A personal loan can be the perfect solution when you need money in a pinch. You have the funds you need, and your bank account doesn’t take a hit.
The only problem is that some people don’t realize how personal loans work or what to look for when shopping for one.
A personal loan should not be taken lightly or used as an impulsive decision; instead, it requires careful consideration of all aspects of the contract before signing on the dotted line. Here are some things to remember before applying for a personal loan.
Know your credit score.
Knowing your credit score is the first step before applying for a personal loan. A high credit score can help you secure a lower interest rate, which means you will pay less over time.
You can find your credit score by requesting a free copy from one of the three major credit bureaus: Experian, TransUnion, or Equifax.
You will receive this report via email or mail within 30 days—and it’s free! Your scores are generally between 300 and 850; anything above 740 is considered excellent, while scores below 650 are considered flawed.
If you have bad credit (a low FICO score), there are several things that you can do to improve it: Pay back all of your bills on time (avoid late payments).
Don’t max out any one line of credit by charging more than 30% of its limit. Don’t apply for multiple new lines at once; instead, spread them out over time, so they don’t show up as recent activity on one report account after another within short order.”
Shop around for the best interest rate.
It’s essential to shop around for the best interest rate. When comparing personal loan offers, look for lower interest rates and fees, as well as a variety of other features that could save you money down the road. Here are some features to consider:
Lower rates — Some lenders offer lower introductory rates than others; it’s worth looking into whether they can provide you with a better deal.
Lower origination fees — Origination fees are charged by banks when they process loans, which can add up quickly over time if you don’t pay off your loan early enough in its term. Try asking about any available discounts or special promotions before agreeing to pay an origination fee upfront.
No prepayment penalties — A prepayment penalty (also known as an exit fee) happens when you make an early payment on your mortgage without paying off all of its principal balance (i.e., the amount borrowed).
Be aware of fees and penalties.
You have to pay fees and penalties because of the loan. For example, a sentence can be charged if you don’t pay back your loan on time.
The amount you pay for a fee or penalty is up to your lender, but it’s usually less than $100.
Do you want a fixed or variable rate?
The next step is deciding whether you want a fixed or variable rate loan. Which one is right for you depends on your needs and the plans for your future.
Fixed Rate Loans are more predictable because they don’t change over time, but they can be more expensive than variable rate products.
Variable Rate Loans often have lower interest rates initially, but there’s no guarantee of how much they’ll cost later on—and that’s why they’re riskier than fixed-rate products.
A variable rate product may have a lower interest rate initially, but it could increase at any time.
The longer you take to pay off a loan, the more overall interest you will pay.
When deciding how long you want to take to pay off a loan, remember that the longer it takes to pay off your debt, the more overall interest you will pay. Most personal loans have a flat-rate percentage of interest that is added on top of your principal each month.
If you take out a $10,000 loan with an interest rate of 5% and only make one payment per year until 20 years later, when you’ve paid off the total amount owed ($20,000), then at the end of those 20 years there will still be $939 left in principal.
This means that even though it took 20 years for this personto pay off their debt,they still ended up paying over $2,000 in total interest payments during those 20 years due to taking sucha long timeto make payments on their loan.
Determine what type of loan you need.
Now that you have a general idea of how much money you need and how long you’d like to borrow it, it’s time to figure out what type of loan will work best for you.
Remember: personal loans are meant for individuals needing a short-term cash solution. They are not typically used as a long-term financial solution or as the only source of funds needed to purchase an item.
A personal loan is a lender-borrower agreement.
Before signing a personal loan contract, you must understand all the terms. Use a personal loan for any reason:
- High-interest debt consolidation
- Paying off bills or credit card balances
- Buying a new car, home, or other large purchase
- Starting or growing your business
If you’re considering taking out a personal loan, here are some things to keep in mind:
Remember, you are entering into a contract with the lender, and it is important to read the fine print and understand all of the terms before signing on the dotted line.
To improve your credit score and qualify for a better interest rate, consider making payments on time regularly so that you can establish a track record of paying off debts.
This can take time but will lower interest rates when applying for future loans or credit cards.