Need to fill gaps in your budget, cover a large expense, or pay down high-interest debt at a lower cost? 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.
Before you take out a loan, know how much you need. Borrow only to cover your goal, like paying off high-interest credit card debt, making an urgent repair, or home improvements. Lenders will consider basic information including your income and the information on your credit report. You need to make a more thorough review of your financial picture. Consider your minimum monthly expenses and all of your potential sources of extra income. Before you apply, decide what personal loan payment will fit your budget.
Lenders are more likely to approve loans to borrowers with high credit scores, and they offer those borrowers favorable terms including lower interest rates. If your credit score is in a lower range, consider taking steps to improve your score before applying for a personal loan. Lenders report credit information monthly, so your score can improve in just a few months. You can get one free credit report per year from each of the three credit bureaus, Equifax, TransUnion, and Experian.
There are more options than ever for personal loans. You can borrow from a brick-and-mortar bank, credit union, or peer-to-peer online lending marketplace. The best type of loan for you depends on your credit score, as well as the amount and purpose of the loan. Lenders may have a different application process for small business loans, and some financial institutions do not make business loans at all. There are also specific types of loans for healthcare financing. If you have good credit, you’ll have more choices. If you have bad credit, you’ll typically pay higher interest rates.
Compare features of loan you consider applying for. Look at loan terms including origination fees, interest rates, repayment terms and catch up on some of the best financial podcasts. Read the fine print about late fees and penalty fees. Consider helpful features like autopay, skip payment options, and online account management.
You have probably heard that when you submit a loan application for a personal loan or another credit card account, your credit score might take a hit. Still, you’ll want to get a ballpark figure on your interest rate. Through LendingClub, you can check what your interest rate could be without impacting your credit score.
Complete an application for the personal loan with the best rates and terms. You may be asked to provide proof of income, such as pay stubs, business records, or tax documents. If for some reason you are declined for a personal loan, try not to worry. You’re not alone and there is a path forward. Taking a few personal loan eligibility steps can set you up for success next time you apply.
Your lender may send a check for the loan amount, make a direct deposit to your bank account, or in the case of a balance transfer loan, pay your creditors directly.
Use the money you borrow for its dedicated purpose, especially if you’re consolidating debt or paying down other bills. Use the funds from your loan to make payments to high-interest rate creditors first. Do it right away so you don’t pay any more in interest than you have to—and so you’ll be less tempted to spend the money on something else entirely.
Before your first payment is due, set a due date reminder in your calendar, set up auto pay or use the amortization method. Being 100 percent sure you’re making payments on time can help you to build, maintain, and protect good credit history.
Before applying for a loan or turning to other short-term lending options for borrowing money, check out our answers to the most frequently asked questions about how to take out a personal loan.
If you’re just starting out with personal loan research, read our personal loan definition first.
Depending on your income and credit history and who you ask, the answer will vary. A majority of personal loans are unsecured, which means they don’t require collateral. 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 replacing an aging furnace, deck, or roof―the interest rate on a personal loan might be better than the annual percentage rate (APR) on your credit card 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 consolidation. A personal loan can be used to combine multiple outstanding credit card balances into one loan with 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 soon, or need to pay for out-of-pocket medical costs. Rather than charging these large expenses to a high-interest rate credit card, you could apply for a lower rate personal loan instead. Remember, a credit card that you can’t afford to pay off to zero at the end of every month is essentially a very expensive “loan.” A personal loan for large expenses will not only give you the time you may need to pay the money back, there’s a very good chance you will save a lot 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 personal 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 more debt than is absolutely necessary.
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 quick loan options. 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) at much lower rates than you’d get for a payday loan.
Regardless of your lender, it’s important to take on no more debt than is needed to cover the expense.
If you think a personal loan could help you cover large, temporary expenses or gaps in your budget, start by checking your rate through LendingClub, today. It’s free and won’t impact your credit score.
Checking your rate generates a soft credit inquiry which is visible only to you. A hard credit inquiry that may affect your credit score only appears when your loan is issued.
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