A personal loan is usually an unsecured loan, which helps you cater to your immediate financial needs. This means that you do not need collateral to apply for it. By merely signing a contract and with an agreement to repay, you can get a personal loan. Moreover, as opposed to auto loans or home loans, personal loans do not need a down payment. So, sans the down payment, securing the amount required all depends on your creditworthiness. A personal loan might not be a good pick for someone with a high debt-to-income ratio, no credit, or bad credit.
Things to consider when planning to apply for a personal loan
Choice between secured and unsecured loan
Typically, personal loans are unsecured, but in some cases, these loans may be secured. Let us understand them in brief.
Unsecured loans
These do not require collateral, and the lender will decide the qualification for the loan based on your financial history. But, if you fail to qualify for an unsecured loan or want a lower interest rate, you can consider applying for a secured loan.
Secured loans
These require collateral, which is either a CD or a savings account. In this case, if you fail to make your payments in time, the lending agency can claim your asset in exchange for loan repayment.
Factors to keep in mind when getting a personal loan
Your credit history and score
The lenders will typically study your credit report before approving your loan application. Credit scores range from 300-850 and are decided based on factors such as credit utilization ratio, duration of credit history, and payment history. Most lenders will demand a minimum credit score of around 600 for qualification. However, in some cases, lenders will grant a loan sans any credit history.
Different alternatives in lenders
Banks are one of the first places where people are likely to reach out to avail a personal loan. However, they are not the only lending agency offering you one. Other places where you can get a personal loan are peer-to-peer lenders, credit unions, online lenders, and consumer finance companies. Though online lenders are the most popular options, it is always recommended to check the reputation and legitimacy of the lender before opting for a loan from them. For doing a background check, you can use resources such as the Better Business Bureau and Consumer Financial Protection Bureau.
The loan amount
When shopping for a personal loan, it is always recommended to shop for the amount you need, and nothing more than that. So, determine the purpose for which you are taking the loan and then calculate the amount you require. If the bank regards you as more creditworthy, it will certainly grant you a higher loan amount, but it is never a good idea to go overboard. A higher amount will attract a higher interest payout. So, borrow what you need.
Interest rate and other costs
You do not have to bear an up-front cost when shopping for a personal loan, but there is still a borrowing cost that you will have to consider. The interest rate premium and other expenses will be a part of your loan amount that you will have to bear over the loan term. The interest rate, repayment terms, and fees will differ among lenders. So, it is quintessential to shop around and compare the rates to find the most affordable personal loan. This difference in cost might be only a few extra bucks per month, but the amount may be significant if you multiply it by the loan term. Hence, patience and diligence are what you need to potentially save you hundreds or thousands of dollars after the repayment period.
Repayment period
A month after you have taken the loan, you will have to start repaying your first installment to the loan company. The repayment term for a personal loan will usually be between six months to seven years. This is a vital factor in personal loans because it will directly influence your monthly payout and the interest rate.