Personal loans are cash that you can borrow from banks or private lenders. These loans are used for various reasons. You can use them to consolidate debts, meet unexpected medical bills, buy an asset, finance a wedding, or take a vacation.
Applying for a loan can also be easy, especially when you have good relationships with lenders. Like other loans, choose your loans wisely and borrow what you may afford to repay comfortably. In addition, calculate the monthly installments and incorporate them with your budget and the basic principles below.
1. Check Credit Scores
Credit scores are undeniably crucial since they determine your approval rate on loans and how much to apply. There are two models of credit score; VantageScore and FICO. In both models, credit scores range between 300 and 850, and your repayment history is a critical factor in determining the score. However, they differ in terms of ranking and weight factors.
There are also factors that cannot impact your credit score, including religion, marital status, education, and nationality, to mention a few.
Gather documents for successful approval on your loan; you need to gather and present certain documents. These papers help banks or lenders understand your financial stability to analyze the risk of credit. The papers also help lenders verify your details like address, employment status, income, and age. So, lenders may request some documents like:
- Military ID
- Government ID
- Birth certificate
2. Know the Forms of Personal Loans
Most of the personal loans are unsecured. Meaning, you don’t need collateral like a car or home to obtain them. The rate and approval you get on unsecured personal loans are based on the credit scores you have.
However, there are other different forms of personal loans, such as variable-rate and secured loans. Variable-rate is a loan with interests, which are tied to benchmark rates. Depending on the fluctuations on the benchmark rate, your loan interests may either increase or decrease on a regular basis.
On the other hand, secured loans are borrowed money from lenders, but they do have collateral. A good example of secured loan is a mortgage. You can borrow against your home like movoto to check the listings of properties that can guarantee the repayment of this loan. Some credit unions, online lenders, and banks can offer this type of personal loan.
3. Understand the Reasons for Applying
For many people, taking personal loans might seem like a frivolous act, but to others, it’s beneficial in various ways. You can use personal loans to:
- Conduct home remodeling – Personal loans can be great when you want to repair the parts of your home, like kitchen, bathrooms, and bedrooms. Since personal loans have low risks, they can also be suitable for individuals who lack home loans.
- Take care of emergency expenses – Personal loans can be used to take care of burial arrangements or pay your medical bills. For example, if a family member dies, you can borrow a personal loan to buy a burial plot and pay for funeral services.
- Buy home appliances – When important household appliances abruptly fail to work, you can borrow personal loans to replace them. Some of the household appliances you can buy using the loan are dryers, air conditioners, and heaters.
- Manage moving costs – Moving costs are expensive, but personal loans may offer you financial support to relocate your household items from one home to another.
4. Ask about the Origination Fees
Origination fees are the costs that lenders charge to serve as a cover for credit agreement and application. Origination fees on personal loans may go up to 6%, and they only apply when money is disbursed.
During loan application, lenders will consider various factors to determine origination fees. Some of these include terms, amount, and creditworthiness. However, paying these fees is not a must, but they can apply in certain situations.
5. Go Through the Terms
Depending on the personal loan type, the terms will differ from one lender to another. Some of these terms revolve around collateral, repayment, prime rate, and prepayment penalty. Hence, it would be important to understand these terms before sending your application.
Also, you should understand the withdrawal terms on the contract. For instance, before you withdraw from the agreement, you must clear your loan balance. Failure to that, the lender may recover the loan through the legal actions of a court.
Personal Loans – Preparation is everything!
Applying for personal loans can be a lengthy procedure if you don’t meet specific requirements of credit scores and the repayment period. Therefore, when applying for personal loans, be sure to gather some documents like IDs, research, and understand the terms of lenders. Last but not least, set a repayment plan to ensure you pay back the loan on time.