The Top Four Things You Should Know Before Applying for a Personal Loan
If you have considered getting a personal loan, you may wonder what you should know about them before you apply. What credit score helps lower the interest rate? How long will it take to pay off this loan? How will it affect your credit? What makes a personal loan different from other types of loans and credit? We will dive into this topic with you here at Max Cash®, and give you the top four things you should know before getting a personal loan.
“The most important thing before applying for a personal loan is working out if you can really afford it. Is your income looking like it’ll change in the next X amount of years? Is your job secure? Will you be moving in X amount of time? Depending on what the loan is for you might even find that borrowing more, costs less and it’ll ensure you can do more with the personal loan too!” – Georgina Grogan, She Might Be Loved
A personal loan is generally an unsecured loan that can be used for nearly anything. It relies primarily on your credit rather than other factors. You can get secured personal loans but that requires some asset as collateral to secure the loan in case of default. Many different places offer personal loans, from banks and credit unions to online lenders and peer-to-peer groups.
You can get a personal loan for as little as $1,000 with repayment terms typically falling anywhere between one and seven years. Interest rates for personal loans fall between 6 and 36 percent right now, with the current state of the economy. Though none of these factors, nor qualifying for any financial product, is guaranteed.
“The reason why behind the personal loan is most important. Is this a financially beneficial move, like taking out a loan to pay down higher interest credit card debt? Or is this a loan meant to fund purchases that may be better delayed? Thinking through in detail why you are getting the loan in the first place is critically important before moving forward with your loan application(s).” – Ben Reynolds, Sure Dividend
1. Your Credit Score and Credit History
Knowing your own credit score can prove invaluable, and not just for applying for a personal loan. But that can help you find the loan that suits your needs and what you should expect in terms of interest rate and repayment terms. Much of the information in your credit report will determine if you qualify and the terms you can secure for a loan.
“Make sure your credit score is high enough to qualify you for a reasonable interest rate. Personal loans are unsecured, which means they have higher interest rates than car loans and mortgages. Even the best-qualified applicants can expect to pay 8% to 10% APR on these products, and people with fair or poor credit may see interest rates in line with subprime credit cards (25% and up).
So work on improving your credit before you apply, even if that means putting off your plans for a year or two. You’ll save a lot of money in the long run.” – Andrew Schrage, Moneycrashers
Generally speaking, a credit score above 670 is considered good. Higher will obviously be even better and lower will be considered fair to poor, once it hits 580 and under. The higher your score, the better terms you can generally get for a personal loan. Higher credit means lower interest rates, which makes a loan cheaper in the long run.
Your credit history also matters beyond just the number, though it does make up part of the criteria that determines your score. But events in your credit history can disqualify you from some lenders and some loan types, so you should check your credit report to know what it says. If you find any mistakes, be sure to report them to the credit bureau where you found it.
“Your credit score is a crucial factor in determining whether your personal loan application will be approved and the interest rate you’ll be charged. Ideally, you should start preparing your credit score well in advance of your loan application to give yourself time to improve it. You can do this by paying your bills on time, reducing your debt-to-income ratio, and correcting any errors on your credit report. A higher credit score can mean a lower interest rate and better loan terms, ultimately saving you money over the life of the loan.” – RJ Weiss, The Ways to Wealth
2. Your Income
Hopefully, you know how much you make, but it matters to lenders as well. Typically, they look at your monthly income. You may have to provide bank statements or paystubs to prove your income to the lender. Self-employed applicants may have to give tax returns as well, up to a couple of years back to show continued and steady income.
A higher income usually means you can qualify for a higher loan amount, as you can show that you have the ability to repay it. You just have to make sure that you include all applicable forms of income when you apply for credit. This will help with the next factor on the list of important things to know about personal loans, listed below.
3. Your Debt-to-Income Ratio
This factor may not get as much attention as things like your credit score or income, but most lenders consider it very important. Simply put, your debt-to-income (DTI) equals your monthly debts divided by your gross monthly income. The resulting number, a percentage usually, is your debt-to-income ratio. Your required household expenses, like a mortgage or rent, and any other required payments like alimony or child support and other debt payments like student loans or credit card payments all count as debt. Obviously, any money you make, even from side gigs, counts as your income as mentioned previously. Be sure to include all forms of income whenever you apply for credit to increase your chances of getting better terms like a lower interest rate.
A good number for your debt-to-income ratio is 36% and below. Conversely, anything above 50% will make it very difficult to take on new debt. It may even become difficult to pay down such a high number. Focus on paying off your debts before taking on new credit if your DTI goes higher than that. A number in between those extremes will probably allow you to take on new debt, though the lower the better, obviously.
“In order to get a loan, you need to be ‘bankable.’ That means that you are the type of borrower that banks want to lend money to. You need to keep in mind a few things before you get a loan to make yourself bankable. One that is super easy to forget about is your debt-to-income ratio. The debt-to-income ratio is very important to banks because it shows them, in a ratio, how much of your income goes to other debts that you need to pay for. If you have too much debt and too little income, banks begin to wonder if you have the ability to pay off the loan. The ability to pay back the loan is extremely important to banks because they also look at your credit report, how long you have been working at your job and lots of other things that make you ‘bankable.'” – Dustin Heiner, Master Passive Income
4. The Interest Rate of the Loan
Before going through with a personal loan, it’s important to evaluate the interest rate and determine for yourself if the interest is something you can afford to take on. When paying back the loan, you’ll have to keep both the principal and interest in mind.
“You should evaluate whether you’re getting the best interest rate for your personal loan. You should check with multiple lenders including banks, credit unions and other financial institutions. Make sure you read the fine print so you understand exactly what type of interest rate you’re getting and whether it will change over time. You want to ensure you’re getting the lowest overall interest rate considering all the additional fees that might be involved. The terms included with this interest rate should work and be affordable given your incoming cash flow and financial situation.” – Jacqueline Gilchrist, Mom Money Map
Max Cash Can Help You Apply for a Personal Loan Today
If you need a personal loan, we have multiple partners to help you shop around for a loan that suits your needs.5 With just one application, you can see if you qualify and potentially find offers from different lenders in minutes.2 5 Start an application here today to begin the process of getting a personal loan.5