New boat? Exotic vacation? Or maybe your one of the 28 million people who would go into debt to buy an iPhone.
There are lots of different reason why people go into debt. One way to get what you want is to take out a personal loan.
If you’re thinking of taking out a personal loan, make sure you know all about the process. So let’s start with the basics.
What exactly is a personal loan?
Personal Loan Vs. Credit Card
We all know the drill. You get a pre-approved card off in the mail. When you sign up for that card and use it, the balance grows.
You’ll have to pay the card off eventually, but all the card really wants is a minimum payment every month. The longer the account is open, the more money the credit card company makes.
Personal loans are different in that they are an installment loan. Borrowers are given a certain amount of money at the beginning; then they pay it back in pre-determined payments each month.
And unlike revolving credit, like a credit card, a personal loan lasts until the loan is paid. Then the loan is closed.
If you need more money after that, you’ll need to apply for a new loan.
Secured Vs. Unsecured
Generally, there are two types of personal loans. Secured loans require assets to be put up against the loan.
For example, if you take out a personal loan, you may be required to use your car as collateral.
If you default on your payments, the lender is allowed to claim your assets as payment for the loan.
Unsecured personal loans let you borrow money without putting up any collateral. You can qualify for an unsecured loan based on financial history. But, these loans usually have a higher interest rate.
Know Your Credit Standing
Once you’ve decided you want a personal loan, it’s important to look at your credit scores. How much you can borrow and your interest rate will largely depend on how good your credit score is.
Just be aware you’ll need to have above average credit to get a good deal and to qualify.
Not sure what your credit score is? There are sites that offer free credit reports to help you get an idea of where your credit score stands.
If you happen to have a low credit score, don’t panic. There are always ways you can improve your credit score including:
- Pay your bills on time
- Pay off debt
- Keep balances low on credit cards
- Avoid opening new credit cards
- Fix any inaccuracies
Do Your Research
Did you know that every inquiry made on your credit score lowers your credit score? So when lenders are looking at your credit score, they are causing it to drop a little bit.
To avoid this, don’t apply for personal loans from several different lenders at the same time.
Do your research. Contact a few lenders to find out what is needed to qualify for a personal loan. Read this to start. Then ask around to find out the minimum credit scores accepted and interest rates.
We usually suggest checking out personal loans from your current bank or credit union first. They are aware of your financial history, and you have already built a relationship with them.
Beware of Fees
Not all personal loans are equal. Interest rates and fees can vary from lender to lender. And there’s nothing worse than paying excessive fees.
Here are some fees you need to be aware of.
Okay, let’s talk mathematics. The difference between 3% and 5% may not sound like a lot, but when it comes to interest, each percentage point adds up. Look around, do some calculations, and figure out the best loan for you.
Want to pay your loan off early? Think again. Some lenders will charge you for paying the loan off before the predetermined date. Otherwise, the lenders will miss out on some of the interest they would have earned otherwise.
Make sure to always ask about the fees charged to cover the cost of processing the loan. It varies from lender to lender but is usually from 1 to 6 percent of the loan amount.
Budget for Monthly Payments
Next, you need to create a budget so you can determine how much you can pay towards the personal loan each month. This payment will be due each month. If you are late, you will have to pay penalties.
There are two different types of loans that help determine your monthly payment.
Short-term loans often get lower interest rates because they carry less risk for the lender. But, these loans will likely have a higher monthly payment.
Long-term loans will have a lower monthly payment because you’ll have more time to pay the loan off. But, the interest rate will likely be a little higher.
It’s a balancing act to find the loan that allows you to borrow the amount you need, have a decent interest rate, and keep monthly payments manageable.
Consider a Cosigner
If you find yourself in the position where you can’t find a lender due to poor credit, consider asking someone to be a cosigner.
When you use a cosigner, you are basically borrowing their good credit to help you qualify for a loan. The lender can use both your credit history and the cosigners to help you get the loan you want with better rates.
Just make sure the cosigner is someone you trust and has good credit.
Taking Out a Personal Loan
Taking out a personal loan is possible if you follow these guidelines. Just make sure you do your research to find the best loan possible. And read all the fine print so you know exactly what you are signing.
So get out there, buy your boat or a new iPhone. And if you run into any other financial questions, come check us out. We have all the info you’ll need when it comes to handling your personal finances.