:
- Prepayment penalties. Most online lenders do not charge a fee for paying off the loan early, but some might, so be sure to find out.
- Automatic withdrawals. If a lender requires payments be automatically withdrawn from your checking account, consider setting up a low balance alert with your bank to avoid overdraft fees.
- APR surprises. The total cost of your loan, including any origination fees, should be clearly disclosed and figured into the annual percentage rate.
However, it’s not all doom and gloom. With the bad, also comes the good:
- Payments are reported to credit bureaus. Your credit score benefits if the lender reports on-time payments to credit reporting agencies.
- Flexible payment features. Some lenders let you choose your payment due date, forgive an occasional late fee or allow you to skip a payment in case of hardship.
- Direct payment to creditors. Some lenders will send borrowed funds directly to creditors, which is especially beneficial for borrowers who are consolidating debt.
6. The Final Countdown
Once you’ve selected your provider, the loan and read your agreement, it’s time to undergo some fun administrative tasks, such as:
- Provide Identification: passport, driver’s license, state ID or Social Security card
- Verification of address: utility bills or copy of lease
- Proof of income: W-2 forms, pay stubs, bank statements or tax returns
The lender will run a hard credit check, which may lower your credit score but this is only short term. Upon final approval, you’ll receive your funds according to the lender’s terms, typically within a week, but this is reliant on your loan providers terms.
Lastly, taking out a personal loan can help you relieve your debt load and cover unexpected costs, but take stock of your options before settling on one choice. Find the lowest rates, borrow only what you need to and repay the debt on time, or it may cause you more financial trouble than you had before.