Are you considering applying for a Personal Loan? If you answered yes, there are some things you need to know before getting one. Personal Loan is a solid way to borrow between $1K-50K or more with some providers at a reasonable rate with fixed monthly payout amounts. We broke down the process in 8 parts, so you know what to expect.
What is a Personal Loan?
Let’s start with a basic explanation of this type of loan. Personal loans are money borrowed from traditional banks or online lenders that need to be paid back in monthly payments. The typical payback period is between one year and five years at rates between 5% to 36% APR. This kind of loan is also known as “Unsecured” because it is not backed by collaterals. Personal loans are different from credit cards or other loan types in a few ways. Credit card loans usually come with higher and fluctuating APR that result in no fixed payment terms.
Tip: Typical personal loans do have fixed terms, but there are exceptions. Therefore, if you decided to go with a personal loan, look for a fixed rate agreement.
1. A personal loan should be a short-term solution.
Personal loans can be a helpful solution to provide you with the money you need to get you out of emergency or financial crisis. Whenever you borrow money from banks or online providers it comes with an interest rate and the longer your terms are the more you pay on top of what you have borrowed. Therefore, it should be a short-term solution to your financial needs.
Tip: Always try to pay off your loan as soon as possible to avoid high-interest rates and paying more than you need to.
2. Your credit score matters!
Your credit score is a magic number that tells lenders where you stand. From a glance, they can decide whether to let you borrow money or ask you to look elsewhere. In other words, it tells them how much of a risk you pose in terms of finance. Credit scores run from 300 to 850. The higher your number, the more confident lenders will feel when borrowing money to you. Generally, to qualify for a personal loan you’ll need a credit score of 660+. Also, the loan amount they can approve you for is dependent on your score.
Tip: It is essential to be in good standing when taking out a personal loan. Your chance of getting one as well loan amount and payout terms are dependent on your credit score.
3. Your income is an important factor.
In the previous part, we’ve talked about the importance of your credit score. However, that is not the only decisive factor for getting a personal loan. Since no collateral can be used by loan providers in case you don’t pay, lenders rely on your income to decide how much they can lend you and how much you can afford to pay back. As a general rule the more you earn, the more you can afford to borrow. In some scenarios, lenders won’t let you borrow if your income is below a certain amount even if your credit score is on a high side.
4. Interest rates and Fees.
It is very important to know interest rates and fees before signing a contract. Interest rates are a little high on unsecured loans because there is no collateral involved, such as your house, auto, RV or a boat.
Typical interest rates you can expect are between 5% to 36%. As mentioned previously, your credit score and income are the biggest influencers. When taking out a loan you can also expect to pay fees in the following scenarios:
Pre-payment fee: Some loan providers will charge you a fee if you pay them back in full earlier than your terms agreement. It is very important to read the fine print and look for providers who allow paying back earlier.
Origination fee: Some loan providers will charge you for the expanses that occurred when issuing you a loan. These fees can be for loan paperwork and pulling your credit report.
Late-payment fee: As long as you keep your payments up-to-date- don’t worry about it.
Up-front fees: Stay away from lenders requiring to pay upfront before approving you for a loan and signing the documents.
5. Personal loans can save you money.
In some cases, personal loans can save you money from a previously incurred debt. If you are slammed with high-interest credit card payments or huge payments from previous loans because of late charges it is a good idea to take out a personal loan and pay off high-interest loans. This is especially useful if you find a loan with a low APR. It is a lot easier to make one payment rather than making several loan payments with penalty charges. Before making this move, be sure it makes sense economically and won’t cost you more.
7. Can you afford the loan?
Even if lenders approve you for a loan it doesn’t mean you should take it. Regardless of lender, all loans come with interest rate and you will always end up paying more than what you have borrowed. Go through all the pros and cons and then make a weighted decision. We’ve seen cases where short term solution created more issues than it has solved.
8. Shopping for a loan?!
Finally, you weighted all ins and outs and decided to take out a personal loan, but how should you approach it and where to find the right provider? If your credit score is high and your income is good, it would be a good idea to apply at your bank or credit union as you will get better terms and you have a high approval rate. If you decided to get personal loans online make sure to check several loan options and select one with the lowest APR and “consumer-friendly” pay-out terms.
The more you know about personal loans, the less chance you have been scammed or paying more than you need to. Personal loans are not for everyone and by being informed you can make a confident decision whether to take out a loan or wait and think of some other option.