Personal loans refer to borrowed money that can be utilized to finance large purchases, debt consolidation, emergency expenses, and more, with the intent of paying back the original sum plus interest. How you use the loan depends on you, as long as the money is paid back within the allotted timeframe.
A personal loan is unsecured, meaning they are not backed up by collateral, an asset that lenders accept for loan security. If you’re a young professional, a millennial, or a beginner in taking out loans looking for financial assistance, consider this quick guide to getting a personal loan.
6 Practical Tips When Getting a Personal Loan
1. Choose the right lender
Several banks and non-banking financial companies will have attractive offers right off the bat. However, doing thorough research and comparing the benefits of each lender is the best course of action in identifying the ideal lender for your situation.
You could go online, consider using third-party websites to help you, and weigh out the pros and cons of each lender. It’s in your best interests not to accept the first loan offered to you; always shop around before committing to a loan.
Traditional banks are no longer the only ones offering personal loans. Credit unions, community banks, online banks, and online lenders could give you a better rate than well-known banks. All lenders evaluate differently depending on various factors and criteria, so make sure to expand your options.
2. Check your credit score
Personal loans rely heavily on creditworthiness and determine the interest rate you receive on a loan. As such, you must check your credit score before sending out applications to lenders. The ideal credit score is 670; anything less than that will make it difficult for you to get a decent interest rate on your loan.
Since every lender evaluates eligibility differently, it will enable you to assess whether to pursue a particular lender in taking out a loan. You can check your credit scores and acquire credit reports from credit reporting agencies.
3. Consider the risks of your current liabilities
Existing debt must be taken into account before applying for a personal loan. If you’ve previously taken out a loan or have credit cards to pay off, evaluate your debt-to-income ratio by considering factors like tax brackets to determine your capability of paying.
Suppose you’ve determined your debt-to-income ratio is less than 30%. In that case, it would be best to consider other alternatives like taking out a secured loan. However, if you’re adamant about taking out a personal loan, consider enlisting a cosigner to improve your odds.
A cosigner is a secondary borrower who can boost your loan application by offering their credit score, reassuring lenders that the loan will not be left unpaid.
4. Determine how much to borrow
Deciding how much to borrow is critical since there’s no reason to pay interest on the money you’re not going to need. Ideally, you should only borrow an amount you can afford to pay off.
It’s recommended not to take out loans with payments that take up more than 5% to 10% of your monthly budget.
5. Get pre-qualified
Once you’ve eliminated loan options you’re ineligible to acquire, consider lenders who offer to prequalify or preapprove you with a soft inquiry. Lenders use pre-qualifications or pre-approvals to determine if an individual fits the general profile of what they consider an ideal borrower.
During the pre-qualification, you’ll typically be asked to fill out a short form and provide your personal and contact information, income, and the amount you need. After filling out the pre-qualification form, the lender will conduct a soft inquiry and then notify you if you’ve qualified for the loan.
Taking these measures won’t guarantee you’ll be granted a loan. However, it does increase your chances of securing a loan by getting a pre-qualification or pre-approval from multiple lenders.
6. Look closely at fees
Ensure that you fully understand all the details stated in the contract since certain charges apply to personal loans; these include processing and foreclosure fees.
Aside from these rudimentary fees, factors like annual percentage rate, repayment period, monthly payments, origination fee, and penalty charges should be identified in the loan document before concluding a deal. Closely examining these factors and costs will ensure you do not have to pay hidden fees.
Keeping Your Options Open
Personal loans can fill a gap in your budget without risking your home or other assets. Borrowing individuals find this method ideal, as it affords flexible repayment terms, lower interest rates, and higher borrowing limits. These factors make personal loans an option that provides fewer risks to get you out of a financial bind. However, no process is perfect, and you still must consider the pitfalls of borrowing money.
Equip yourself with knowledge by keeping these tips in mind as you take out a personal loan for the first time.
