With so many struggling to keep up with mounting credit card debt and staggeringly high-interest rates, more and more people are turning to personal loans as a payoff option. Last year nearly 30% of people had taken out an unsecured personal loan, most citing credit card debt as the reason why.
If you find yourself in this position a loan could be a great option. They can offer much lower interest rates than the credit card you’re paying on.
Applying for a loan is a big decision, so it’s important to know what you’re getting into. Here are 10 things you should know before you apply for a loan.
Before you jump into applying for a loan there are a number of things you should consider first. Here we cover 10 things you should know before you apply for a loan.
10 Things You Should Know Before You Apply For A Loan
Your Credit Score
This is the very first step in the process to figure out if you’re ready to apply for a loan. Your credit score is the single most important determining factor in loan approval.
The higher your score the more likely you are to be approved for the loan, get a better interest rate and have more lenders willing to work with you. Luckily, there are many free options out there to check your score.
The major reporting companies like TransUnion or Equifax give you a full credit report once a year for free. You can also ask your bank if they will give you a free report.
Get this report early so you have the chance to correct any errors if you find them. If you find any incorrect personal information, have something listed as unpaid when you paid it off, or any other error, file a dispute with the reporting agency right away.
Catching and correcting errors on your credit report is one of the easiest ways to clean up your credit and boost your score. The higher your score before you apply, the better.
One of the biggest influencers to a lower credit score is a high credit utilization ratio. The more of your available credit you are using the lower your score will be.
If you are using more than 30% of your total available credit you want to work on getting that amount down as quickly as possible. The closer this number is to below 30% the better when you apply.
Not only does this up your score and give you a better chance at approval but it will also get you better interest rates on the loan.
Create A Budget
Now that you have your credit score info and you’ve gotten your credit utilization in the best place it can be, you’re ready, right? You need to take a few more steps before running to your nearest lender.
Not quite. You need to take a few more steps before running to your nearest lender.
You need to take a few more steps before running to your nearest lender.
While a loan may seem like a great idea at the time, you need to make sure you’ll actually be able to afford it. Create a detailed budget with all of your weekly, monthly, and yearly expenses.
Include your monthly income, all debt you are currently paying, your regular household bills. If you are going to apply for a loan to eliminate the balance on one of your credit cards will you be able to afford the loan payment? Will it be higher than the current payment you’re making on the card?
You want to have a clear picture of your finances before you walk into the lender’s office and take everything they can give you. Use your budget to figure out the smallest amount of money that can get you by and try to borrow that.
Banks Vs. Other Lenders
Do your research and decide if a bank would be your best option or a private loan business would work better for you. Shop around for the best rates and the lenders who are most willing to lend to you.
Be careful though. When you apply for a loan it can result in a “hard inquiry” on your credit report. This can negatively impact your score. Try and do your research on the lender before you fill out an application.
It’s all about the details with an unsecured loan. These loans mean the lender is taking a greater risk.
This extra risk can mean higher interest rates for you.
Secured loans can be great because they generally mean lower interest rates for you. However, these do require you to put down collateral.
These are the types of loans you’ll receive on the back of your house or a car. If you fall on hard times and can’t repay the loan the lender will take possession of the collateral.
Have Your Information In Order
Make sure to have all the important documents you’ll need to provide the lender. You’ll need to provide the following right away:
- Social Security Number
- Proof of Income (Paystubs, etc)
- Copy of Your Tax Return
Contact the lender before you apply for a loan to make sure you have everything available when you go into the office or on their website to apply.
Check the Fine Print
Before you sign anything you need to check the fine print on the loan. Ask questions about fees, interest rates, and repayment terms.
Ask lenders to explain anything that is written in the loan docs that confuses you. You should be completely clear about what you’re getting yourself into.
Types of Interest Rates
Do your research and be aware that there are many different types of interest rates. The type of rate you receive will greatly impact how much you have to pay on the loan.
The best type of interest rate is a simple interest rate. This means that the rate is the same throughout the length of the loan and never changes.
If you are taking out a large loan for a business venture loan protection insurance may be a good idea. The insurance can be very costly but protects you during times of financial pressure.
The insurance will make your loan payments for you should you fall on hard times.
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Be Smart, Do Your Research, Then Apply
While a loan may seem like a great quick fix in times of struggle sometimes they can sink you even deeper into the hole. Reach out to a professional lender and ask important questions.
If you decide that a short term personal loan would be best for you contact us about applying here.
Have you had a great experience getting a personal loan? Share it with us, we would love to hear from you.