A personal loan is a sum of money that you can borrow for virtually any purpose, whether it’s for consolidating debts, covering unexpected medical expenses, purchasing a new appliance, funding a vacation, or even paying for educational expenses. The borrowed amount, along with the interest, is repaid through monthly installments over a period of typically two to five years. These loans are often unsecured, which means they do not require any collateral to back them up.
Types of Personal Loans
Here are the two common types of personal loans:
Secured loans: Secured loans involve providing collateral as a guarantee for the loan, meaning the lender can seize the asset if you fail to repay the borrowed amount. In the case of personal loans, the collateral is frequently in the form of money held in a savings account or a Certificate of Deposit (CD). Certain secured loans are specifically named based on the type of collateral required. For instance, an auto title loan employs your vehicle as collateral to secure the loan.
Unsecured loans: Unsecured loans do not require collateral, and they are granted based on the borrower’s creditworthiness and their commitment to repay the loan. Unlike secured loans, there is no specific asset that the lender can claim in case of non-payment. However, even though there is no collateral involved, if you stop making payments on an unsecured loan, the lender can still take legal action against you to recover the unpaid debt. This may result in a lawsuit and potential consequences on your credit score and financial standing. Therefore, it’s essential to responsibly manage and fulfill the repayment terms of unsecured loans to avoid such repercussions.
Apply for a personal loan
Before filling out the personal loan application, it is often possible to complete the process online and receive a decision on the same day. However, there are certain essential steps to take before proceeding with the application.
Check your credit score
Since personal loan approvals largely depend on your creditworthiness, it is crucial to assess your credit scores and obtain updated credit reports from all three major credit reporting agencies—Equifax, Experian, and TransUnion—before initiating the application process. It’s important to note that these actions, known as soft inquiries, do not affect your creditworthiness or credit score. The actual impact on your credit score occurs only when you formally apply for a loan, and the lender conducts a hard inquiry to assess your creditworthiness.
Visiting AnnualCreditReport.com allows you to access a free credit report from each of the major reporting agencies once every year. Numerous credit card and loan companies offer complimentary monthly credit scores from one or more of the major credit reporting agencies. Services like Credit Karma provide free credit scores, credit reports, and various financial services, with some, like Credit Karma, being completely free. However, there are others that offer a free trial initially and subsequently charge a recurring fee. Alternatively, you also have the option to purchase your credit score directly from credit reporting agencies or other online vendors.
The credit score of an applicant holds significant weight in the evaluation of a loan application by lenders. These scores have a range from 300 to 850 and are calculated based on factors such as payment history, outstanding debt, and the length of credit history. While many lenders typically require a minimum credit score of approximately 600 for qualification, there are some who are willing to extend loans to individuals with no credit history at all, acknowledging the situation of new credit users yet to establish a credit track record.
Make sure your credit report does not contain any inaccurate information.
Ensuring that your credit report does not contain any inaccurate information is crucial for maintaining a healthy credit profile and financial well-being. Here’s a detailed explanation of why this is important and how you can go about verifying the accuracy of your credit report:
1. Importance of Accurate Credit Reports:
– Lender Evaluation: When you apply for credit, such as a loan or a credit card, lenders review your credit report to assess your creditworthiness. Inaccurate information can lead to a distorted perception of your financial responsibility, potentially resulting in denial of credit or unfavorable loan terms.
– Credit Score Impact: Inaccurate negative information, like late payments or accounts in collections, can lower your credit score. A lower credit score may hinder your ability to access credit in the future or lead to higher interest rates on loans.
– Identity Theft: Errors on your credit report could be a sign of identity theft or fraudulent activity. Monitoring your report helps identify and rectify unauthorized accounts or activities, protecting you from potential financial harm.
2. How to Check for Inaccurate Information:
– Obtain Your Credit Report: Request a free copy of your credit report from each of the major credit reporting agencies—Equifax, Experian, and TransUnion—once a year through AnnualCreditReport.com.
– Review Each Section: Carefully examine the sections of your credit report, including personal information, accounts, payment history, and public records (if any).
– Check for Errors: Look for discrepancies, such as accounts you don’t recognize, incorrect account statuses (e.g., marked as delinquent when you’ve paid on time), or inaccuracies in personal details (e.g., wrong address or name misspellings).
3. How to Correct Inaccurate Information:
– Dispute Inaccuracies: If you find any errors, you have the right to dispute them with the credit reporting agency. You can do this online, by mail, or over the phone.
– Provide Supporting Documents: Gather evidence to support your dispute, such as payment receipts or correspondence with creditors. Send copies, not originals, of these documents to the credit reporting agency.
– Investigative Process: The credit reporting agency will investigate your dispute and contact the creditor to verify the information. If the creditor cannot validate the data, the agency must remove or correct it.
4. Regular Monitoring:
– Stay vigilant by regularly monitoring your credit report throughout the year. You can subscribe to credit monitoring services or use free platforms like Credit Karma to receive periodic updates on changes to your credit profile.
– Promptly address any inaccuracies that arise, as timely resolution helps protect your credit score and financial reputation.
Lenders set income prerequisites for borrowers to guarantee their ability to repay a new loan. These minimum income requirements differ depending on the lender. For instance, SoFi mandates a yearly minimum salary of $45,000, while Avant’s requirement is lower at $20,000. Nevertheless, it’s not uncommon for lenders to withhold information about their specific minimum income requirements, so borrowers may not always be aware of them.
