How to Get a Personal Loan (Application, Approval, Alternatives)
Personal loansÂ are typicallyÂ unsecured loansÂ offering up to $50,000 with a term of up to 5 years. They come in several shapes and sizes andÂ interest rates, fees, and terms can differ greatly, but the averageÂ personal loanÂ in the United States is between $7,000 and $8,000 and charged at a rate of 11% and 12%.
Steps to Getting aÂ Personal Loan
- Check YourÂ Credit Report
- Compare Rates and Terms
- Get a Pre-Qualification
- Look at theÂ Fine Print
- Look at Alternative Options
- Receive Final Approval
1. Check YourÂ Credit Report
The better yourÂ credit scoreÂ is, the lower theÂ interest rateÂ of the loan will be. You can get a freeÂ credit checkÂ from all three of the mainÂ credit bureausÂ (TransUnion, Experian, Equifax) once a year and use this to see what the lenders will see.
YourÂ credit reportÂ will show yourÂ credit historyÂ in intricate detail, as well as your personal details and all active accounts. If yourÂ credit scoreÂ is below 600, you’ll likely be refused aÂ personal loan; if it’s lower than 700, you may succeed, but won’t necessarily get the best rate.
In any case, it always helps to build yourÂ credit scoreÂ and it’s also very easy to do. If you follow the steps below, you may see a sizeable improvement in a few short months:
- Increase Credit Limits:Â Your credit utilization ratio calculates your debt in relation to your credit limits. Someone with a debt of $100,000 is not necessarily worse off than someone with debt of $10,000 if the former has a credit limit of $2 million and the latter has a credit limit of $20,000. By judging debt in this way, yourÂ credit scoreÂ builds an accurate and relative picture of your financial situation. By increasing your credit limits, you can improve this part of yourÂ credit scoreÂ in one quick move.
- Payoff Debt:Â Debt is the other half of the credit utilization ratio and works just as well as increasing your credit limit. If you have a debt of $5,000 and a credit limit of $10,000, your credit utilization is a high 50%. If you repay just $1,000 and increase your credit limit by $1,000, this ratio drops to a respectable 36%.
- Get a SecuredÂ Credit Card: A securedÂ credit cardÂ uses a security deposit as collateral, allowing you to sign-up even if you have veryÂ bad creditÂ or no credit at all. It can build your credit in as little as 6 months as all payments are reported to theÂ credit bureaus. Your deposit will set your credit limit and is completely refundable.
- Stop Applying:Â Every time you apply for a newÂ auto loan,Â personal loan,Â credit cardÂ or mortgage, you receive a hardÂ credit inquiry, which can reduce yourÂ FICO credit scoreÂ by between 2 and 5 points. What’s more, every new account will reduce your score even more and make it harder to quickly build a strong score. Keep applications to a minimum and only apply when you absolutely need a new account.
- Keep Making Payments:Â Your payment history accounts for 35% of yourÂ FICO credit score, which is more than anything else. It takes a long time to build your score this way, but as soon as you miss a payment, your score can drop by over 100 points and undo all your hard work, while making your task considerably harder.
At the same time, however, yourÂ credit scoreÂ is not the only thing that matters. There is a misconception here, one that claims you can get pretty much anything you want as long as you have anÂ excellent creditÂ card. But that’s simply not the case.
If you are self-employed with an inconsistent income that never goes higher than $15,000 a year, it’s still possible to have anÂ excellentÂ creditÂ score. After all, as long as you keep credit applications to a minimum, meet your payment obligations on time and keep a strong credit utilization ratio, you can build a greatÂ credit score.
But does that mean you’ll be offered a $200,000 mortgage or a $50,000Â personal loan? Of course not. You’re not making enough money to cover those debts. You might be offered a low limitÂ credit cardÂ with relative ease, but you’ll struggle to get a sizeableÂ personal loanÂ and may be refused outright.
2. Compare Rates and Terms
An estimated rate is, as the name suggests, just an estimate. It can vary greatly depending on yourÂ credit score, income, and a few other factors. However, your eventual rate will always fall into the estimated range and by looking for the best ranges and comparing the most likely rate based on your currentÂ credit score, you can avoid wasting your time on high interest loans.
Many borrowers will look for the lender they are most familiar with, including the ones they have aÂ bank accountÂ or mortgage with. But yourÂ checking accountÂ is irrelevant here and by skipping the comparison shopping you could end up with a much higher rate than you can afford.
Look for the cheapest rates and compare these to the bestÂ loan amounts. Calculate how much you will need and whether or not you can sacrifice a few dollars here and there to save more on interest.Â
3. Get a Pre-Qualification
A pre-qualification will give you an idea of what sort of loan you can get based on yourÂ credit scoreÂ and income. You can then use this information to compare and contrast, ensuring you find the best and most suitable loan for you.
