Thinking about applying for a personal loan? Make sure everything’s right and in order by asking yourself these questions that align with the best practices for getting a personal loan.
What Kind of Personal Loan Do I Need?
These are two questions wrapped into one. Without answering a few important questions, you won’t know how to compare your options because you won’t know what kind of personal loan you need.
How Much Money Do You Need? Borrowing too much means paying extra interest and encumbering your credit more than necessary. Borrowing too little means taking on the expense of a loan without being able to accomplish your goals.
Do You Want a Secured or Unsecured Loan? A secured loan is protected by collateral, like a car, home equity, or something you own that has high value. You can get more money for lower interest with a secured loan. By contrast, if you default on an unsecured loan, it will severely hurt your credit score, but you won’t lose anything.
Armed with the answers to these questions, you can move forward to figure out the details of your personal loan.
What Is My Credit Score?
Your credit score won’t be the only thing a potential lender checks out before deciding the details of a loan to offer you. But it will almost certainly be the first thing, and it has considerable impact on the process.
If you don’t know your credit score, you can get a free credit report once a year. Many banks and credit cards also offer a running account of your credit score as part of their online banking services. You can use your credit score for initial research into your loan options.
In many cases, banks and lenders set minimum credit score requirements for different products they offer. You can find a broad range of loans available to you by researching your credit score before going into further details.
Can I Afford It?
Another simple step many potential borrowers forget to consider is the loan’s exact monthly payment and if they can afford it. Confirm there’s room in your monthly budget to accommodate that payment. If there isn’t, the loan adds extra hardship to your life.
It’s a good idea to also look into your future for the term of the loan. If you have any plans that might change your financial situation — for example, a child starting college or a temp job winding down — run your budget with those realities to make sure you can still afford your payments after that happens.
What Is My Goal Here?
Ask yourself why you want to get the loan. What is the real purpose of borrowing this money? Personal loans tend to have comparatively high interest rates, so it’s smart to make sure you need the loan before moving forward.
Once you concretely identify your goal, ask yourself if there are ways to accomplish that goal without going into debt. If the answer is yes, explore them before signing up for a personal loan. If the answer is no, move forward knowing you’re doing the right thing.
How Will This Impact My Credit?
Done right, a personal loan can improve your credit situation. If nothing else, regular, on-time payments gradually increase your credit score with each successive month. But that’s not without risk. If you miss a payment, the opposite happens, and your credit degrades.
Further, the new loan impacts your debt-to-income ratio. This number compares your minimum payments each month against your monthly income to see if you can likely afford a loan. Usually, it’s a more conservative estimate than the realities of your finances. It’s not part of your credit score but is usually the most crucial number lenders look at after running your score.
On this topic, it’s worth mentioning debt consolidation loans. These are personal loans where you pay off a small grouping of individual loans with a single, larger loan. The larger loan is at a lower interest rate and runs over a more extended period than the loans it incorporates. This results in a lower monthly annual payment and less interest paid in total. As long as you avoid predatory lenders, this is one of the best reasons to take on a personal loan.
Figure Lending LLC dba Figure. 15720 Brixham Hill Avenue, Suite 300, Charlotte, NC 28277. (888) 819-6388. NMLS ID 1717824. www.nmlsconsumeraccess.org. Equal Opportunity Lender.