Need to fill gaps in your budget this month or pay for a large purchase? Understanding how to take out a personal loan is the first step to securing the funds you need to cover temporary, short-term expenses.
Before applying for a loan or resorting to other short-term lending options, check out our answers to the most frequently asked questions about taking out a personal loan.
Depending on who you are and who you ask, the answer will vary. Personal loans are unsecured, which means they don’t require collateral from the borrower. Because of this, the interest rates on personal loans are typically higher than what you’d see on a home mortgage or auto loan.
Even so, taking out a loan may still be a good option, especially if you meet the following criteria:
If you need to make a major purchase―like a new appliance or replacing a leaky roof―the interest rate on a personal loan might be better than your credit card APR or in-store financing options. If you take out a loan and pay the seller in cash, you may end up better off in the long run.
The same principle applies to credit card debt. A personal loan can be used to consolidate multiple outstanding credit card balances into one monthly payment. The APR on a personal loan could be lower than the interest rates on your credit cards, especially if they are close to being maxed out.
Say, you’re getting married. Rather than charging the wedding costs to a high interest rate credit card, you can take out a lower rate personal loan to cover the expenses. This option will not only give you the time you may need to pay the money back, but there’s a very good chance you will save on interest charges. (Just make sure the personal loan APR is lower than your credit card APR).
While not a guarantee, a personal loan may help improve your credit score—especially if your current credit report shows credit card debt as your main type of credit. A loan can help diversify your “account mix” and may lower your credit utilization ratio.
When your budget is tight or your credit card bill is higher than usual, a small personal loan may help cover a temporary spike in your monthly expenses. Typically defined as $3,000 or less, a small personal loan can be a great way to borrow exactly what you need without taking on a surplus of additional debt.
Because they are less profitable than home mortgages and auto loans, many major banks won’t offer small personal loans. However, plenty of reputable online lending marketplaces offer access to lenders that do offer such loans. For example, qualified borrowers can obtain a personal loan through LendingClub for as low as $1,000 (and all the way up to $40,000).
Regardless of your lender, it’s important not to take on more debt than is absolutely necessary to cover the expense.
Now that we’ve covered what personal loans are and what they can be used for, let’s look at the steps you need to secure a personal loan. According to Claire Tsosie and Jackie Zimmerman of NerdWallet, there are six steps to taking out a personal loan:
The better your credit, the better your rates. To qualify for a loan through LendingClub, you’ll need a minimum credit score of 600. Be sure to understand your credit score (and check it for free) before trying to take out a loan.
Pre-qualifying for a loan is a great way to see what type of offers you’ll likely receive. Online lending partners will perform a soft credit check as part of this process, which won’t impact your score.
Once you know what you can qualify for, head online to compare rates and terms from various lenders. As Rebecca Safier of Student Loan Hero points out, “Even if you have no trouble getting approved, it’s smart to shop around and compare personal loan offers. That way, you can find the best offer for your financial situation, as well as a personal loan with the lowest rate.”
If your credit is good, you may qualify for an introductory interest-free credit card that defers interest and fees for a set period of time (typically the first 12-18 months) while you’re paying it off. If your credit isn’t great, a secured loan, or using a co-signer, can be good options to consider.
Look for prepayment penalties. Know whether the lender reports your on-time payments to the credit bureaus. See if flexible payment options are available. As always, before you sign for a loan or any contract, be sure you understand all the terms and conditions.
When you find a loan from a lender that meets your requirements, gather your ID, proof of address, and proof of income paperwork. Once you’re approved, you will usually receive the money within a week, depending on the institution and their policies.
If you think a personal loan could help you cover temporary expenses or gaps in your budget, start by checking your rate today. It’s free and won’t impact your credit score.
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