Proof of income can be demonstrated through various documents, such as recent tax returns, monthly bank statements, pay stubs, and signed employment verification letters from employers. For self-employed applicants, tax returns or bank deposit records can be provided as evidence of income. These documents help lenders assess the borrower’s financial stability and ability to meet loan repayment obligations.
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Having a solid repayment plan is also a critical step to take before borrowing any money.
Having a solid repayment plan is essential before borrowing any money to ensure responsible financial management and avoid potential debt issues. Here’s a step-by-step explanation of how to create a solid repayment plan:
1. Assess Your Financial Situation: Start by understanding your current financial position. Calculate your total income, including salary, freelance earnings, investments, or any other sources of income. On the other side, list all your expenses, such as rent/mortgage, utilities, groceries, transportation, entertainment, and other monthly bills.
2. Determine Your Borrowing Needs: Clearly define the purpose of the loan and the specific amount you need to borrow. Avoid borrowing more than you require, as it will increase your debt burden and interest payments.
3. Research and Compare Lenders: Shop around for lenders who offer favorable interest rates and terms. Compare loan options from different institutions and choose the one that best suits your needs and financial capabilities.
4. Calculate Loan Repayment Amounts: Use online loan calculators or financial planning tools to estimate the monthly repayment amount for the borrowed sum. Consider different loan tenures to find a monthly installment that fits comfortably within your budget.
5. Analyze Your Budget: Review your monthly budget and identify areas where you can cut back on expenses to allocate more funds towards loan repayment. Make adjustments to your spending habits to accommodate the new loan repayment.
6. Emergency Fund: Before taking on any debt, it’s crucial to have an emergency fund in place. Aim to save at least three to six months’ worth of living expenses in a separate savings account. This safety net will protect you in case of unexpected financial challenges.
7. Set Clear Goals: Define your financial goals and timeline for repaying the loan. Having specific targets will help you stay focused and motivated throughout the repayment journey.
8. Prioritize High-Interest Debts: If you have existing debts with high-interest rates, consider prioritizing their repayment before taking on new debt. High-interest debts can accumulate quickly and hinder your overall financial progress.
9. Additional Income Sources: Explore opportunities to boost your income, such as taking on a part-time job, freelancing, or selling items you no longer need. The extra income can be dedicated to accelerating loan repayment.
10. Stay Committed to the Plan: Once you have a solid repayment plan in place, stick to it diligently. Avoid missing any loan payments and resist the temptation to use the borrowed money for non-essential expenses.
By following these steps and having a well-thought-out repayment plan, you can borrow money responsibly and ensure that the loan fits seamlessly into your overall financial strategy. This approach will not only help you meet your financial goals but also improve your creditworthiness over time.
Decide how much you want to borrow
The primary factor to carefully consider when determining the appropriate borrowing amount is undoubtedly your actual financial needs. It is essential not to stretch beyond your means, as this could lead to higher monthly payments and unnecessary interest expenses. Conversely, borrowing too little might not adequately cover your requirements, making loan repayment challenging.
Before finalizing the borrowing amount from a lender, thoroughly assess your budget and analyze how the loan payments would integrate into it. Should you realize that borrowing the initially planned amount is unaffordable, you might need to adjust your expectations or consider postponing the loan application until you’ve saved enough to support your objectives.
Use lender prequalification to shop around for competitive rates
When selecting a lender, one must take into account various aspects, including interest rates, fees, loan terms, customer service, and reputation. Engaging in comparison shopping, exploring multiple lenders, and evaluating their offerings are crucial steps in making an informed decision.
Typically, lenders have a preference for potential borrowers who exhibit the following qualities:
1. Stable Income: Demonstrating a consistent and sufficient income that enables them to afford the monthly loan payments.
2. Positive Credit History: A credit history that showcases timely payments and responsible credit management.
3. Low Debt-to-Income (DTI) Ratio: Maintaining a low DTI ratio, which indicates that their debt obligations are relatively small compared to their income.
4. High Credit Score: A high credit score, reflecting a history of responsible credit usage and a lower risk for the lender.
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What Documents Are Required For a Personal Loan Application?
Each loan provider is different and may ask for different documents as you apply for a loan. On the loan application itself, you’ll be asked for your Social Security number, address, and your income.
You will also normally need at least three documents to apply for a loan:
Proof of identity: Driver’s license, passport, or state-issued ID card.
Proof of your income: Pay stubs, tax returns, W-2s and 1099s, bank statements, or your employer’s contact information. If you are self-employed, the loan provider may ask for bank statements, 1099s, or tax returns.
Proof of address: Utility bill or your rental agreement for this. If you don’t have either, you might be able to use a mortgage statement, voter registration card, property tax receipt, or bank or credit card statement.
What To Do If You’re Denied For a Personal Loan?
Your personal loan application may be rejected by a lender for a variety of reasons. Your DTI may be too high or your credit score may be too low. It’s also possible that you requested a larger loan than the bank believes you are capable of repaying in light of your income, employment stability, and other debts that are still owing.
If a lender denies your personal loan application, there are a few steps you can take to improve your chances of getting a loan in the future:
- Ask for the specific reason your application was rejected
- Review your loan application for mistakes or inaccuracies
- Improve your credit score by paying down your current outstanding debts
- Check for mistakes on your credit report
- Increase your income
- Compare lender requirements
- Apply for a smaller loan amount
- Consider using a co-signer
- Pay stubs/proof of income
- The last couple years of tax returns
- Documentation of 401(k)s and other financial accounts
- Photo ID
- Rent/mortgage history
- Proof of collateral, if you’re pursuing a secured loan