Personal loans can be a great way to solve cash flow problems. They can help you consolidate your debt, pay bills or help you out of an unexpected financial bind. You can even use a personal loan to fund a new business venture. Personal loans are great for many purposes as long as you do not use the money for frivolous things you really cannot afford. Additionally, any time you take on new debt, you should understand what you are getting into.
Here are ten important things you should know that will help you find a great deal on a personal loan.
Know your FICO Scores
A large part of what determines whether or not you are approved for a loan and how high the interest rate depends on your credit report. A lender will typically pull credit reports from Experian, Equifax and TransUnion and compare your credit score from all three. If you know your scores before you apply for the loan, then you can get a ballpark idea of what interest rate percentage you should be eligible for.
Check Your Reports
While you are looking at your FICO scores, check your credit report for errors. All too often people end up with lower scores than they should because of errors on their credit report. If you can find and correct these errors before you apply for a loan, then you will greatly improve your chances of getting favourable loan terms. It can take up to 30 days for the bureaus to resolve these errors, so you should pull your reports early as you can.
Different lenders have underwriting guidelines, so not all their offers will be the same. Fill out an application at a website like creditloan.com personal loans or even prosper.com and they will submit your application to different vendors. Applying online is faster than going to multiple banks and online lenders tend to have higher approval levels and better loan terms. You are not obligated to accept any offers once you fill out the application, but is a nice, quick way to make comparisons.
Know the Fees
Almost all personal loans have fees besides principal and interest. Examine all your loan offers carefully and look for “hidden” fees. Sometimes a lender may charge a lower interest rate, but charge higher fees to make up the difference. In these cases, you want to make sure you know the total cost of the loan so that you can compare apples to apples. What looks like a good offer on the surface could be loaded with fees.
Figure Out What You Can Afford
The longer you have a loan out, the more interest you pay. Before you even apply for a loan, you should know how much of a monthly payment you can reasonably afford. If you do not already have one, set-up a budget to figure out how much you can pay each month. Once you have determined your monthly amount, try to get a loan agreement that allows you to pay back the loan as fast as you can without going over your budget.
Lenders lose interest if you repay the loan early. Some lenders will include penalty fees for paying off the loan early. Your best bet, if possible, is always to get a loan with no early repayment penalties. The exception to this rule in cases where you know you can pay the loan back early and the fees for repaying the loan will save you more money in interest payments than you have to pay in fees.
Type of Interest Rate
There are two types of interest rates, variable and fixed. Fixed interest rates tend to be higher, by comparison, when you take the loan out, but your monthly loan payment will always remain the same. Variable interest rates may be low when you take out the loan, but as the interest rates change so do your loan payments. On the surface, a variable interest rate may seem attractive, but a fixed interest rate is your safest bet.
Payment protection insurance is also known credit protection insurance, loan repayment insurance, or other similar names. It is any type of insurance that pays on your loan if you cannot make the payments for some reason. Some people consider it a valuable investment; others consider it a waste of money. If you do decide to purchase loan insurance, shop around for different quotes. Do not assume the lender offers the best price.
Unsecured vs. Secured Personal Loans
Unsecured personal loans tend to come with a higher interest rate because the lender is taking a bigger risk. If you have any assets that you can use as collateral to secure the loan, you will most likely get a better interest rate. The downside to this is that if you default on the loan, you are putting your personal assets at risk. This is another reason it is important to be certain you can afford the loan payments.
Have Your Documents Ready
A startling number of loans are rejected every day simply because the applicant did not provide all the required financial documentation. Even worse, the loan underwriter may charge you a higher interest rate because he or she did not know your complete financial picture. Be sure to gather important paperwork like tax forms, checking account statements, deeds, title and everything else that the lender requires. Do not submit an incomplete application.
Applying for a personal loan can be a little bit stressful, but getting a loan can be a huge help when you need it. Even though you may feel like you are at the lender’s mercy, you really are not. You are the consumer and if a lender wants your business bad enough then that lender will work with you to come up with a good loan deal. Just be wary of lenders who use high-pressure sales techniques. Be certain to base your borrowing decision on facts that make good financial sense and not in a sales pitch.