Personal loans are highly flexible loans that you can use for almost any purpose. If you’re thinking about applying for a personal loan, you might want to know how to take out a personal loan to ensure you’re getting the best possible deal. We’ll break down what you need to do.
1. Determine How You’ll Use the Money
If you’re thinking about applying for a loan, you probably already know why you want the loan and how you’ll use the money. However, you should take the time to really consider how you’ll use the money and whether it will better your financial position.
Applying for a personal loan to take a vacation might be fun, but it isn’t going to leave you better off financially. In fact, it will hurt your financial position.
On the other hand, getting a loan to consolidate debt or to work on a home improvement project can be a good thing to do. Think about precisely how you’ll use the money you borrow, and make sure you have a plan you can stick to once you get the loan.
2. Figure Out How Much You Can Afford
If you’ve thought about how you’ll use the money, you can start thinking about how much to borrow. You’ll have an idea of how much you need to borrow to meet your goal, so think about how much you can afford to borrow.
That means taking a close look at your financial situation, including your current income and expenses, the stability of your job and income, and your emergency fund.
You want to make sure that you can easily fit the new loan payment into your budget and that you’ll be able to handle the unexpected, such as losing your job or an emergency expense, without having to take on more debt.
If you’re already stretching yourself to pay the bills or you feel like you’re not secure in your job, you’ll want to borrow less or nothing at all. If you have plenty of room in your monthly budget and a healthy emergency fund, getting a larger loan isn’t as risky.
3. Check Your Credit
Next, take a look at your credit score and credit report. Your credit score is a number that ranges from 300 to 850. You want a score of about 740 or higher to give yourself the best chance of qualifying for a loan and getting the best rate possible.
You are entitled to get a free copy of your credit report from each credit bureau once a year.
When you look at your credit report, take note of your score and anything that’s impacting it. Also, look for any errors that may be on the report.
Some things, like your credit utilization ratio, are easier to improve in the short term. If you have high utilization, try not using your credit cards for a month or two and paying down as much of their balance as possible. That could boost your score before you apply for a personal loan.
If there are errors on the report, make sure to reach out to the credit bureau to correct those mistakes. Getting inaccurate information removed can also improve your credit score.
If you only have fair credit or even bad credit, you can still apply for a loan, just be ready to see higher rates and fees.
4. Assemble Required Documents
When you apply for a personal loan, your lender will want some paperwork from you. Common things to provide when applying for personal loans include:
- Proof of income
- Proof of expenses, including other loan statements
- Proof of assets, such as bank account statements
Getting these documents together before you apply can make the actual application process easier. It also helps to have them on hand in case a lender asks for more details. That saves you the effort of having to search for documents as your lender requests them.
5. Prequalify with Multiple Lenders to Check Your Rate
Before you apply for a loan, look at multiple lenders to get an idea of their rates and fees. Once you’ve found a few that you like, check if they offer prequalification.
Prequalifying for a loan usually involves a soft inquiry on your credit report. That means the lender can get information about your credit profile with no impact on your credit score. The lender can then give you a more accurate loan quote, including the term, rate, fees, and monthly payment.
Prequalifying with a few different lenders can take a bit of effort, but it gives you the chance to get multiple loan offers to compare. It also helps you make sure the lenders you’re looking at are legitimate.
6. Compare Loan Offers
Once you’ve received your prequalification offers from a few lenders, it’s time to choose the best one.
You’ll want to look at a few factors:
- Interest rate. The higher the loan’s interest rate, the higher the total cost of the loan will be. More interest accrues each month, driving up the monthly payment.
- Repayment term. This is how long it will take to pay the loan off. Longer terms mean higher overall costs but lower monthly payments. Shorter terms save you money overall but result in higher monthly payments. Try to strike a balance between affordability and overall cost.
- Fees. Some lenders charge additional fees, such as origination fees or prepayment penalties. Try to minimize the fees you pay or could potentially pay.
Of course, one of the top things you’ll be looking to do is minimize the total cost of your loan. That means trying to get the lowest interest rate and fewest fees. However, you also need to consider other factors, such as how easy the lender is to work with.
For example, if one lender option is your current bank, you might be willing to accept a slightly higher rate for the convenience of keeping all your money in one place.
7. Make Sure the Loan Still Makes Sense
Once you select a loan offer, it’s your last opportunity to take stock of your finances to make sure the loan really makes sense.
If you’re planning to consolidate other debts with your personal loan, will the interest rate and fees of the loan you’ve been offered really save you any money?
If you need to borrow $25,000 to have enough for your home improvement project, but lenders will only offer up to $15,000, can you come up with the remaining $10,000 another way?
Don’t just apply for a loan because you’ve made it this far into the process. Do one last check to make sure the loan will truly help you accomplish your financial goals.
The last step of the process is, of course, to apply for the loan. Go to the lender’s website and submit the full application. If you want to, you can apply with multiple lenders, especially if you’re worried about whether you’ll qualify. So long as you apply for the loans within a short period, some credit scoring formulas will batch those applications into a single hard inquiry on your credit report.
Once you’ve applied, wait for your lender to get in touch. If all goes well, you’ll get approved, and the funds will show up in your account a few days later. In some cases, the lender will ask for more details before processing the application. Provide the information as soon as possible to ensure the process goes as smoothly as possible.
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