Most people strive for savings that are enough to let them live comfortable life. However, this isn’t always the case, even for those who live with strict financial discipline. Certain situations occur, which force you to seek alternative solutions. Sudden emergencies, financial opportunities, and changes in plans are inevitable, and taking out a loan seems like the only viable option.
It is important to learn how to get the best personal loans. Contrary to popular belief, banks don’t just hand out money when you enter their institution — taking out a loan is a much more complex job than some people believe. You need to prepare yourself with the right documents, reasons, and a viable plan in mind before approaching them. Additionally, before committing to a loan plan, you need to understand a personal loan’s terms and conditions and understand the loan payment plan that you’re comfortable with.
This article will help you understand the finer aspects of taking out a loan to help you prepare well and manage your finances.
Reality Check: Before You Ask for a Loan
While you may have access to several credit facilities, you shouldn’t abuse those opportunities and learn how personal loans work at least before applying to ease down the entire process. Additionally, you may not qualify for a loan from all of them. Therefore, before you ask for a personal loan, you need to do a reality check. You may be clear on why you need the loan, but you need to understand what getting that loan means. In the meantime, here are factors that affect the types of personal loans and loan amounts you can access:
Factors That Affect Your Loan Access
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Credit score
Your credit score reveals how you manage your finances. It allows potential lenders to see how much confidence they can place in your loan repayment ability. Lenders have reason to assume you will likely default on repayment if you have a poor credit score. Conversely, a healthy credit score gives them confidence that you’ll repay without fail. Ideally, your credit score needs to be at least 700 to improve your chances of getting a loan. Some lenders, such as those who offer payday loans, don’t consider your credit score. However, they impose high personal loan rates. Therefore, it is always better to have a good credit score. However, if you have a bad or no credit score, there are various bad credit loan providers who can help you with the same.
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Income and Employment History
Lenders will ask for your income and employment history for whatever loan you seek. If you’re not employed, they’ll need to assess how well you’ve been earning through self-employment. Your income determines how much you can spare for the loan repayment. Additionally, your employment history determines how secure your current position is. That security, in turn, determines whether you’ll keep earning long enough to clear your monthly payments. The longer you have held your position or run your business, the more confidence the lenders will have in you.
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Debt to Income Ratio
Your debt to income ratio is a factor comparing how much debt you have versus how much you earn. Generally, lenders are open to approving loan applications from those with low debt and income ratio. However, different types of personal loans and lenders impose specific thresholds.
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Collateral
Collateral is something of value that a financial institution accepts as security for the loan. Should you fail to pay, the lender uses your collateral to recover their losses. One type of loan is an unsecured loan where you don’t have to provide any collateral. However, a secured loan demands collateral. The value of your collateral can influence how much a lender is willing to offer.
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Repayment Period
One important factor to consider is how long you’ll take to repay the personal loan. The longer the repayment period, the more manageable the installments. However, you’ll end up paying more with a longer repayment plan in comparison to a shorter one. In addition, long repayment periods expose you to situational changes that could affect your ability to pay. For example, you may lose your job, or your business may not perform well in that period. This outcome will jeopardize your investment and risk your collateral, affecting your credit score. However, longer periods also ensure you have the ability to pay installments without disturbing your current expenditure.
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Loan Amount
Your needs dictate how much you’ll need. It is important to remember only to take out a loan for the amount you need, even if you can access more. The temptation to take out a larger personal loan may blind you from the reality of repayments. As such, you need to exercise restraint and borrow only what you need.
Types of Loans
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Personal Loans
A personal loan is an installment credit an individual uses for diverse reasons. For example, to settle emergencies, buy an asset, pursue financial opportunities, etc. Unlike other credit products such as mortgage loans, there is no specified reason to take a personal loan.
Most personal loans are unsecured loans, with a few personal loans needing some collateral. Additionally, you may have to pay a fixed or variable interest. Furthermore, a personal loan’s repayment period can be months or years depending on your repayment plan and the amount borrowed.
