A personal loan should never be taken out on a whim. This money must always be repaid, so it is important that you only take out a loan for a vital purpose, such as paying unexpected medical bills or consolidating your current debts.
Personal loans are recorded in your credit report, so if you have late payments or fail to repay, it will affect your credit and lower your credit score.
The interest rate on the loan will depend on your credit position, particularly your credit score. When you have a higher score, you will be offered a lower interest rate and vice versa.
There are a number of reasons for taking out a loan, but this can also influence the average loan amount. In this chart with LendingTree customer data, you can see that credit card refinancing has the highest average loan amount followed by debt consolidation.
This shows that debt restructuring is one of the more costly reasons to take out a loan. On the other end of the scale, the average loan amount for vacations is the least costly reason. This may suggest that consumers may use other finance methods to cover the cost of vacations.
There are lots of lenders in the market who offer some great personal loan rates with a variety of products to suit your needs.
The important considerations when choosing a lender include:
- Do they offer the lowest interest rates?
- Do they have loan repayment flexibility?
- Are they willing to consider other factors, including your income and ability to retain employment before rejecting an application?
- Do they listen and provide advice should you run into trouble?
- Do they allow a co-signer should you not qualify?
In this post, we’ll review th things you should know before apply and understand what are the important factors to consider when shopping around. Please bear in mind that to qualify for a loan, the lender must evaluate your creditworthiness and ability to repay the loan.
Preparation Can Boost Your Chances of Getting Approved
If you are looking to take out a personal loan and have some time to prepare for it there are a of couple steps you can take to help you increase your chance of approval and increase your chance of better rate.
The first thing you should do is pull your credit report. You can do that at Annual Credit Report. You’re allowed to pull your report for free once every year.
You can use this free service to look at your credit report to see if there are any errors or delinquencies that need to be addressed.
The report will not disclose your credit score (on which many lenders base their pricing) but there are a few things you can see.
For example, you can review your report to see if you have excessive accounts, excessive utilization, and get an idea of what your debt to income ratio will look like.
Improve Your Credit Score
Lenders normally do not like to see lots of inquiries, lines of credit, or high utilization on credit reports.
According to Experian, the average credit score for the United States residents was 703 across all age groups in 2019. This was only 3 points below the average credit score for people in age 50 – 59, which scored 706 points. Adults in the 20 – 29 age bracket had the lowest credit score at 662. This is 13.14% less than those in the age group of 60+ who scored 749 points.
If you’re looking to get a personal loan soon, try not to apply for other lines of credit. If there are excessive lines of credit or installment loans, it may be that they can be reasonably paid off – do so if possible.
One thing you can review when trying to boost your credit is utilization. Utilization is the amount debt you have on lines of credit, or credit cards, to the amount you’re approved for.
If you can reasonably decrease this amount below 30% it may increase your score (link).
You can also review your debt to income ratio. That is the amount of monthly debt you pay off compared to the monthly income you receive. Lenders typically want to see debt to incomes below 40% but many will go up to 50%.
Gather Relevant Documents
If you’re getting close to applying there other things you can do now to prepare. Many personal loan providers will require verification of information that you put on the application.
This information may include a copy of your state ID, a copy of your Social Security card, pay stub, or taxes. Some will have other unique requirements such as education verification or proof of assets.
Make sure you have those documents on hand when applying because it will increase the speed in which you get your funds. Also some personal loan providers will allow for a co-borrower.
If there is someone that can help you increase your chances of getting approved or of getting a better rate, you should consult them and see if they are okay with applying with you.
The advantage of a co-borrower is that if they have better credit, you get a better rate.
In many cases, they will also increase the amount of overall income on the application. A co-borrower will increase your chances of getting approved.
What Questions Might The Bank Ask You Before Giving You a Loan?
A bank will want to know your credit and financial history before giving you a loan. They will probably ask you how much money you make and how much you need for the loan. They might also ask you how you plan to use the money from the loan and how you plan to repay the loan.
If you have low credit, they might ask you if you have a cosigner, you can use or if you have any collateral to put up for the loan. Besides this, they will also ask for personal information such as your address, phone number, and social security number.
