Getting a personal loan is the quickest way to get the additional funds you need. These types of loans are taken out for a short period of time, usually between two and five years. Before you get one, however, there’s important personal loan information to understand.
Where to Find Personal Loans
The three best places to get personal loans are online lenders, banks, and credit unions.
Online Lenders – Online lenders make it easy for you to complete the entire process virtually without having to visit a branch. You can research lenders and compare offers online. You can also apply for a loan and receive the funds digitally.
Banks – Getting a personal loan from a bank is easy, but you will need to visit the branch to submit your application.
Credit Unions – Credit unions offer personal loans at much lower interest rates than most other lenders. The terms are more flexible too. The restriction is that you must be a member of the credit union to qualify for a personal loan. This is because credit unions are member-owned financial institutions.
3 Basic Requirements for Getting a Personal Loan
Although specific requirements may vary slightly from one lender to another, basic requirements always include:
Good Credit Score – A good credit score is the most basic requirement to get approved for a personal loan. The better your credit score, the higher your chances of getting approved. A high credit score will also qualify you for lower interest rates.
Clean Credit History – Defaults, collections, and bankruptcies act as red flags to prospective lenders. Having one or more of these on your credit report will make it difficult for you to get approved. Even if the lender approves your application, they will almost certainly charge you exorbitant interest rates.
Steady Employment – Before any lender lends you money, they will want to know that you have the means to pay it back on time. Being steadily employed is one way to demonstrate your ability to pay back the loan. Someone who has a stable job with steady income is less likely to miss payments or default on the loan.
Documents You’ll Need to Submit When Applying for a Personal Loan
Every lender will have their own customized application form that you’ll have to fill out to initiate the loan process. In addition, you’ll have to submit these documents to support your application:
Identification Proof – All lenders will want to see some proof of identification to verify your age and citizenship. It also helps prevent identify theft. Documents to submit for this purpose could be:
State issued ID
Certificate of citizenship
Address Proof – Lenders will need to know where they can get in touch with you personally. Knowing where you stay also helps them get a better idea of your lifestyle.
Any of these documents are acceptable as address proof:
Lease or rental agreement
Voter registration card
Proof of insurance on your home or vehicle
What Can You Use A Personal Loan For?
Only a few niche lenders impose restrictions on what you can use your personal loan for. Otherwise, personal loans can be used for any purpose.
Personal loans can come in really useful for:
Emergency expenses – An unexpected hospitalization or vehicle repairs can upset your tight monthly budget. Even a small personal loan at times like these can help defray the expenses.
Home renovations – Large home renovation projects can be expensive but they can boost the value of your home. Taking a personal loan to cover the cost of renovations is well worth it if you’re putting your home up for sale. The increased value of your renovated home will more than makeup for the interest on the loan.
Debt consolidation – Using a personal loan to pay off multiple lines of credit card debt is a good idea. You can repay the loan over a longer period of time, and with a better interest rate too.
Although you can use personal loans for any purpose, including funding a vacation, it is not advisable. You will be paying interest on the money that you borrow, increasing the cost of your vacation considerably. The same applies when taking a personal loan for any other non-essential purchases.
Personal loans should also not be used for business purposes. Small business loans or credit lines may be more appropriate funding sources.
How Long Does it Take To Get the Funds?
The exact time may vary. In most cases, you will get the money the same day or the day after you submit the application. Few lenders may take up to a week to release the funds. It rarely takes longer than that.
What You Should Know About Personal Loan Interest Rates
The interest rate you pay will rarely be the same as that published on the lenders’ website. That published rate is just an estimate. Your interest rate is determined by your credit score. The lender will do a soft credit pull to check your credit score. A good score will qualify you for a lower interest rate.
Your annual income and amount you wish to borrow will also be taken into consideration when calculating your interest rate.
Pros and Cons of Personal Loans
You get the money quickly. Some lenders release the funds within as little as a day of receiving your application.
These are usually unsecured loans, which means you won’t need to use your home or vehicle as collateral to borrow money.
You get the money in one lump sum, and usually with a fixed rate of interest. This makes it easier to keep monthly payments on track and minimizes the risks of late or missed payments.
Interest rates are considerably lower than other emergency loan resources such as payday loans.
You get a reasonable amount of time to pay back personal loans, unlike payday loans with their shorter repay terms.
You need to have good credit to qualify. This is unless you’re taking a secured personal loan for which you’ll have to put up collateral.
Some lenders charge fees such as origination, prepayment, and late fees. This makes your personal loan that much more expensive.
APRs on unsecured personal loans are typically higher than those of some secured loans.
You’re adding another bill to your monthly payments. They could stretch your budget to the limit or even break it. You risk damaging your credit if you miss payments on your loan. Make sure you can afford the monthly payments before taking the loan.
Understanding the basics of personal loans is the key to using this funding resource to your advantage while minimizing the risks.