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Mortgage Loans
The mortgage loan is used for specifically buying a house. A mortgage lender offers you the funds to pay for the house upfront; then, you’ll make installments towards clearing the loan. Mortgage loans enable more people to afford a home early. This way, they can enjoy living in their home as they make the monthly payments. The alternative would be to save up and buy one in your old age, which isn’t ideal and may not come to pass.
The mortgage loan amount depends on how much you have as the down payment for the property. The more the down payment, the less you’ll need as a loan. Therefore, you’ll have less of a burden to clear. Additionally, you’ll qualify faster for the mortgage, as you have a significant down payment.
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Auto Loans
Auto loans are similar to mortgage loans, except they’re meant for acquiring a vehicle. You’ll need a down payment, with the auto loan covering the remainder. Typically, you’ll have a 36 or 72-month repayment period. However, many lenders are offering longer monthly payment periods.
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Home Equity Loans
Home equity loans share similarities with personal loans in that you can use the money for any reason. The difference is in the use of your house as collateral. Home equity loans have a fixed interest rate and a five to 30-year repayment period. There is a variation to this loan called the home equity line of credit. This variation behaves like a credit card, allowing you to borrow and pay the interest, then settle the loan later.
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Debt Consolidation Loans
This loan type is a personal loan you take to pay off high-interest debt, such as a credit card. You’ll consider this loan since its interest rate is significantly lower than your credit card debt. Additionally, you can use this loan to settle several credit card debts. Therefore, you’ll be left with one loan to pay, which is much simpler to manage. This move has the effect of improving your credit score. Note that you may have a fixed or variable interest rate with varying repayment periods.
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Payday Loans
Payday loans are short-term loans you take to repay by your next payday. Typical loan periods are two to three weeks, although you may get an extension to your next payday. These loans don’t require a credit report. However, they charge the highest personal loan rates. As such, you need only consider this credit product for desperate financial emergencies. Additionally, avoid the temptation to renew and extend the loan, as the personal loan rate will be staggeringly high.
Benefits of Loans
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Access to Cash for Emergencies
The main benefit of accessing loans is the option to get the money as a lump sum. Having liquidity during specific events in your life is a life-saver, enabling you to accomplish so much. While some financial needs can wait, as they should for your financial health and wellbeing, others can’t. Therefore, you’ll have peace of mind knowing you can access a personal loan for such events. For example, an unexpected medical bill could cause more problems than necessary if you don’t settle it immediately. A personal loan will come to the rescue, leaving you with manageable monthly payment installments.
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Investment Opportunities
Loans also come in handy in good fortune. You may learn of a lucrative investment that needs a down payment or immediate payment. If you don’t have the necessary cash, you’ll regret that lost opportunity. Fortunately, a personal loan could remedy the situation. Such an investment may have excellent returns that will cover your personal loan repayment and give you some profits.
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Credit Repair
Did you know that taking a loan and repaying the installments diligently improves your credit score? For example, a debt consolidation loan will do so while saving you from high-interest rates. You only need to ensure the monthly payments are officially logged to reflect on your credit history, thus the score improvement.
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A Reliable Option
While a loan from a friend or family member will have lax terms and conditions, accessing them isn’t easy. In addition, social ties are easily broken when money comes into play. Therefore, a loan from a financial institution preserves a formal connection and sets a precedence. As long as you qualify, personal feelings won’t be a factor that should disqualify you. As such, you’ll find such a loan more reliable than the alternative.
Steps to Take To Get a Loan
Let us look at what you need to do, what documents you need, and where to proceed with your loan application. Different lenders impose specific demands on personal loan applications, which you need to find out when you approach them. However, this list contains more or less what to expect.
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What Documents Do You Need?
Lenders usually ask for proof of your identity to prevent malicious entities from usurping identities and accessing credit facilities. As such, the lenders must ascertain that you are a US citizen who resides within the border and are of contractual age. Therefore, you’ll need to produce your driver’s license, passport, state-issued ID, military ID, or social security card, whichever applies.
Next, you need proof of income. Lenders only consider personal loan applications for those who can pay them back. Therefore, you’ll need to prepare your pay slips, bank statements, or employer’s contact information. If you are self-employed, you’ll need bank statements, income tax returns, or other financial statements that show your cash flow.