You will need to supply all of the following information, and this will be used to determine if you’re a good fit or not:
- YourÂ Social Security Number
- Your full income and debts (debt-to-income ratio)
- Your date of birth, home address, phone number, and email
- All your previous addresses dating back a fixed number of years
- Details of your education
If your income is too low, yourÂ debt-to-income ratioÂ is too high, yourÂ credit scoreÂ is poor or you have made too many credit applications, you may be refused a pre-qualification.
4. Look at theÂ Fine Print
Does the loan have aÂ prepayment penalty? Does it charge high fees and penalty rates? Is there anÂ origination fee? This information may not be included on the main offer page, but it’s essential for determining the worth of a loan, so dig around in the terms and conditions, and make sure you’re getting the best loan possible in terms of theÂ lowest rateÂ as well as the lowest fees.
5. Look at Alternative Options
AÂ personal loanÂ is not the only option at your disposal, and it may not even be the best one. Depending on what you need the money for, there are a host of better alternatives out there, ones that may be more forgiving of yourÂ credit scoreÂ and more willing to give you a large sum and aÂ lowÂ rate.
It’s not all about banks. There areÂ online lenders,Â credit unions, and a host of otherÂ financial institutionsÂ willing to help you out.
We have outlined some of the best alternative options a little further down this article.
6. Receive Final Approval
Once you have browsed multipleÂ loan offers, checkedÂ loan rates, and decided on the best option for you, it’s time to apply and get final approval. You will need to provide some additional info, including W-2 forms and pay stubs, and then the lender will check yourÂ credit scoreÂ and you’ll receive a hit of between 2 and 5 points.
If there are no issues, the loan will be finalized. SomeÂ online lendersÂ offer to pay your funds by theÂ next business dayÂ and other lenders offer instant payment on acceptance of theÂ loan application. However, many will pay within 1 week.
What areÂ Personal LoansÂ Used For?
You can use aÂ personal loanÂ for a variety of reasons and in most cases, the lender doesn’t care which one you choose. As long as you meet theÂ monthly paymentsÂ and have a respectableÂ credit score, they don’t care if you’re blowing it on a vacation or launching a business. Here are a few reasons to apply for aÂ personal loan, some of which make more sense than others.
If you have a lot ofÂ credit cardÂ debt, you can use anÂ unsecuredÂ personal loanÂ to clear it. You’ll still have debt, as you’re essentially swapping one debt for another, but you may be charged aÂ lowerÂ interest rateÂ or smallerÂ monthly payment.
There areÂ debt consolidationÂ and debt management companies that specialize in this service and can do all the hard work for you. However, these companies focus mainly on reducing yourÂ monthly paymentÂ andÂ interest rateÂ in exchange for a prolonged-term. You’ll pay less per month and may have an APR that is several points lower, but the increased term means you will pay much more over the length of the loan.
If you have a strongÂ credit score, are in a good financial position and have several high interestÂ credit cardÂ debts, you can get a low rate, short-term loan. You’ll pay more per month, but over the term, you could save thousands of dollars in interest payments.
It’s rarely a good idea to accumulate debt just so you can enjoy the vacation of a lifetime. But what if it’s the only chance you have of taking that vacation? What if it would be a life goal realized and you’re confident that you can make theÂ monthly paymentsÂ and eventually clear the debt?
In such cases, while we would never recommend it, using aÂ personal loanÂ for a vacation is understandable. It’s something that many older married couples do to pay for cruises and trips across Europe. It’s also a method used by young married couples to have the honeymoon they have always dreamed of.
Student loansÂ aren’t always readily available, nor are they the best option. And while they are usually more preferable toÂ personal loans, they may not provide the coverage that you or your grandchildren need.
In the last decade or so, there has been an over 1,000% increase in the number of seniorÂ student loanÂ borrowers. This isn’t the result of an influx of mature learners, but rather it’s because they are assuming debts on behalf of their grandchildren and children, co-signing to help them through college.
Pay for a Major Expense
Life can throw several major and unexpected expenses your way, and if you don’t have any money in your savings, aÂ personal loanÂ may be your only option. Many couples live their lives relatively debt and problem-free until one of the following expenses raises its head and they opt for aÂ personal loan.
- Marriage: A marriage is not something that happens unexpectedly, unless you’re a parent and your child is the one getting married. In either case, it’s a massive expense that can cripple you financially, with the average wedding costing over $30,000.
- Adoption: The average cost of adoption in the United States ranges from between $40,000 and $50,000. Like a wedding, it’s not necessarily something that happens unexpectedly, but also like a wedding, when the time is right and the need is there, it’s something you feel like you have to do.
- Funeral: Funerals can cost upwards of $10,000 and often occur out of the blue. If the deceased is insured or has assets, it’s not a problem, but there are countless people who are not insured, don’t have assets, and die unexpectedly. If you’re the closest person to them, you may find yourself assuming responsibility for their funeral.
- Medical Services:Â If you fall ill and need a specific type of treatment or surgery that your insurance won’t cover, aÂ personal loanÂ could be the only option. Medical treatments are very expensive, and many Americans simply can’t afford to cover these costs out of their own pockets.
