Meaning of a Personal Loan

1. If you need a permanent solution for your financial issues, you aren’t going to get it by taking a non-secured loan

Whereas an average home mortgage is repaid for some decades, the term limits for personal lends are usually lower. This is the recommended thing since there is no justification why you should take a loan and pay it off for longer than necessary. However, it also implies that if you’re getting a loan for a significant amount of money, like to renovate your home, the repayments might weigh you down, and finally fail to keep up with the repayments.

2. The interest rates might be higher than you think

When you hear fiscal institutions advertising for the interest rates for the home mortgages, that is motivating, and you think you can take a mortgage. However, that is not what we are deliberating here; we are talking about non-secured loans that their rates can be twofold that of collateral loans. The reason is apparent: when you apply for a home mortgage, you are placing the home itself as a security asset. You agree with the bank that in case you fail to pay, you are ready to relinquish the home. That is a considerable risk for you, and the creditor is assured of the security of his money, as opposed to personal loans where if you can’t pay, the creditor has nothing to take for compensation. In return, banks charge lower interest for collateral loans and higher stakes for non-secured loans.

3. Your credit rating comes in handy

With no asset for security, the only thing a creditor has to rely on is the evaluation of your creditworthiness. If you aren’t creditworthy, you can expect that your interest rates will be exceptionally higher compared to the debtors with an excellent credit rating. So, before taking an individual loan, work on your creditworthiness to make yourself desirable to fiscal institutions. We will tell you how to accomplish that in the latter part of this article.

4. Apart from banks, there are other options

You shouldn’t always rely on banks when you need a loan. There are other options, such as credit unions and online lenders who have low-interest rates. Some financiers offer personal lends specifically to the borrowers with poor credit ratings.

5. Individual loans are a lifesaver

One of the key reasons why folks choose individual lends is to cater for crises. For instance, emergency health bills, a broken door or, God forbid, a funeral. Surprisingly, many people opt for payday credits or their credit cards. These options are demonically punishing, but anyway, people choose them because of the situations they find themselves in.

When you request a personal credit, you can get money in your bank within days or weeks. Though somewhat slower compared to paydays or credit cards, they are much more affordable, hence better options.

6. It can save you from your existing loan

One of the primary purposes of taking an individual loan is to consolidate the debts you already have, such as your student loan, auto credits, and credit cards. You may do that to take advantage of lower rates compared to what you are currently paying on the existing debts. You may also benefit from only servicing a single debt monthly. However, you need to be careful when consolidating your bills.

7. Never ever get a personal loan to finance some expenses

One best thing about non-secured loans is that unlike collateral-loans such as a mortgage, you don’t need to explain what you want to use the credit for. But there are some essential aspects you ought to understand better than to borrow, whether you are using a credit card or taking a non-secured loan.

Don’t take a loan to purchase a wedding gown; why do you want to start your marriage journey with the accumulation of debts? Though some banks would advertise travel loans for couples. Actually, that isn’t a good idea. What about when the vacation is over? Would you have anything remaining to vend and pay off the loan? Lastly, I don’t think I will be doing justice to my fingers if I type to tell you that you shouldn’t take any credit for gambling.

Another more complicated question is whether it is prudent to get a non-secured loan for a home down payment. The rationale for needing a buyer to pay some money as a down payment is to prove that he can afford the home. The mortgage lender might not be impressed if you finance the home using an unsecured loan. Again, if you opt to go this route, you need to do this cautiously, since pilling debt in the form of unsecured loans could hurt your applications for mortgages on a later date.

The Link Between Personal Loans and Credit Score

One of the major factors that lenders use to determine your eligibility and how much to give you as a personal loan is your credit score. The interest rate charged on your personal loan is indirectly proportional to the credit rating.

If for instance, you have a credit rating of 800, which is considered excellent, you would not have issues getting approved for low-interest rates. In fact, if you keep your credit score over 740, you will be eligible for the lowest interest rates on personal loans from any lender.

Borrowers with a credit rating of between 700-740 may still get the best deals, but they might be charged higher interest rates compared to people with outstanding credit. If you have a credit score of between 600-700, you could still get some online lenders who may approve your application for a personal loan, but with mediocre interests. If your score is below 600, it would be tough to qualify for a personal loan from most financial institutions, apart from those who specialize in providing personal loans to persons with demanding credit rating. You may also fall into lenders with ridiculously high-interest rates.

How to Enhance Your Credit Score

It is always a good idea to enhance your credit rating if it is not appealing to creditors before you think about applying for a personal loan. As such, you increase your chances of getting a low-interest rate. Here are some things to do to increase your credit rating quickly.

