A personal loan is a great way to get extra cash when you’re in a pinch.
If you are considering getting a personal loan but do not know where to begin, we’ve got you covered.
This article will show you how to get a personal loan and get the best rates.
What is a Personal Loan?
A personal loan is an unsecured installment loan that is repaid in monthly installments. They are typically for $5,000-$10,000, with a repayment period of 24-60 months. They are offered by banks, credit unions, direct lenders, and peer-to-peer lending websites.
Pros and Cons of Personal Loans
1. Check Your Credit
Lenders have minimum credit requirements you need to meet to be eligible. The first thing you need to do is to check your credit rating.
You can check your credit score and report for free on several websites. Credit Karma allows you to view your credit score and monitor your credit.
What’s Your Score?
- Excellent credit – 720 and higher
- Good credit – 680-719
- Fair credit – 640-679
- Below-average credit – 580-639
- Bad credit – Under 580
Where does your score fall? If you have good or excellent credit, you will have no trouble finding a lender and getting the best rate. If you have fair credit, you’ll still be able to get approved for a personal loan but not at the best rates.
If your credit score is below average but not horrible, then you’ll have trouble finding a personal loan lender, but you still have options. Borrowers with a credit score below 580 cannot get an unsecured personal loan but may qualify for other types of bad credit loans.
Regardless of your credit rating, it’s a good idea to improve your score before applying for a personal loan. Paying down your credit card 20% of the card limit. This will ensure you’re maximizing your credit score.
2. Get Pre-Approved
Now you know your fico score, it’s time to get pre-approved for a personal loan. You will need to complete a loan application and provide documents to verify your identity, income, and assets to ensure you meet the minimum requirements.
Documents Needed to Apply for a Loan
- Drivers License or ID card
- Paycheck stubs
- W2’s from your employer
- Tax returns
- Bank statements
3. Compare Loan Offers from Multiple Lenders
- Get at least 3 loan quotes
- Get quotes within 14 days, so it does not affect your credit
- See the true cost of a loan by looking at the APR rate
You should never get a loan without shopping around for other loan offers to get the lowest rates. Interest rates and fees will vary depending on the lender.
I recommend getting loan quotes from at least 3 lenders. Since each loan company charges different upfront fees and rates. An easy way to find the true cost of a loan is to look at the APR (annual percentage rate). The APR includes all fees and interest to give you the true loan cost.
Some people don’t apply with one lender because they’re afraid of having multiple credit inquiries. However, FICO, the credit scoring model, allows consumers to shop rates without impacting their score. It’s called a “rate-shopping window.”
You have 14 days to have lenders pull your credit report and only count as a single credit inquiry. So when you compare quotes, do so within two weeks.
4. Look into Personal Loan Alternatives
Personal loans aren’t the only way to get access to cash when you need it. Before getting a loan, you should look at all available options.
A credit card is basically a loan. It’s a line of credit you can use whenever you need and have those funds available to borrow again after it’s repaid. There are key advantages to having a credit card over getting a personal loan.
With a credit card, you’re only charged interest on the money you borrow. This is especially helpful if you are not spending the money all at once. You can also keep your line-of-credit forever and be able to borrow the money again as you need it.
Home Equity Loans
If you own your home and have equity, you can use your home equity as collateral for a loan. You can get a lump sum payment with a home equity loan or get a revolving line of credit with a HELOC.
Home equity loans are much riskier because you can borrow more money at a lower rate with a longer-term, giving you low monthly payments. Be careful of using a home equity loan for debt consolidation. If you’re unable to make the payments, you could lose your home.
5. Ask These Questions
- Do you charge prepayment penalties? Some lenders may charge a prepayment penalty if you pay off your loan early.
- Are there closing costs? Lenders may charge closing costs or an origination fee. This fee is charged by lenders for processing and issuing the Compare multiple loan offers to ensure you get a good deal.
- How can I pay? Most financial institutions do not accept credit cards for payments. Make sure you can electronically make your payments with your bank account.
- Will I have a fixed rate? There are fixed-rate and adjustable-rate, or variable rate loans. A fixed-rate loan means your interest rate and payment will remain the same throughout the life of the loan. A variable rate loan has a rate that will adjust annually.
- What is the APR? The easiest and quickest way to compare loan offers is to use the APR. The APR includes the interest charged and all fees to give you the true cost of the loan.
6. Watch out for Predatory Lenders
The personal loan industry has become much more regulated predatory lending practices. Charging high-interest rates and various large fees may be illegal in your state if your loan offer has a high rate, or look at your state laws on predatory lending.
What to look out for:
- Interest rate above 25%
- Unusually high origination fees
- No limit on the rate disclosed in the agreement
- High rate on secured loans
Good and Bad Reasons to Get a Personal Loan
Among the most typical reason, consumers seek a personal loan is for debt consolidation. But unless you’ve got a definite repayment strategy that’s manageable, then you could find yourself in a much worse financial situation than when you started.
An unsecured loan is a workable alternative for debt consolidation when you’ve got substantial debt. I strongly advise against any loan for unsecured debt.
- To make major repairs or renovations to a home.
- To start a new business.
- Pay off student loans or high-interest credit card debt.
- Make repairs to your vehicle.
- Medical emergencies
- To take a vacation or travel.
- Buying unnecessary items such as clothing
- To buy a car when you can’t qualify for an auto loan
Personal Loan Lenders
- Peer-to-Peer Lending – There are -to-peer lending website out there that match borrowers to lenders.
- Banks and Credit Unions– Your local bank or credit union is a good place to apply for a personal loan. Because local credit unions are more community-focused, they may offer you a better rate and loan term than online lenders.
It’s easy to get a personal loan. And get the best deal by following the advice in this article.
Check your credit and make sure you look at all available loan options. Shop and compare loan offers so you can make sure you’re getting the best deal. And ask the right questions.
Are you ready to apply for a personal loan?