Launch a Business
Launching a business is another risky way to use aÂ personal loan, but one that many borrowers are submitting to every year. This is the golden age of entrepreneurs, and there has never been a better time to launch a business.
Of course, grants and business loans are also available, but the former often requires you to work in specific niches and abide by specific terms, while the latter will be weighed against your personal finances if your business is small or new. AÂ personal loan, therefore, may be the only option for business owners seeking to launch a new project.
Alternative Options toÂ Personal Loans
AÂ personal loanÂ isn’t your only option when you need a little cash. You can borrow money through several different avenues, and the best option for you will depend on what you’re using the money for:
You need credit to build credit; you need aÂ credit cardÂ or a loan before you can get theÂ FICOÂ scoreÂ you need to get aÂ credit cardÂ or a loan. It can feel like a Catch-22 situation, but it’s not as complicated as it might initially appear.
If you have no credit orÂ bad credit, you may be offered a super highÂ interest rateÂ loan orÂ credit cardÂ and that can help you to build a respectable score. However, it’s a risky way to do it and there are many better options out there if your only goal is to build credit.
For loans, you can use something known as a credit builder loan. Much like a reverse loan, a credit builder loan requires you to complete many of the same steps as a traditional loan, only the lender keeps the lump sum amount and moves it to a secured account.Â
ThatÂ loan paymentÂ earns you a small rate of interest and this helps to offset some of the interest you pay the lender. Every month, you make a payment on the loan, paying some of the principal in addition to the monthly interest, and the lender will report your payments to the three majorÂ credit bureausÂ (TransUnion, Experian, Equifax).
Every month, your score will improve slightly as your payment history receives a boost and then, at the end of the term, they’ll release the lump sum to you, and you’ll get most of your money back (minus the interest) in addition to theÂ credit scoreÂ boost.
Paying Off Debt
AÂ personal loanÂ is a great way to clear debt, but it’s not necessarily the best option. If you’re struggling to meet yourÂ monthly paymentÂ obligations, it’s not the right option at all, as yourÂ monthly paymentsÂ will increase as your term decreases.
Instead, you can look into the following options:
- Debt Payoff:Â Sometimes, simple debt payoff strategies like the Debt Avalanche and the Debt Snowball are enough to clear your debt and can do so in a way that won’t cost you dearly or damage yourÂ credit score.
- Debt Settlement:Â One of the best and cheapest ways to clearÂ credit cardÂ debts, debt settlement works by agreeing reduced settlement amounts with your creditors.
- Debt Management:Â A form ofÂ debt consolidationÂ performed by a specialist credit counselor. You will pay less every month and can receive greatly improved terms.
Launching a Business
Once you’ve cut costs, reduced expenses, and considered all possible ways to reduce your initial outlay for a business launch, then it might be time to consider crowdfunding. Sites like Kickstarter can help you to get the funds you need and if you have a good idea or product, along with perks, it can give you capital.
You can also sell shares in your business to friends and family, or simply ask them for a small loan.
Expanding a Business
One of the bestÂ loan optionsÂ for expanding your business is something known as PayPal Working Capital, a program that we have touched upon and praised several times before. If you accept PayPal for your business and have processed many payments through your PayPal account, you’ll be offered a lump sum to help you grow.
TheÂ loan amountÂ youâre offered will depend on how much money you receive every month. As for theÂ repayment term, you need to pay 10% of the total every 90 days, and all payments are taken as a percentage of your income. If you opt for $20,000, you may pay a fee of $2,000, taking the total to $22,000, and be asked to pay $2,200 every 90 days for a 20% cut.
This means that for every $1,000 you earn, you’ll pay $200 back to your PayPal Working Capital loan, in addition to the usual PayPal fees. TheÂ application processÂ is quick and easy, and you can have the money in your PayPal account in just a few minutes.
Paying for Education
While aÂ personal loanÂ can be a useful option when paying for your education or a family member’s education,Â student loansÂ often provide better rates andÂ loan terms. They can also cover most of the costs associated with college, although if you need extra money for living costs, then aÂ personal loanÂ can be considered.
Paying for Vacations or Other Expenses
If you are a homeowner and have built substantial equity in your home, then aÂ home equityÂ loan orÂ home equityÂ line of creditÂ may provide you with betterÂ loan termsÂ and a much higherÂ loan amount.Â
AÂ home equityÂ loan orÂ line of creditÂ is aÂ secured loan, as it uses your home as collateral. If you fail to make the payments every month and eventually default on your loan, the lender can simply take your asset and use it to recover the costs of the loan.Â
As a result, theÂ annual percentage rateÂ is often much lower. You will still needÂ good creditÂ and a respectableÂ debt-to-incomeÂ ratioÂ to apply, but the bestÂ home equityÂ loan is typically much more favorable and cheaper than theÂ bestÂ personal loan.
How to Get a Personal Loan (Application, Approval, Alternatives) is a post from Pocket Your Dollars.