How To Shop For Personal Loans?
Not all personal loan providers are the same. You can go to your local bank or credit union and see if they have a personal loan that will work for you.
There are also many online credit providers for personal loans. Spending time shopping around for personal loan providers can save you a significant amount of money and improve your chances of getting a loan.
Most providers will post their minimum requirements to get approved for a loan.
There are personal loan providers for those who have poor credit, so don’t get discouraged if you don’t think you can get one. You can, but the interest rate will be very high.
Below are some things you should consider when shopping for a personal loan.
- Cost – In general, most borrowers want to borrow the most amount of money for the lowest interest rate. But remember that with personal loans there are many other costs other than just the rate. Many personal loan providers will promote their lowest rate but also have many other associated costs that borrowers should consider. Consider all fees when pricing out your loan. Listed below are typical fees for personal loans.
- Application fee – This is a one-time fee the provider will charge for applying for a loan. It is not common, but there some lenders that will charge you for applying.
- Origination Fee– This is the most common fee and tends to be a bigger fee for personal loans. The fee is typically 1-6% that is taken from your loan amount. So if you have a $10,000 loan with a 5% origination fee, you will only get $9,500 in funds. This fee needs to be considered if you need a specific amount because you may need to increase the amount you request to cover this fee.
- Late Fee/ Return Payment – A late fee is also common for lenders to charge, but some providers won’t. If you have issues with paying on time, pay attention to late penalties.
- Check Processing Fee – Many providers will charge for processing a payment that is not automatic. If you are uncomfortable with automatic withdrawal, you would want to avoid providers that charge you to process a payment.
- Prepayment Penalties – This is an uncommon charge. This a fee for paying off your loan early.
Online Lender vs Bank: Which is Better?
This depends on your needs and the banks and lenders you are looking to work with. In general, online lenders tend to have better interest rates and easier approval rates. However, you need to make sure the online lender you are applying with is legit and has good reviews before you send in your personal information.
If you have a certain bank, you always work with, they might be more willing to give you favorable loan terms because they know you and will negotiate terms with you. To know which is better for you, it’s a good idea to shop around.
What I Should Avoid When Choosing a Loan?
When choosing a loan, try not to choose one with high interest or with a longer or shorter repayment term than you would prefer. You should also avoid using a lender that is not well-known. Try to choose a lender that is reputable and that you know of people who have worked with them in the past.
You can also read reviews of lenders online. Don’t choose one with bad reviews or with many negative reviews about the services.
Review Loan Terms & Payments
The term is the length of time it takes to pay off the loan.
Many personal loan providers have limited terms and this should be considered when taking out large amounts. Some providers have a maximum term of 36 months and if you take out $50,000, that will end up being a large payment.
You should look at the max terms the provider has. If you need longer terms to lower your payment, you will want to avoid certain providers.
Potential borrowers need to be aware of what they can use a personal loan for. Many personal loan providers have restrictions on what their loans can be used for.
For example, education or business use is a common restriction for personal loans.
Be sure to review that before applying. You do not want to be declined just because you are trying to use the loan for restricted use. The most common use of a personal loan is to consolidate debt.
Personal loans are a great product for paying down and paying off credit card debt. You get a fixed monthly payment for a fixed term so you know exactly how long until you will be out of debt.
How to Avoid Personal Loan Fees?
Most lenders charge a flat loan fee or a percentage of your monthly payments. There are some ways you can avoid this. Paying your bill on its due date is one easy way to make sure you can avoid the extra fees. Some banks and online lenders will also wave the fees if you agree to out the bills on automatic payments.
When shopping around you want to avoid many credit pulls because they can negatively affect your credit. You should find 3-6 providers that you think will meet your needs and apply all on the same day.
This will avoid having many recent pulls. Lenders do not like to see a lot of credit checks because it makes it appear that you are desperate and taking out a lot of money all at once.
One great service that many online personal loan providers do is a soft credit pull. A soft pull is when the lender checks your credit but doesn’t pull your report or score.