You will also need proof of residence, which reveals the stability of your lifestyle. For this, you need a utility bill, mortgage statement, lease agreement, property tax receipt, proof of insurance on your home, or credit card statement.
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Decide the Loan Amount
You then need to figure out how much you need on the loan. For example, if you’re looking for a mortgage loan, you’ll need to consider the property’s value. Next, subtract your down payment to arrive at a logical figure. For a personal loan, you need to determine the cost of your need. For example, if you need to settle a medical bill, find out the hospital’s total invoice and associated charges. It is essential to get this figure right, as changing it later will affect your application and possibly disqualify it.
The final figure will give you an idea of the number and value of the repayment installments. You need to be confident you can afford those monthly payments. Furthermore, knowing how much you need prevents you from borrowing more. Remember, a personal loan should not lead you to financial ruin but save you from a potential one.
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Pick the Right Type of Loan
With so many types of loans available, you need to pick the most appropriate one. For example, if you need a loan to buy a car, settling for an auto loan is better than getting a personal loan. If the reason is more ambiguous, or you need it for several reasons, then a personal loan makes sense. If you need to settle a financial emergency and pay by the end of the month, then a payday loan would suffice.
Additionally, consider whether you have collateral or not. Secured loans are only available when you produce collateral, while unsecured loans have no restrictions. However, the inherent risk makes it harder to qualify for an unsecured loan. Read on to learn how you can settle for the right option.
You need to also determine whether you’re comfortable with a fixed interest rate or a variable one. Fixed interest rates remain so throughout the repayment term, while variable rates tend to fluctuate within the same period. You’ll enjoy a steady repayment figure in a fixed interest rate loan, while variable interest loans are cheaper in the initial stages.
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Check Your Credit Score
Most lenders check your credit score as part of the loan application assessment. Your credit score reveals the likelihood of you paying the loan. Fair to excellent credit ratings usually guarantees approval, with the latter availing competitive interest rates. Poor ratings will likely disqualify your application or subject you to high-interest rates.
Note that your credit score won’t affect your application acceptance if you’re applying for a payday loan. However, you’ll still have to incur high-interest rates. Therefore, a good credit score is vital to your financial health. There are several credit report services online where you can confirm your score. Take time to review your history to ascertain there are no mistakes. If you spot any, you’ll find credit repair services online to help raise your score.
Your amended credit score should give you an idea of your chances in different loan applications. If your financial need can wait, it’s a good idea to first work towards improving that score.
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Shop Around for Different Offers
Just as there are different types of loans, so are there varying conditions for those loans from other lenders, banks, or credit unions. Different financial institutions offer specific loan products. For example, banks famously provide personal loans, auto loans, and debt consolidation loans. However, they are strict about credit scores and prefer dealing with employed people or those with established businesses. In contrast, online credit bureaus accept all loan applications, especially payday loans. Mortgage lenders, as the name suggests, are ideal for mortgage loans. However, some are branching out, offering more loan products.
Take time to compare interest rates, repayment durations, security, loan charges, and such variations. Find out how a lender treats someone late with the repayments or defaults.
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Ask About Eligibility Requirements and APR
Once you have several lenders in mind, look through their eligibility requirements and APR rates on their website. Most lenders freely share this information online. Your credit score will guide you in determining an applicable APR for your personal loan.
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Weigh Your Options
At this point, you’ll have narrowed down your list to a few suitable lenders. Pick the lender who offers you the most appropriate terms for your situation. Pay special attention to the loan charges. While some lenders offer competitive terms elsewhere, their loan charges may prove too high. Therefore, take a more comprehensive view of the loan terms and conditions to settle on the best possible loan.
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Apply for the Loan
While most lenders give customers an online application process, some may ask that you visit their branch for the application. This usually depends on the type of loan you need and the documents necessary in the application. Online applications are relatively fast and straightforward. However, ensure you pay attention to the fine print before committing yourself. In-person applications allow one to ask more about the loan and its terms and conditions.
