Four Things You Need to Know When Applying for a Personal Loan
A growing number of Americans are looking at personal loans to meet their short and medium term financial goals. At the end of 2016, more than 15 million citizens had a personal loan. This is the highest number since the Global Financial Crisis of 2007-2008. People take personal loans for varied reasons including management of major expenses, debt consolidation and covering sudden unexpected costs.
Unfortunately, personal loans have led to the financial ruin of many so it’s prudent to cover all the bases before applying for one. All lenders aren’t the same. Evaluating your financial position and comparing it against what each lender offers increases your odds of having a seamless experience. The following are some of the important things you need to pay attention to.
1. Credit Score
Your credit score will determine whether you qualify for a personal loan and at what interest rate. Above average credit scores have higher chances of approval and also attract a lower interest rate. Checking your score beforehand prepares you for what to expect. Credit reporting companies are required to provide you with one credit score report each year at no cost. Personal loan lenders and banks also provide free reports.
One of the reasons for checking your score early is to identify any errors. Read the report thoroughly and look for any incorrect information such as debts marked as outstanding when they’ve already been paid. Get any mistakes fixed immediately by filing a dispute with the credit bureau. The report can also show you pending payments you had forgotten about and which you can then settle before applying for the loan.
2. Credit Utilization Ratio
The utilization ratio is one of the key factors determining your credit score. It refers to how much debt you have relative to your available line of credit. For example, if you have a $20,000 line of credit but have only $3,000 in outstanding debt against it, your utilization is 15 percent.
A credit utilization ratio under 10 percent contributes positively to your credit score. The higher the ratio than 10 percent, the more it impairs your score. By paying off some of your outstanding debt, you can reduce your utilization ratio and increase the likelihood of obtaining a new loan at a better interest rate.
One of the fastest ways to get yourself into a debt quagmire is taking loans you cannot afford. The subprime mortgage crisis demonstrated that just because a lender approves your loan doesn’t necessarily mean you have the capacity to pay. Ultimately, you know your financial situation better than anyone else. That’s why the preparation of a personal budget is vital.
Examine your income and expenses to see how the monthly loan repayments would be accommodated. If it looks like the payments will starve you of cash to do other things, consider cutting off expenses you can live without. Remember to factor the time it will take you to pay off the loan. Ideally, the faster you can comfortably pay it off, the better since you’ll pay less total interest overall.
4. Reputation and Fine Print
The number and type of companies that offer personal loans is vast. As with any other industry, the lenders vary from trustworthy to disingenuous. Take the time to know the company well before applying for the loan. For how long have they been in operation? What do their past customers have to say about them? How do they compare with other lenders? Use websites such as personalloan.co to see how the company’s product stacks up against the competition.
Always read the fine print as this is where the nastiest surprises will be tucked away. Check if the lender will penalize you for paying off the loan early. Look out for origination fees; many companies will not levy this so don’t go for one that does when you have better alternatives.
The requirements and documentation for personal loans aren’t as demanding as those for mortgage applications. Still, you need to be prepared and informed if you want the process to be less stressful and your application approved.
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