• Get your credit report: to solve a problem, you must find out the cause of the problem; otherwise, you will not solve it. So, if you want to enjoy low rates on your loan by spicing up your credit score, you should find out what is weighing it down. The first step is to get your credit report from main credit bureaus such as TransUnion, Equifax, and Experian. Go to AnnualCreditReport.com, and you will be able to access it freely.
• Pay all your outstanding debts: one of the sure-fire ways to boost your credit rating is to settle all your unpaid bills. Payment history affects your credit rating, so paying all your debts on-time raises your credit profile. Besides, paying off the debt of your credit card will aid you to enhance your credit usage, which also hugely determines your credit rating, by bringing down your debt-to-credit ratio.
• Wait for at least half a year before making a subsequent inquiry: however, though this is not as vital as your credit utilization or your payment history, multiple inquiries affect your credit rating. An inquiry happens whenever you request a credit, (whether a credit card, a loan, or any funding) and the financial firm executes a hard inquiry on your credit profile. While less than two hard inquiries might not affect your credit rating significantly, carrying out several of them can pull down your score.
  Fortunately, inquiries are scrapped from your credit profile after twenty-four months, and they don’t affect your credit rating after twelve months. So, if there are multiple inquiries on your profile, you want to wait until a year is over so that you can think about applying for a loan. After that period, your score might have gone up and be approved for a personal loan with low interest.
• Report any erroneous issues on your credit profile: there is a possibility that the problem that is decreasing your credit rating is entirely not your mistake. If you realize errors in your credit report or some distorting comments you don’t know about, take action and report to all the three main credit bureaus.
• Wait until poor comments are removed from your credit profile: finally, if you realize there are poor comments on your credit profile that are making your profile remain down, you can opt to wait until they disappear. In most cases, that takes seven years for all the negative comments to be scrapped from your credit profile; though there are exceptions where they can remain for ten years.

1. Know your credit rating

Having excellent credit rating places you in a better position to get a personal loan you are applying for. It is among the elements that money lenders look at when considering whether to approve your loan or not and if they approve, how much to give you. So, evaluate your creditworthiness by looking at your credit rating. Here are the universally accepted categories you can use:

• 720 and above: Excellent.
• 690-719: Good.
• 630-689: Average or Fair.
• 300-629: Poor.

If you find your score ranges between the poor or fair scores, you need to follow the steps we highlighted above to boost it and increase your creditworthiness. And if you think your credit score is erroneous, you can follow up with credit bureaus and have it corrected.

2. Compare projected interest rates

Getting your credit rating will help you know the projected interest rate you would be charged on the personal loan, and also the amount you may get.

3. Get prequalification

Applying for a loan prequalification gives you an idea of loan offers you might get. Most financial firms carry out a soft credit check during this process, and it doesn’t ruin your credit rating. So, it is essential to do it. During prequalification, the lender may need the following information:

• phone no., address, email;
• date of birth;
• social security number;
• mother’s maiden name;
• month debt obligations;
• college name;
• previous address.

Your loan pre-qualification might be denied. Apart from bad credit score, other reasons why you might be denied include:

• meager income;
• lack or little work history;
• so many credit inquiries;
• large debt-to-income ratio.

4. Shop around

After the prequalification, now you want to compare the interest rates, payment terms, and the loan amount. Online-only lenders provide flexible terms and a lot of convenience than traditional banks. Credit unions also provide good interest rate for personal loan and are some of the best lenders for small loans.

Traditional banks can give you large amounts, but then you need to have an exceptionally high credit score and stable income. They might also provide personal loan with low interest if you have established a long-term customer relationship with them. The best way to get personal loan with good terms is by shopping around.

5. Compare what other lenders offer you with other credit options

Check if you can be approved for a 0% credit card: if your credit rating is good, you may get a credit card with 0% interest for goods you buy for 12 months or more. If you can afford to pay off your loan within that time, then you should opt for your credit card.

Think about a secured loan: perhaps you are not creditworthy. In this case, you may get better interest rates if you choose a secured loan. However, you will have to provide an asset such as a home as security. If you can give out collateral, a secured loan could be a better option.

Add a co-signer: this could be a way out for the people who aren’t creditworthy. The financial institution evaluates the income and credit rating of both parties and may give better loan terms.

6. Go through the fine print

When it comes to matters of finances, you need to read everything and make sure you have understood it. If you don’t understand it, you should ask for clarification. Some of the things you should be aware of include, prepayment penalties, ARP surprises, direct payoffs to creditors, automatic withdrawals, etc.

7. Final approval

Once you have chosen the right lender that suits your financial needs, you should present the following requirements for a personal loan application:

• Federal-issued ID: you may also provide a passport or driver license.
• Bank statements: it is proof of how much you have and whether you are employed or self-employed.
• Social security number: it is needed to evaluate your credit rating.
• Proof of employment: lenders ask for at least pay slips of the last three months.
• Verification of address: you may need to provide a lease copy or your utility bills as proof.
• Employer’s contact information: some lenders tell you to provide the contact information of your employer and in some instances that of your former employers.
• Photo of identity.

The lender at this point executes a hard credit check that might bring down some marks from your credit rating. Upon final appraisal, you get your money according to the terms agreed upon with your lender.