It’s kind of like a credit background check to see if you will qualify for a loan. Many providers will do the soft pull and give you preliminary rates and terms you may be approved for under their guidelines.
You can use the soft pull from some providers to see if you can get approved and also get an idea of what the cost of the loan will be.
Can I Negotiate a Personal Loan?
This depends on the lender. Some lenders will be willing to negotiate with you while others will make an offer and you have to take it or leave it. Many people want to negotiate the interest that is on personal loans if they feel like what they’re being offered is too high.
Larger financial institutions and national banks are usually stricter when it comes to negotiating deals. If you are working with a smaller place, they might be more willing to give you a better deal.
Check Benefits and Discounts
There are some personal providers that offer benefits. These can range widely as to what they offer. There are some that offer social benefits like networking events for borrowers.
There is one that will plant a tree for every loan issued. Many offer education programs and information to help their borrowers improve their credit and general finances.
There are some with points benefits and if your bank has a rewards program and you get a loan, those points can be used to increase the loan.
Be sure to research all the benefits. These benefits should be secondary to the cost of the loan. You may get a benefit for borrowing from a certain provider, but the cost has to come from somewhere.
One common discount that should be considered that can significantly lower your cost is autopay. Many providers will reduce your cost of setting up autopay.
How Can I Get a Low Interest Personal Loan?
The lower your personal loan interest rates, the less money you will pay. This will affect your monthly payment, which could lead to a shorter repayment time.
Your credit scores and credit reports are important in lending decisions. It is a good idea to get a copy of your scores and reports before applying for personal loans. This will allow you to understand the criteria that lenders will use when considering your application. You can always check your credit score as frequently as you like.
After you have reviewed your credit reports, you will be able to determine what type of loan is available. Lenders are more selective than others in approving applicants. If they provide them, you can find out the minimum credit score requirements of lenders to see where you stand.
People with high credit scores are likely to receive the lowest interest rates. If you don’t have good credit, it might be difficult to get a personal loan with a low interest rate. You may want to improve your credit score before you apply for a personal loan. This will increase your chances of receiving a low interest rate, and can help you save money over your loan’s life.
When You Shouldn’t Get a Personal Loan?
It is not recommended to obtain a personal loan if you don’t need the money for any good reason.
A personal loan is not recommended to finance a vacation or luxury purchase. You should not use it for anything other than paying medical bills or purchasing a car.
If you do not have good credit it can often be a bad idea to get a personal loan. You may have a poor credit record and end up lowering your credit score.
Personal loans offer a flexible form of finance, as they can be used for practically any purpose. In this chart compiled from LendingTree consumer data, you can see that debt consolidation is the most common reason for taking out a personal loan. The least common reason is for home improvement. This is likely due to more advantageous products that can be used for home improvements such as home equity lines of credit.
How Do I know If I Can Afford It?
When applying for a personal loan, you have the option of selecting the repayment plan that best suits your income and cash flow. Lenders may offer an incentive for using autopay, such as a 0.25 percent or 0.50 percent reduction in your APR.
Some people prefer to pay off their loan over several months or years in order to keep their monthly payments as low as possible. Others prefer to pay off their loan as soon as possible, so they select the highest monthly payment option.
The highest interest rates are often associated with choosing a low monthly payment and a long repayment term. It may not appear so because your monthly payments are so much lower, but you end up paying more for the loan over the course of its life.
Borrowers should aim to spend no more than 30 percent of their income on debt, which includes mortgages, car loans, and personal loans. So, if your monthly take-home pay is $5,000, you should try to keep your total debt obligations to $1,500 or less each month.
Personal loan lenders, on the other hand, are more lenient, especially if you have a solid credit score and evidence of income. Mortgage lenders, in particular, are notorious for rejecting loans to persons with debt-to-income ratios of more than 40%. You may be able to stretch this ratio a little to take on a higher monthly payment if you think you can temporarily handle higher payments in order to save a lot on interest.
With a debt-to-income ratio of more than 30%, it’s more difficult to get approved, and stretching yourself too thin can lead to cash flow issues. This should only be done as a last resort and only if you have a backup plan in place, such as a partner’s income or an emergency fund.
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