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If you’re looking for a way to consolidate a higher-interest credit card debt, or want to finance an expensive home improvement project, or want a student loan — knowing how to get a personal loan will make things easy for you.
Getting a personal loan saves considerable money as the average interest rate on a personal loan (say, for a two-year loan) is around 10.6 percent. This is much lesser than the average credit card interest rate of approximately 17.7 percent. (Inputs from the Federal Reserve)
However, one thing you must keep in mind is to avoid applying for a personal loan without seriously considering its necessity. For instance, borrowing money for a vacation might not be a good idea. You may end up paying off your trip for many years to come. Also, you may want to consider 0% APR credit cards that can help you save on balance transfers.
How does a personal loan work?
A personal loan works as a type of installment loan whereby you borrow a fixed amount of money and pay it back in monthly installments with interest. The loan amount is paid over the life of the loan — which could be from 12 to 84 months.
To get a personal loan quickly and easily, the lender must approve your application. Sometimes, you can get the loan money as instantly as the same or the next day. Other times, the process may take up to a week.
How to get a personal loan?
Getting a personal loan is easy if you know-how. Let’s list out the steps to make applying for a loan easier for you.
1. Do the Math
Begin by deciding how much money you need. Then, use a personal loan calculator to find out what your monthly payment will amount to. Even though you wouldn’t know the exact rates and repayment terms of lenders at this stage, you will have a rough idea of the loan cost. Finally, decide if you can handle the loan and its repayment.
FYI: As some lenders charge an origination fee to start the proceedings, ensure that you factor in the fee too.
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2. Explore all your loan options
Check out other types of loans available as well. They may better serve your money needs. Do read up on a home equity loan or home equity line of credit loan. While personal loans are unsecured, home equity loans are secured by your home. The latter, as a result, may get you better interest rates. Of course, there’s a greater risk involved as you’re pledging your home to back the loan.
Also know that while personal loans have fixed rates, other types of loans have more flexible rates.
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3. Evaluate your credit score
Needless to say, the best personal loan lenders require that you have a good credit score. Higher the credit score, the more chance of your loan getting approved, and with a good interest rate.
If your credit score is lower than your expectation, you can get a copy of your credit report to see if there are any errors.
Generally, credit scores are calculated thus:
- Excellent credit score: 720 and higher
- Good credit score: 690 to 719
- Average credit score: 630 to 689
- Bad credit score: 300 to 629
4. Improve your credit score
If your credit score is low, you may still be able to get a personal loan but the interest rates and fees will be high.
Take steps to build your score up before you apply for a loan. Want to improve your credit score? Ensure on-time payments and keep a tag on the amount of credit you use relative to your credit limits. This is also important because most lenders run a credit check to determine if you’re qualified enough to repay your loan.
5. Arrange for a cosigner if you need one
Keep in mind that you may need a cosigner to help you get approved for a loan with a decent interest rate. Depending on whether you can find one or not, and your credit situation, you may have the option to get a secured personal loan instead of an unsecured personal loan.
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6. Think about where to get a personal loan from
Your three options for a personal loan source include:
- Banks and financial institutions such as Wells Fargo and Citibank.
- Credit unions offering personal loans at lower interest rates and flexible terms.
- Online lenders offering a convenient way to compare personal loans.
FYI: If you’ve been a long term account holder with your bank or credit union, your chances of getting a personal loan get better.
7. Look around for the best personal loan rates
NEVER EVER settle for the first offer you get. Explore all the interest rates available and choose the best one. You can even compare several types of lenders, their rates, repayment terms — and then zero in on the right loan for yourself.
8. Choose a lender and apply for a loan
The next step is to pick the best lender for your needs. Then, begin the application process. The lender will typically need your complete details — name, address, and contact information — along with your reason for the loan, annual income, and employment information.
FYI: On your part, review the complete rates and terms, conditions for the loan, any fees, and the repayment period plan. ALWAYS read through the fine print carefully and identify any hidden fees or other pitfalls.
9. Provide necessary documentation for approval
To get approved for a personal loan, you will in all probability need to provide a copy of your latest pay stub, W-2 forms, bank statements, tax returns, driver’s license, Social Security Card, state ID, and/or proof of residence (utility bills or copy of lease) — to name a few loan documents.
The lender will run a hard credit check for the final approval. Interestingly, you can even get yourself pre-approved if you’ve decided to use the financial products and services of an online lender.
Cases where you might not get approval include a really low credit score, a high debt-to-income ratio (above 40%), bad credit history, less income, little or no work history, and too many recent credit inquiries.
10. Finalize the loan and make prompt payments thereafter
After approval, finalize the loan and accept the terms. Usually, you’ll get the loan funds within a week — or maybe in a shorter time. Once you get the loan money, note when your first repayment is due. The best solution is to set up automatic payments from your checking account. You can also add extra money to pay off the loan sooner.
FYI: Some lenders offer interest rate discounts if you set an auto-payment account.
Read more: Types of Home Loans – Which One Is Right for You?