A personal loan is the money that you borrow for any reason. You may be taking out that personal loan for debt consolidation, for meeting an unanticipated high medical bill, for buying a new appliance, for funding a vacation or for even paying off your student loan expenses.
Once you take out this loan, you have to pay back the money along with the interest rate that is charged. You pay the money back over a period of 2-5 years or whichever is the term of the loan. Majority of the personal loans are unsecured which means that the loans aren’t backed by any collateral.
The interest rate that you pay is expressed in terms of APR or Annual Percentage Rate. The average APR on a personal loan is around 9.41% as of August, 2019 but it may also range from 6% to 36% depending on your credit score and the examination of your debts, income and credit worthiness.
Loan amounts usually range from $1000 to something more than $50,000 and these are paid back in the form of fixed payments.
Things to do before you take out an unsecured loan
Take a quick look at your credit score
When you have a strong and good credit score, this gives you a fairer chance of qualifying for a personal loan and grabbing a lower rate of interest. You have to properly assess your creditworthiness by checking your credit score that you get free of cost. Here are the following categories into which your credit score falls.
- 720 and higher: Stellar credit rating
- 690-719: Good credit
- 630-689: Average credit
- 300-629: Poor credit.
If you have a credit score that is not at all friendly for taking out an unsecured loan, you should watch out for steps to build your credit score before you apply for the loan.
The biggest factors that have an impact on your credit score are timely payments, the total amount of credit you use in accordance with your credit limits and the debt that you carry. If you think you have to improve your credit score, you have to get a free credit report to check and rectify the errors.
Compare and contrast the estimated interest rates
When you have a clear idea of your credit score, you will tend to know what kind of interest rate will be offered to you and whether or not you’ll receive an unsecured personal loan at an affordable rate. You may use the loan calculator to compare and contrast the rates that you may get in relation with the credit score that you have.
In these calculators, you have to enter your credit score and the loan amount that you’ll take and the calculator will calculate the term of the loan as well as the interest rate that will be charged on the loan.
Pre-qualification is required for the loan
When you get pre-qualified for a loan, you get a quick sneak-peak into the different kinds of offers that you may be offered by the lender.
There are several online lenders who perform a soft credit check when you pre-qualify for the loan and this won’t affect your credit score. Hence, checking out the score ahead of time will definitely be a win-win situation for you.
During the process of pre-qualification, you can be asked for the following details.
- Monthly debt obligations (student loans, rent, etc.)
- Social Security Number.
- Work address, employer’s name and phone number.
- Previous addresses.
- Maiden name of your mother.
- Date of birth
- Name of your college and major.
What are the cases when you don’t pre-qualify for a loan? Apart from a poor credit score, few other reasons for being denied a loan are.
- Little or no history of work.
- Too less income.
- Too many credit inquiries like credit card applications.
- High debt-to-income ratio, more than 40% is considered as risky.
Shop around and do a comprehensive market research
Unsecured loans are provided by banks, online lenders and credit unions. Compare and contrast the pre-qualified offers with the amounts of loans, monthly payments and interest rates from other kinds of lenders to grab the best loan offer.
Credit unions can offer low interest rates and flexible terms, particularly to borrowers who have a poor credit. They also give you a good shot for a small unsecured loan of $2,500 or less than that.
Few of the bigger financial institutions offer unsecured loans like Discover, Citibank and Wells Fargo. You may also grab better rates from a local community bank, particularly when you have a good relationship with a bank. Or you can get small loans from icash.ca.
Compare loan offers with other options of credit
Before you choose an unsecured personal loan, check if you qualify for a 0% credit card. When you have good credit, you’ll get a card which has 0% interest on future purchases.
Check whether or not you’ll get a secured loan if your credit is not great. However, for that, you will require collateral like a handsome savings account or a car or a house. If you already own a house, try taking out a home equity loan or a line of credit which is cheaper than unsecured loan.
You can also check out for a co-signed personal loan that is an option for the borrowers who don’t qualify for a loan on their own ability. The lender will choose the income and credit history of both the co-signer and the borrower in approving the loan. Such a co-signed loan may also offer better and favorable terms and conditions.
Last but not the least, don’t forget to read the fine print of the loan documents before signing on the dotted line. Check out the prepayment penalties, automatic withdrawals, APR surprises and several other factors of the loan.
Will your payments be reported to the credit bureaus? If yes, your score will benefit. So, unless you’re sure about agreeing with the fine print of the loan, don’t go for it.