If you’re thinking about taking out a personal loan for the first time, there are definitely some things you need to know before agreeing to the terms. Taking the time to lay out the groundwork will help you get the best possible deal on your personal loan. Plus, it will ensure you know the ins and outs of what you’re agreeing to, there are no surprises, and you’re set financially for years to come. Here are things to consider before taking a loan.
Things to do Before Taking Out Your First Personal Loan
1. Check Your Credit Report and Score
When you apply for a personal loan, the first thing potential lenders check is your credit score. A high score indicates that you’re a responsible borrower and are more likely to pay the money back on time. This increases your chances of getting approved for a loan. It may also qualify you for a lower rate of interest.
Your credit report contains your payment history and other details that your creditors submit to the credit bureaus. This information is used to calculate your credit score. Sometimes, inaccurate information gets reported and this can damage your credit score, affecting your ability to get a loan.
Before you apply for a personal loan, it’s important to go through your credit report thoroughly. If you come across any inaccuracies, file a dispute with the credit bureau and get the mistake corrected. This small step could make the difference between getting your loan application approved or rejected.
2. Lower Your Debt-To-Income Ratio
Debt-to-income (DTI) ratio is the difference between your monthly earnings and monthly expenses. Lenders will want to check your DTI to determine whether or not you will be able to afford the monthly repayments. The high DTI means your income is barely enough to cover your expenses. This makes you a risky borrower as it suggests you’re more likely to miss payments.
Calculate your debt-to-income ratio. Ideally, you want it to be less than 30% for the best chances of getting approved for a personal loan. If it is higher than that, look for ways to lower it. Could you increase your income with overtime or by taking up a part-time job? How about using your skills to earn money freelancing?
To lower your DTI ratio some more, consider cutting back on unnecessary expenses. How about canceling those cable subscriptions? Maybe cut down on the number of times you eat out or get takeaways. These may seem like small change but it adds up and could lower your DTI ratio enough to help you secure that personal loan.
3. Keep Your Documents Handy
You’ll need to submit three types of documents when you apply for a personal loan.
1. Proof of identity documents. In order to verify your identity, your lender will ask you to submit any two forms of identification from this list:
- Social Security number
- State-issued ID
- Driver’s license
- Birth certificate
- Certificate of citizenship
- Military ID
2. Employment and proof of income. Before approving your applications, lenders will want to make sure that you can afford to pay back the loan. If you’re traditionally employed, they’ll want to see the following documents:
- Pay stubs for the past 3 consecutive months
- Employer’s contact information
- W-2s and 1099s
- Tax returns
- Bank statements
If you’re self-employed, you’ll need to submit documentation related to:
- Income tax returns
- Bank statement
3. Proof of address. Proof of address helps the lender know where to send the loan papers. Any one of the following documents is enough for this purpose:
- Mortgage statement if you own your own home
- Lease or rental agreement if you’re renting
- Utility bill
- Bank or credit card statement
- Voter registration card
- Insurance papers of your home, rental or vehicle
Keeping your documentation ready will prevent any unnecessary delays in getting your loan processed.
4. Know Your Responsibilities
First and foremost, you need to understand your responsibilities before you take out that first personal loan. This not only includes the date you’ll have to pay each month, but the minimum amount due, the interest rate, the length of the loan, and just how much you’ll pay back over the long run. These details will help ensure you make the best decision for your finances and don’t get taken advantage of.
An extremely high interest rate, for example, could have you going elsewhere for your loan. The timeline for the loan and the minimum payments required may also not fit your financial goals or budget. It’s essential that you carefully review the details and fine print of any personal loan you take out.
5. Shop Around for the Best Rates
Although your bank is a great place to start when it comes to your first personal loan, it really may not be the best option in the end for your finances. Shopping around will give you the best look at what you qualify for, how much you can get, and the interest rate you’ll receive. You may just find the best loan at the fifth bank you talk to, or you may discover your bank really did offer the best you can get.
Credit unions can also be a great place to look as they tend to offer lower interest rates. However, you should know that credit unions generally only lend to their members, and you may not be eligible to join. Reviewing membership requirements to determine whether it’s a good option may be the route for you.
6. Know What Your Personal Loan Will Be Used For
Personal loans can almost always be used for anything you’d like. They are often used for debt consolidation, emergency situations, or other cases where money is needed quickly. It really depends on the person and their own financial situation.
Sometimes, though, individuals will use personal loans for things like jewelry, including engagement rings, or vacations. This is not advisable. These are not necessities in life, and it will put you in debt with sometimes very little to show for it. It’s best to just save up for these goals, especially since you won’t have to pay interest on the money.
There are exceptions though. It’s important to review your agreement with the financial lender before signing to ensure you’re using the personal loan properly. For example, lenders generally don’t like personal loans for down payments. This is because the point of a down payment is to show your ability to pay the mortgage.
Is a personal loan right for you? Make sure you follow these things to consider before taking a loan. These tips should get you on the right track for answering that question. Before you make that decision, you should review your finances and determine if this is the best for your bank account and financial future.