A personal loan is a great way to get cash for your honeymoon, your home improvement project, or to consolidate your credit card debt. As with any loan, you need to consider whether you can afford it and can pay it back.
If you considering a personal loan, do your homework ahead of time to get the best deal. This article will help prepare you to get the best deal on your personal loans.
What are personal loans?
A personal loan is money borrowed from a bank. Personal loans are mostly unsecured, meaning that they are not backed by collateral.
Unsecured personal loans are different from other loans such as home and auto loans. For home and auto loans, your home or car acts as collateral. If you don’t make good on your payments, the bank has the right to take your home or car.
When banks make personal loans, banks want assurance that you will repay the loan because the loan has no collateral. So they look at credit score and debt to income ratio.
How much can you borrow?
Typically, you can borrow up to $50,000 if you have good credit. Some lenders may provide loans up to $100,000 if you have high income and excellent credit.
Personal loans typically have a term of 1 to 5 years.
Where can you get a personal loan?
You can get a personal loan at a bank or credit union. Online lenders and peer to peer lending programs also offer personal loans.
What are interest rates like for personal loans?
The interest rate on personal loans ranges from 5% to 36% depending on your credit score according to Bankrate. There may be other fees such as origination fees. Analyze all the costs and understand how much you are paying in fees and interest before committing to a loan.
What factors do banks consider when providing personal loans?
Credit Score
As with all loans, your credit score is an important factor deciding whether you qualify for a personal loan. Lenders typically require a credit score of at least 660 for a personal loan.
Income
Banks look at your income to evaluate your ability to make monthly payments. If your payments on a potential personal loan are too high relative to your income, you may have a tough time qualifying for the loan.
Employment History
Since most people get their incomes from employment, banks also look at your employment history. If you have been working at the same employer for a few years, banks consider your employment to be stable
Other debts
If you have too much debt, banks are unlikely to give you another loan. Banks look at your debt to income ratio (DTI). Though lenders have different DTIs, many of them require your debt payments to be below 35% of your total income.
How can I get qualify for a personal loan with bad credit?
If you are unable to qualify for a personal loan on your own, getting a cosigner with good credit can help you get the loan. The cosigner agrees to guarantee the loan if you fail to make payments. A cosigner can be a friend or a family member. But he or she needs to have good credit.
What documentation do you need to get a personal loan?
Typically lenders will ask for pay stubs, proof of residence, and a copy of your driver’s license. Lenders may ask for additional documents if necessary. The faster you can provide the documents, the faster the lender can process the loan.
How do I ensure I get the best interest rate?
Shop around for the best deal. Loans with fixed interest rates give you certainty on your monthly payments. Your bank or credit union may not offer the best rate. Consider online lenders as they are likely to offer competitive terms.
Read the fine print
The terms offered by lenders vary quite a bit. Read the fine print to understand the terms. Is there a penalty for prepayment? Are you paying origination fees? Are you paying a fixed rate or a variable rate?
Set up automatic payments
Consider setting up automatic payments from your bank account to make monthly payments. This will allow you to pay on time every month. Some lenders give you incentives such as a lower interest rate if you set up automatic withdrawals.
Bottom Line
Personal loans are a great way to get cash. You can get a personal loan from a bank, credit union, or even an online lender. Preparation is vital when you apply for the loan. Get your documents ready and shop around with a few vendors to get the best rate. Always read the fine print to avoid surprises later.