You need to carry the documents mentioned earlier or have them in soft copy, depending on the application process. Note that a lender may ask for more documents than those mentioned. Typically, the application process entails a discussion of how much you need. The lender may perform a soft credit check. Additionally, depending on the initial terms or loan offer, you may amend parts of your application. Be keen throughout those steps.
Once you agree on the personal loan amount and repayment details, read through the terms and conditions carefully before signing any pages.
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Upon Approval, Arrange for Loan Repayment
Once the lender accepts your personal loan application, they will contact you to sign certain documents and send the money to your account. Short-term personal loans such as payday loans take less than 24 hours to reflect in your account. Larger personal loans may take longer, but most typically reflect in less than five business days.
Ask about the repayment due date to ensure you have the necessary funds in your bank account. The best solution is to institute an automatic deduction from your income or to maintain a certain minimum in your checking account.
Tips for Improving Your Loan Application Approval Chances
All lenders are keen on your ability to repay the personal loan, with most of them relying on your credit score to determine that ability. Others consider your collateral and down payment in case of mortgage loans. Therefore, you’ll improve your loan approval chances by first addressing your credit score. Next, you need to prove you have enough disposable income to cover the repayment installments. Lastly, having collateral or a down payment may come in handy.
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Improve Your Credit Score
First, request a copy of your report from one of the credit reference agencies and study it keenly. If you need, ask for a more detailed breakdown. However, you’ll have to pay for the extra details. Next, have all erroneous entries amended. Your creditor should readily address such concerns, which help improve your score.
Always confirm that you’re still in a relationship with all parties linked to your credit report. Credit reports are not documents that one frequently accesses. As such, you may still have an ex-wife or roommate linked to you through a joint loan or account whose poor status affects your score. If the loan or account no longer exists, request a notice of disassociation on your credit records.
You then need to confirm your registration on the electoral roll. That record proves your stability, which further improves your score. It helps to keep the registration updated when you move houses. Remember to update your residence address on all your financial accounts, and keep doing so whenever you switch addresses.
Ensure you make prompt payments on all debts you owe. Timely payments give potential lenders confidence to extend credit facilities. Additionally, those payments are positive entries on your credit history.
Avoid overdrawing on your credit cards. Maintain a certain minimum as a sign of financial discipline. Additionally, keep using those credit cards, as each transaction is a positive entry in your credit history.
Where possible, consolidate your debts to one or a few easier-to-manage loans with more favorable interest rates.
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Cut Back on Borrowing
Unless it’s an emergency application, you need to cut back on borrowing in the period leading to your personal loan application. That period is also perfect for consolidating your loans. By minimizing borrowing, you’ll free up more disposable income, which improves your debt and income ratio. Additionally, it demonstrates financial discipline to the lenders.
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Borrow Only What You Need
Avoid borrowing more than you need as this may jeopardize your financial future. Additionally, a lender may find a huge sum unreasonable and reject your application. Therefore, determine what you need, and stick to that figure.
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Present Collateral
You may have most of what a lender wishes to see, except a few minor details that collateral can cover. Therefore, while you’ll risk something of value, present it if the personal loan is necessary.
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Understand an Application Rejection
If your application fails, find out why the lender decided so before the next application. Similarly, avoid making several applications to improve your approval chances. You may be making the same mistake and wasting precious time and other resources. Additionally, the lenders may find you desperate for cash. They’ll view this strategy as a red flag and reject your applications. Therefore, address the present issue to ensure a more efficient and solid subsequent application.
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Get a Co-Signer
If your credit score remains poor, enlist the help of a co-signer. A co-signer is someone willing to be associated with you to help you raise your score. Their excellent credit history should address the lender’s remaining concerns. You must be honest with a co-signer about your intentions. Disclose all details, and let the person decide whether they are ready to take on this significant risk.
Conclusion: Getting A Personal Loan Is Easy?
Financial emergencies and opportunities rarely find you prepared, and as such, personal loans come in handy. You now understand how to apply for a personal loan correctly with the right information and a keen approach. With different financial institutions presenting unique loan products, such information becomes more crucial. Remember, you need to treat personal loans as a last resort and only borrow what you can repay. Repayment plans are also a very important part, and you should always stick to a plan that you’re comfortable with.
