About 20% of Americans take out personal loans to cover the time between paychecks, pay unexpected bills, and finance home renovation projects.
Unlike a mortgage intended for the purchases of a specific property, a personal loan has no limitations on how you can use it. Banks or institutions offer personal loans after a comprehensive appraisal process.
Before you apply, there are some things you need to keep in mind. Keep reading to discover valuable tips for taking out a personal loan.
Shop Around for a Favorable APR
The APR or Annual Percentage Rate is an all-inclusive metric that allows borrowers to compare different loan products. It includes the interest, insurance, and administration fees.
The APR differs between lenders and can significantly affect the cost of borrowing.
Quite often, personal loans have fixed-rate installment loans, so the interest rate may not change during the loan term. This means you’ll pay the credit in equal installments every month.
Lenders usually assign a rate based on credit score, debt-to-income ratio, and credit history.
Your lender may impose an origination fee of up to 10%, depending on your income, credit score, and loan amount.
When applying for a personal loan, shop for a lender with the lowest APR.
Know Your Credit Score
Before approving your loan application, your bank must assess your creditworthiness. One way to do this is to check your credit score from the main credit reporting agencies.
Even though there are up to 40 credit agencies in the US, the big three include; Experian, Equifax, and Transunion. Their role is to compile credit scores and reports about individuals.
Historically, the credit scores are based on FICO scores, as shown in the table below.
| Credit Score | Classification |
| 720-850 | Excellent |
| 690-719 | Good |
| 630-689 | Fair |
| 300-629 | Bad |
If your credit score falls below 500, you’re unlikely to qualify for a personal loan. However, your lender may bend the rule and advance a personal loan even with bad credit under special circumstances.
For example, you may get a loan if you provide a guarantor or a signee with a good credit score or when you provide collateral. Regardless, your lender may impose a higher APR.
Prepare a Budget
Before you get a personal loan, set up a budget of needs versus income to know how much you need to borrow. You can start by writing down your daily or monthly expenses.
Next, calculate your monthly income after deducting taxes. Then subtract the total expenses and see the amount left. Evaluate whether the balance is sufficient to cover your loan installments.
Failure to plan can lead to late payments and penalties, eventually harming your credit score.
Have Your Documents Ready
In order to get a personal loan, your lender may ask for vital documents to support your application. Normally, lenders evaluate these documents to assess the risk of advancing credit and check your ability to pay.
Some of these documents include;
- Official proof of identity. In this case, they’ll need your SSN for tracking income, benefits, and taxes.
- A recent proof of residence. Your lender will mostly ask for utility bills such as electricity and water bills.
- Pay slips to determine if your income corresponds to your budget.
- Amortization schedules for assets or mortgages if you have to provide collateral.
To make it easier for their clients, most lenders have online simulation tools that help you find the best formula depending on your financial capability.
Understand the Terms and Conditions
Before signing a loan agreement, the lender must provide you with ample information to know if the credit will meet your financial needs.
Some of the vital information includes;
- The identity of the lender
- Amount of loan
- Duration of the contract and schedule of repayments
- Total amount due
- Total fees including percentages or rates
- The loan’s APR with detailed calculations of how to arrive at the rate
- Penalties in case of a late payment
- Existence of a withdrawal period after signing the contract
- Your right to obtain a letter of offer
- Insurance details
Final Thoughts
A personal loan is essential because it helps you meet your current needs. However, taking a loan when not needed can lead to misuse. A personal loan can hurt or improve your credit score, depending on how you manage it. With this in mind, take a loan only when necessary. Also, keep in mind that your credit score can also affect your estimated APR. Finally, you can consider consolidating credit card debts so that you’ll only have one facility during the loan’s tenure.
