Need a Personal Loan? Here’s How to Make It Happen.
(Scroll all the way to the bottom of this article for a list of the best personal loans for both good & bad credit.)
Personal loans are becoming more and more popular these days, especially when compared to charging up debt on high interest credit cards. There are many advantages to using a personal loan to finance some type of expense, whether planned or not.
First, you can oftentimes qualify for a much lower rate than what you’d receive on a credit card. Plus, payments are typically fixed, so you know exactly how much you’ll pay each month and for how long.
Finally, just like credit cards, funds received from a personal loan can be used for almost anything. They offer a large degree of flexibility while still providing clear repayment terms you can plan for regularly.
So how can you make a personal loan happen? Here’s everything you need to know.
How do you qualify for a personal loan?
Lenders look at a variety of factors when reviewing your personal loan application. One of the most influential components is your credit score.
Many lenders have a minimum credit score they work with, whether they advertise it or not. It’s good to have a general idea of where your credit stands so you know what kind of lender you’re likely to qualify with.
For example, if you have an average credit score, you probably don’t want to apply for a personal loan with a lender that advertises working with borrowers who have excellent credit. On the flip side, you shouldn’t apply with a bad credit lender if you have good credit.
Your current finances also play a role in your qualification for a personal loan. Lenders analyze your monthly income and compare it to your monthly debt payments.
This information is used to determine your debt-to-income ratio. We’ll talk more about that soon, because this number not only influences whether you’re approved for a personal loan, but also helps determine how much you can borrow.
The lender may also require that you verify your monthly income. Usually, this is accomplished either through recent pay stubs or bank statements.
Where is the best place to get a personal loan?
There are multiple options for applying for a personal loan. Historically, borrowers would visit a local bank or credit union. Both the application and the approval processes can be much slower with a traditional financial institution, although many large banks are expanding their online presence.
The bigger the bank, the better the credit score you typically need to qualify. Local banks and credit unions, on the other hand, may be more willing to work with lower credit borrowers.
For a faster loan application and funding process, it’s worth looking into online lenders. They can also sometimes be more competitive with interest rates because they don’t have physical branches to support. Plus. online lenders are more likely to tell you upfront what their minimum requirements are to qualify for a loan, while traditional banks can be more evasive.
It’s also easier to compare offers when you can quickly prequalify online in a single sitting. In many cases, this step gives you accurate details on what kind of loan terms you could qualify for without performing a hard check on your credit report and damaging your score.
How can you get a small personal loan?
You can apply for a small personal loan directly online. Oftentimes you can get prequalified and then fill out a formal application once you review your loan offer. You’ll also need to provide some personal and financial information to help the lender review your application.
Expect to provide the following information when it comes time to apply:
- Contact information
- Social security number (for credit check)
- Recent pay stubs, bank statements, and/or tax returns
- Employment information
- Other debt obligations (such as mortgage payments or car payments)
Specific lenders may require additional documentation depending on their own guidelines.
The approval process for a personal loan depends on what kind of lender you’re working with. The most straightforward kind is a direct lender, which handles both the application and loan origination.
A loan broker, on the other hand, allows you to potentially receive personal loan offers from multiple lenders by filling out a single application form. Once you pick an offer, you then finish the application and get funded through the lender, not the loan broker.
Another option is a peer-to-peer or P2P lender. The funding process for this can be a bit slower because instead of having your loan funded directly, you’ll need investors to commit to financing your personal loan.
How much will you qualify for a personal loan?
Each lender differs in how much money you can borrow. Most will have both a minimum and maximum loan amount. The minimum typically doesn’t vary and remains set for all borrowers working with the same lender.
Your maximum loan amount, however, is determined by your debt-to-income ratio, or DTI. If you remember from earlier, your DTI refers to how much of your pre-tax monthly income is already devoted to debt payments.
Not all of your monthly bills are included in this calculation; instead, just your existing credit is considered. That means things like your monthly payments for your mortgage, credit card minimums, auto loan, and student loans.
To figure out your DTI, simply add up all of those monthly debts and divide by your total monthly take-home pay before taxes are taken out. When you do that, the percentage you get is your debt-to-income ratio.
So how does this apply to the amount of loan you qualify for?
Most lenders don’t want your DTI to exceed 45% (sometimes less, depending on the lender). Your potential monthly loan payment is taken into consideration as part of your DTI. So the more debt you have in other areas of your life, the less you could qualify for with your personal loan.
How can you compare personal loan offers?
It’s smart to compare personal loan offers from different lenders before you commit to one. There are a few things you’ll want to look at before making a decision.
First, compare the interest rates as well as any fees. Look at these factors separately, but also look at them as represented by the annual percentage rate, or APR. This number helps you look more holistically at the cost of your personal loan.
Another point of comparison is the repayment term. A long-term helps you take advantage of lower monthly payments, but you’ll most likely pay more in interest than if you were to choose a shorter term. Your interest rate may also vary depending on the loan term you choose.
A personal loan can be an effective way to take care of a major expense, debt consolidation, or even a short-term gap in your budget. The most important thing is to make sure you can afford the monthly payments.
Also, consider how long you want to be paying for your expense. Consolidating credit card debt over a few years might be worth it. But if you’re getting a personal loan for a non-emergency or necessity, like a vacation, you may not want to take that long with your repayment period.
Either way, as long as you tackle your personal loan application with a strong repayment strategy, you’ll set yourself up for a positive financial future.
Ready to Apply?
Crediful has compiled a list of the best personal loans for both good & bad credit.