Tips for Choosing the Right Personal Loan

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Coming up with a large amount of money to take care of a big expense in your life isn’t something that most people can readily do. For this reason, many people turn to the idea of taking out a personal loan. Personal loans can be used for everything from completing a cross-country move to financing the adoption of a child. Some people use them to handle financial emergencies and others use them to perform home repairs. Regardless of why you are considering taking out a loan, it is important you choose the right one.

Basics of a Personal Loan

Before you start shopping around for loans, you should have a firm understanding of what to expect and what will be expected of you. You typically need a good credit score to get a personal loan. The exact number ranges between 640 and 750, depending on the lender. The lender also looks at your debt-to-income ratio. The maximum is 45 percent, but a lender may require a lower one depending on your income, the loan amount, and your credit score. Finally, you can expect to pay interest at a rate ranging from 8.5 percent to 18 percent, depending on your credit score.

Don’t automatically discredit a personal loan if you have a poor credit rating, though. Some lenders will work with you, especially if you have property you can put up as collateral for the loan. If you don’t own any property, lenders may accept your application if you have a co-signer.

Required Documentation

To apply for a personal loan, you will need to have the proper documentation. First and foremost, you’ll need to prove your identity, so expect to provide a driver’s license and social security card for verification. You will probably also need to bring a utility bill or other piece of official mail in order to prove your address. W-2 forms or other income verification will also be necessary. Expect lenders to ask you questions as well, including how much monthly debt you have, information about your employer, and in some cases, your mother’s maiden name for further identification verification.

Prepare Your Finances

For the best chance of getting the loan you need; you should prepare your finances the best you can. Most importantly, you should get rid of credit card debt. Any amount owed on a credit card will count against you when the lender runs your report, even if you pay your monthly bills on time and never pay any interest. By getting rid of credit card debt, you greatly increase your chances of being approved for a loan.

Even though most lenders won’t look into this, think about cutting out superfluous purchases such as extra cable channels or daily coffee purchases. This money could be better used for paying back the loan over time.

Begin Shopping for Your Loan

Once you know you have the proper identification and can meet the requirements, it’s time to begin shopping for your lender. When making your decision, always be sure to read the fine print. Some lenders charge penalties if you pay your loan off early. Others have variable interest rates that could cause you to pay more than you expect to over time. Search for lenders who offer fixed terms and fixed interest rates if you need to ensure you pay the same amount each month.

When talking to potential lenders, it may seem like you wouldn’t want to ask questions about the possibility of being unable to pay the loan back, but this is actually important information. If you find yourself laid off or otherwise financially unable to pay back your loan, you need to know what options are available to you. Always ask about the policy for non-payment before signing on the dotted line.

In addition to looking at the loan terms, you must look at the business itself as you choose a loan company. Be sure they are in good standing with governing agencies and that they have a solid rating with the Better Business Bureau. Read online reviews to ensure they do not have a history of dissatisfied customers. Always listen to your intuition. A good lender will be willing to walk you through the process and provide thorough answers to any questions you have. Remember, if something seems too good to be true, it probably is.

A personal loan is a valuable resource for people who need money quickly, but no matter why you need it, be sure you are in a position to pay it back. Non-payment can result in consequences such as wage garnishments and lowered credit scores. Never take on more than you can afford.

photo credit: Dinheiro / Money via photopin (license)

One Response to “Tips for Choosing the Right Personal Loan”

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  1. Laurie says:

    It is always a good idea to keep an eye on your credit report to ensure there are no discrepancies and have an idea of what your score is. When you know what your score is, you are able to work on rebuilding it if necessary and if you see any discrepancies on your credit report – you can work on getting them removed. Great tips, thanks for sharing!

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