If you find yourself in a situation where you need money, a personal loan could be an option. This type of loan can help you get out of a financial crisis or help you pay off some necessities. There are several steps involved in procuring a personal loan, and it’s best if you research and compare options before starting the application process. Here’s how to get a personal loan.
What Is a Personal Loan?
A personal loan is money you borrow from a traditional bank, credit union, or other lending institution that you agree to pay back with interest. Often, these kinds of loans have a fixed interest rate and fixed payment schedule, making them easy to manage. Most personal loans are unsecured, meaning that there’s no collateral needed against the money you borrow. The amount you can borrow can vary greatly, from $1,000 to $50,000 or more, depending on your need. You’ll usually find interest rates for personal loans in the 3% to 36% range, with one to seven years for repayment.
What Factors Affect the Terms of Your Personal Loan?
Many factors are considered for all types of loans, including personal loans. These include:
- Your income
- Your credit history and score
- The amount financed
- The length of the loan
- Employment history
- Type of personal loan
Before applying for a personal loan, you’ll want to check your credit history and score, as these are the biggest factors in determining your annual percentage rate (APR). If you don’t need a loan immediately, you may want to take time to improve your credit score before you apply. Improving your credit by paying your bills on time, reducing your overall debt, and reducing the number of inquiries on your credit history can significantly impact your APR.
How To Get a Personal Loan
Once you’ve decided that a personal loan is a direction you want to take to help pay bills, you’ll need to follow these steps to apply:
Run the Numbers
Figure out how much money you need. Some lenders charge administrative or origination fees, so be sure to include them in any calculations to figure out how much you can afford. You can use a personal loan calculator to run the numbers for examples of various rates and loan lengths. While you may not know exactly what your terms will be, this will give you a rough idea of what you can expect based on the amount, interest rates, and terms.
Check Your Credit Score
The most significant factor in determining your APR is your credit score. Personal loans with the best terms often require you to have a minimum fair credit score of 580. If you have good or excellent credit, with a score of over 670, you’ll get the most competitive rates and terms. You’ll also have an increased chance of approval. You can get one free copy of your credit history from AnnualCreditReport.com or by calling 877-322-8228. If you notice any discrepancies in your credit history, you should contact the major credit bureaus immediately to address them.
Consider Your Options
Looking at the types of personal loans that are available, you’ll need to consider your options, including the lending institution you want to use. You also should research and compare quotes from several lenders as interest rates can vary significantly from one lender to the next. Some lenders also specialize in loans for those with poor or no credit history.
Choose Your Loan Type
Once you’ve weighed all your options, it’s time to pick a type of personal loan that fits your needs as well as your budget. Lenders will offer loans designed to fit your specific needs, such as:
- Debt consolidation
- Credit card refinancing
- Home improvement
Find the Best Rates
As stated, the APR on a personal loan can vary significantly among lenders. You can expect rates to fall anywhere from 3% to 36% on personal loans and even higher on some of those loans you should avoid. Some lenders will prequalify you for a loan using a soft credit check that does not show up on your credit report. If you’re shopping to compare rates, it’s best to do it within a 10- to 14-day window so that the credit checks only count as one because they’re being used to compare lenders.
Select a Lender and Apply
Once you’ve found a lender you want to work with, it’s time to apply for a personal loan. Some lenders let you complete the process online, while others may have you complete a paper form. Lenders vary in the information and documentation required, but most lenders want to see the following:
- Personal information, including name, address, phone number, work phone, cell phone, and email address
- Driver’s license
- Proof of residence
- Proof of income
Once you have all the information and documentation complete, be sure to submit it as soon as possible to expedite the process.
Accept the Loan Terms and Start Making Payments
Read through all the loan information, including any administrative or origination fees, interest rate, loan length, date of first payment, day payment is due each month, etc., to familiarize yourself with your new personal loan. Some lenders offer discounted APR to those who set up automatic payments, so you may want to consider asking your lender if this is an option.
What Other Types of Loans Are There?
While most personal loans are unsecured loans, you can also take out several other types of loans. These include:
- Secured loans
- Fixed-rate loans
- Variable rate loans
- Debt consolidation loans
- Co-signed and joined loans
- A personal line of credit
- Buy now, pay later loans
If at all possible, you should avoid cash advance apps, credit card advances, pawnshop loans, and payday loans. These types of personal loans have extremely high interest rates and fees. They can temporarily save you in a financial crisis while simultaneously digging you into a bigger financial hole.
Personal loans can be used to pay off medical debt, cover an unexpected car repair, pay down debt faster on a big-ticket item, or pay for an upcoming vacation. There are a few types of debt you can not use a personal loan to pay down, though, including student loans.
A personal loan can help you out of financial hardship or give you the opportunity to do something you’ve always wanted to do. Take the time to research the types of personal loans, various lenders, and interest rates available to you.
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