A personal loan is a great way to accomplish something outside the normal realm of financing. These loans can be used for a myriad of purposes, but the great thing is they are usually not secured by any property you own. This kind of freedom can be a very big benefit to your credit.
Applying for a personal loan is a very simple process, but you should take steps to make sure you are getting a good rate, agreeable terms, and that you have a purpose set aside for the funds. Personal loans are great for a number of uses:
- Home Improvement
- Debt Consolidation
- Medical Procedures
- Business ideas
Anything you would normally finance can be funded with a personal loan. You should be cautious to make sure these funds are truly needed because the loan will affect your credit score and your debt to income ratio. Let's walk through the process and look at the pitfalls you should watch out for.
Check Your Credit
If you're one to viciously protect your credit score, then you are probably qualified for a personal loan. These loans, due to not being secured, require a higher credit score than normal financing. The lending institutions are looking for great to exceptional credit to lend to.
That doesn't mean if you have average credit you should not try. It really depends on what your ultimate goal with the money is. Debt consolidation loans are easier to obtain and don't require a very high credit score. These loans are under the assumption all of your debt payments will be rolled into one and should be easier for you to pay down over time.
If you want a personal loan for almost any other reason, you will need clean credit to qualify. It does help to be a homeowner, as that does lend to your stability. Prepare to apply for a personal loan by cleaning up any outstanding debts you may have and make sure your outstanding debt is not too high.
What Loan Is Right For Me?
Personal loans by their nature are a little bit higher in interest, again due to their unsecured nature. This means you will have to determine what loan and what lender are right for you. From traditional banks, credit unions, and even online lenders, you could research your choice for a long period of time.
The easier route would be to determine an amount and start where you already have a banking relationship. Check the rates with your bank or credit union (they usually advertise them on their websites), and then compare with an outside lender.
Don't apply for the loan just yet. Applying will have a small impact on your credit score. If you don't go with that lender or change your mind, you want to avoid that hit. Shop for rates until you narrow the field, and then read up on that loan product's qualifications.
You could also look into peer to peer lending that use a crowdfunded approach to personal loans. The rates on these loans can be very competitive, so you don't have to limit your search to traditional banking institutions.
Determine Your Needs
Personal loans are installment loans that can have terms from 2 years all the way up to 10 years. This is where you need to consider how long you would like to be saddled with a payment. If you are financing debt consolidation, you may be happier with a longer term if your payments are reduced dramatically.
If you're financing something like a wedding, you may not want the debt of your wedding day hanging over you too long into the marriage. Plan your financial future at this step to determine how much money and for how long.
Personal loans scale up or down based on your needs, but if your need changes later on you may want to look into a line of credit versus an installment loan. This line of credit stays the same, but you can take and pay back repeatedly over time. They also have similar qualifications to a personal loan.
Pick A Lender
Once you have checked your credit, determined your needs, and done some research on potential lenders, it's time to pick your lender.
Your lender should offer online access, no prepayment penalties, and maybe have a local branch. It's up to you if you prefer the online experience or if you need a personal touch to customer service.
The research should have landed you with a preferred lender, and now is the time to apply. Like we stated earlier, make sure this is the right one for you because of the impact to your credit score.
The actual application process should not take more than 30 minutes, and then you could be transferred the funds in as little as 2 business days. Banks and lending institutions are getting extremely efficient at making a decision and getting the funds to you.
Applying and receiving your first personal loan will make every subsequent loan much easier to research and obtain. By paying off your first loan, the loan process can be a lot less scary, and your lender will be more than willing to lend to you again if you make your payments on time, not to mention the huge boost your credit score will receive.