Life is an evolving adventure, and sometimes those adventures cost money — money that you may not have available. You might need to finance your college studies, moving costs, emergency expenses, or even consolidate debt. Personal loans can be an affordable solution for most people and they may be less expensive than credit cards.
If you’ve weighed the benefits and drawbacks of taking out a personal loan and have decided to move forward, consider the following tips about what to do before you apply.
What is a Personal Loan?
A personal loan is a large amount of money that you borrow and pay back in monthly installments. Banks or credit unions offer loans with different requirements. Personal loans may be secured or unsecured.
Secured loans require you to offer collateral (an asset) which the lender can seize if you can’t service the debt. However, in unsecured loans, there is no collateral. But if you default on payments, it will negatively affect your credit score, and the lender may file a lawsuit against you.
If approved for a loan, the lender deposits a lump sum of the approved amount in your account. Generally, you are required to pay back the loan at an agreed interest rate over a set period. This payment period can be from six months to seven years.
Applying for a Personal Loan: What to Do First
When applying for a personal loan, you need to gather documents and perform several checks to see if you qualify.
Review Your Budget
Study your monthly spending and see if you have money available to service the debt. See where you can cut back on spending and free up money to pay the monthly installments. Make sure you can cover your bills first before taking out a loan.
Evaluate Existing Debt
One thing banks don’t like to see is too much existing debt. Whether you have student loans, a car payment, or another type of debt, it can be beneficial to pay those down as much as possible before applying for an additional loan.
Check Your Credit Score & Report
Your credit score is the key to receiving a personal loan. A good credit score can indicate how much interest you will pay and the size of the loan. Lenders study your credit history and compare it with your income.
Your credit score is impacted by various factors, including whether or not you were able to pay off previous debts on time, your spending habits, and your current outstanding debt. Most lenders will approve loans with a credit score above 640, but higher scores may earn you lower interest rates during the repayment term.
Understand How Much You Need
When applying for a personal loan, evaluate your financial situation to determine the appropriate amount to borrow. You should also look at your current debts and other financial obligations to ensure that you will be able to make the monthly loan payments. Depending on your credit score, you may be able to take out a higher loan at a lower rate.
Lenders require several different documents for the loan application. While the exact paperwork may vary by lender, most will require the following as part of your application:
- Personal Identification (driver’s licenses, ID card, passport)
- Income verification such as payslips and bank statements
- Proof of address
- Tax returns
- The reason for the loan and the amount
- Get your credit score done first to know where you stand
Getting a personal loan can be used to accommodate unforeseen expenses or to make big purchases. Properly evaluating your finances can help you determine if you’re able to take out a personal loan — and how much debt you can afford to take on. Do your homework, prepare the proper documentation, and shop around for the best rates. Taking the appropriate steps can ensure that your personal loan application experience goes as smoothly as possible.