5 Things to Consider Before Applying for a Personal Loan
Point of Interest
Personal loans can deliver fast cash when you need it most, but the borrowing tool must be approached with the right information for the best results.
Taking out a personal loan may be a little intimidating if it’s the first time you’ve made a major borrowing decision. You probably have questions like “how do personal loans work?” and “how do I get a personal loan?” There are several things you should know before making the decision of whether a personal loan is the right fit for you.
Additionally, there are factors to consider when selecting which lender to borrow with. The best way to approach a major borrowing decision is to be as informed as you possibly can.
5 Things to Consider Before Applying for a Personal Loan
While there are endless things to consider when applying for a personal loan, there are five main items that you should pay attention to. Ensuring you’re squared away in these categories will help to put you on the road to borrowing success.
Your credit score
Your credit score is a reflection of how risky a borrower you are based on your past borrowing behaviors. It is the main metric that personal loan lenders look at when deciding on loan approval. Additionally, lenders use your credit score to help determine what interest rates they are willing to offer to approved applicants. The higher your score, the better your chances of approval, and the better interest rates you can expect to get.
Before you start shopping personal loan lenders, take the time to pull up your credit report and check your score and how the credit reporting bureau arrived at that score. This will give you the opportunity to correct any errors on your report and give you a general idea of what lenders you may be able to work with. Remember, if you have a limited borrowing history, your credit score might not be all that great. You’re better off knowing this now, rather than getting surprised when you speak to a lender. There are always bad credit loans available, but these will likely come at a higher rate than the usual.
Alternatives to a personal loan
Depending on what you need the cash for, there may be other or better alternatives. If you’re not sure how much money you need, a credit card or line of credit may be a better option.
Credit cards offer a revolving line of credit, which means you are able to use and reuse the money you borrow without applying for a new card or loan. Additionally, you’ll only be required to pay interest on the money you actually use. If you get a credit card and don’t ever use any of the money, you won’t pay a dime.
If you’re a homeowner with equity in your home, you could look into using a home equity line of credit. HELOCs work similarly to credit cards in that you are approved for a limit of funding and can use as much or as little of it as you please. The one major difference, though, is that your house is the collateral on a HELOC. Whereas credit cards are unsecured forms of borrowing, a HELOC is a secured form. What this means is that if you default on your HELOC, your home may be at risk of foreclosure.
If you’re struggling to get a personal loan, credit card or HELOC and still need the cash, you may want to look into Payday Alternative Loans (PALs) backed by the government and delivered through credit unions. These loans carry a lot of the attractive qualities of traditional payday loans but without a lot of the predatory characteristics.
You’ve probably heard it a hundred times, but here it is again — if it seems too good to be true, it probably is. Unfortunately, anytime there is money involved in anything, there is a risk of scams. Here are two things to remember when looking for a trusted personal loan provider. One, stick to trusted lenders. This is not the time to reinvent the wheel just to potentially save a few bucks. Two, if the lender requires money from you upfront, something is probably wrong. Remember, you are the one borrowing money here, not the other way around.
Interest rates and fees
While you won’t be paying money upfront for your personal loan, there is still a cost of borrowing. The fees and interest rate premiums will be rolled into your payments over the life of the loan.
Different lenders will have different fees, interest rates and repayment terms. It’s important you take the time to shop different lenders to find the most affordable loan that has the repayment terms you are looking for. While the difference in costs might seem like only a few bucks every month, it adds up over the life of the loan. A little due diligence and patience in the personal loan shopping process could save you hundreds or thousands over the repayment period.
The need for a personal loan
While it’s the last thing to consider on the list, it may be the most important. Make sure you take a little time and consider the reason you’re getting a personal loan. Is it a need or a want? If it’s a want, you’re better off developing a savings plan and waiting until you can afford the item. If it’s a need, is it a critical need or something that can wait?
If it’s something that can wait, you might want to consider doing just that. Taking on additional debt should not be done lightly. The instant gratification is nice, but you need to realize you will be making payments for that gratification for years. Additionally, it could have an effect on your ability to make other financial moves in the future. For example, if you go to buy a car or a house, the additional debt may lower your credit score enough that you aren’t approved.
Good uses of a personal loan include things like paying emergency costs, medical bills, home improvements, moving expenses, repairing household appliances and debt consolidation. Less-than-great uses of a personal loan include things like overpriced weddings, vacations and luxury items. Ultimately, the decision is yours. However, taking a tactical pause to determine the validity of your financial need or want is helpful.