How to Apply for a Personal Loan
The term “personal loan” refers to money borrowed for a variety of reasons such as debt consolidation, paying an unexpected medical cost, purchasing an item, taking a trip, or even repaying a college loan. Payments are made in monthly payments over a period of time, generally two to five years. Interest is charged on the amount borrowed. The majority of personal loans are unsecured, which means they are not backed by any type of security.
The annual percentage rate (APR) of the interest you pay is stated as a percentage (APR). Although the average annual percentage rate on a personal loan is 9.41 percent as of June 2019, it can range from 6 percent to 36 percent based on your creditworthiness, which is determined by looking at your income, obligations, and credit score, among other things.
How to Qualify for a Personal Loan
There are several stages to take in order to qualify for a personal loan, the first of which is determining whether or not the loan is good for you. As an example, if you need money to repair your home or purchase a car, a home equity loan or an auto loan may have a cheaper interest rate than a traditional bank or credit union loan. This is different from unsecured personal loans, which are based purely on your creditworthiness; instead, these loans are secured by the property you want to fix up or the automobile you want to buy.
Although taking out a personal loan to pay for a family trip or reducing debt falls within the personal loan category, you may also want to consider a credit card with a 0 percent introductory APR. When choosing this option, however, make certain that you will be able to pay off the sum in full before the 0 percent rate ends.
Decide How Much to Borrow
For a personal loan to be approved, there are many procedures that must be completed, the first of which is determining whether or not the loan is appropriate for you. In the case of a home equity loan or an auto loan, for example, the interest rate may be lower than if you were borrowing money to modify your home or purchase a car. This is different from unsecured personal loans, which are based purely on your creditworthiness; instead, these loans are secured by the property you want to fix up or the automobile you want to purchase..
If you’re considering a personal loan to cover expenses such as a family vacation or debt consolidation, you can also consider a credit card with an interest rate of zero percent for an introductory period. Be sure to pay off the debt before the 0 percent interest rate expires if you want to go that way, though.
Check Your Credit
Check your credit scores and receive current credit reports from each of the three major credit reporting agencies—Equifax, Experian, and TransUnion—before you apply for a personal loan, because personal loans are strongly reliant on your ability to repay them. There is no influence on your creditworthiness or credit score as a result of any of these acts, which are referred to as “soft inquiries.” That can only happen if you request for a loan and the lender conducts what is known as a hard investigation into your application.
Visit AnnualCreditReport.com to acquire a free credit report from each of the main credit reporting agencies once a year, which is valid for one year. In addition to offering a free monthly credit score from one or more of the main credit reporting agencies, many credit card and loan firms do the same. Several financial firms, like Credit Karma, give away free credit scores, credit reports, and other financial information. Some, such as Credit Karma, are genuinely completely free. Others provide a free trial period before charging a monthly subscription price. If you want to pay for your credit score, you may do so through credit reporting agencies or through other internet merchants.
Where to Obtain a Personal Loan
Personal loan sources may be split into two categories: those having a banking licence or charter and those that do not have such authorization. The most significant contrast between the two groups is in the area of regulation.
Banks and credit unions are two types of financial institutions.
In addition to the Federal Reserve, the Federal Deposit Insurance Corporation (FDIC), the Office of the Comptroller of the Currency (OCC), and the National Credit Union Administration regulate financial institutions that hold a banking licence or a charter (NCUA).
Local banks and credit unions are often the first places that come to mind when considering a personal loan for a variety of reasons. If you apply there, you will almost certainly meet with a loan officer in person, the experience will be tailored to your needs, and the officer will be able to help you through the application process effortlessly. When compared to alternative lending choices, banks tend to have more stringent loan qualification requirements. If you are already a customer, though, the bank may be willing to give you a discount in that region.
The credit union qualification procedure is less stringent than that of banks, and interest rates at credit unions are often lower than those offered by financial institutions. The only need is that you are a member in order to conduct business there. Loan origination costs are often not charged by banks or credit unions, which is a positive for borrowers.
Nonbanking Financial Institutions (NBFIs) are financial institutions that do not lend money to banks (NBFIs)
These sources are referred to as non-banking financial institutions (NBFIs) or non-banking financial businesses (NBFCs) since they do not have a banking license (NBFCs). The most significant distinction in terms of services is that NBFIs are unable to collect deposits from customers. NBFIs are regulated by the Consumer Financial Protection Bureau (CFPB) under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.
A variety of non-bank financial institutions (NBFIs by world bank) exist, including online and brick-and-mortar financing businesses, insurance companies, peer-to-peer (P2P) lenders, payday lenders, and other non-bank enterprises. Generally speaking, finance businesses have higher interest rates than banks or credit unions, but they may be able to approve you for a loan when a bank is unable to. If your credit is good, peer-to-peer lenders may provide cheap interest rates; nevertheless, if your credit is deemed a risk, you may be offered rates that are far higher than those offered by banks. Payday loans are typically lousy loans, with exorbitant interest rates and hidden expenses that make them unaffordable.
Once you’ve eliminated loans for which you are ineligible, you should switch your attention to lenders who are most likely to approve you. With a soft inquiry, many lenders will offer to prequalify or preapprove you without requiring a hard inquiry. Prequalification or preapproval does not imply that you will be approved for the loan; rather, it indicates that you meet the broad financial profile of persons to whom the lender has previously granted money.
A quick online form in which you submit your name, address, income, and the amount you wish to borrow is often all that is required to get you prequalified for a mortgage. The lender will run the mild credit investigation described above and advise you—sometimes within seconds, sometimes a couple of days later—whether you have been prequalified for a loan or have not been prequalified for one.
Check Out the Details
Now that you know you are prequalified, it’s time to prequalify the lender. Go through information and disclosures in your preapproval letter and revisit the website to look for the following:
- Expected Loan Amount, APR, Monthly Payment, and Loan Term. It may or may not be exact, but it will give you something with which to compare other preapproved loans.
- Fees and Penalties. Will this loan have an origination fee? If so, how much? What are the penalties or fees for late or missed payments? Are there any other charges?
- Type of Interest. Is the interest rate fixed or variable? Do I have a choice, and, if so, what’s the difference in rates?
- Unsecured or Secured. Will this be an unsecured or secured loan? For a secured loan, what is required collateral?
- Automatic Withdrawal. Are automatic withdrawals of monthly payments mandatory or optional? If optional, will I get a lower interest rate if I agree to automatic withdrawals?
- Arbitration. In the event of a conflict, is arbitration mandatory, or can I take the lender to court?
- Prepayment Penalty. If I pay my loan off early, will I pay a penalty?
- Fine Print. There’s always fine print, even in preapproval letters. Look for anything not answered above or anything you hadn’t thought of.
Apply for the Loan
Once you’ve narrowed down your options, it’s time to submit an application for a loan. If you want to submit applications to more than one lender, attempt to group your submissions together within a 14-to-30-day time frame to save time. This is referred to as “rate shopping,” and because several queries will be classified as a single inquiry, the impact on your credit score will be minimal.
Your preapproval letter should inform you of any extra paperwork that will be necessary for the actual application process. First, gather all of your documentation. You will very certainly be expected to give proof of income (pay stubs, W2 forms), housing costs, debt, an official identification card, and your Social Security number throughout the application process (if not provided for the preapproval). Send in your application and supporting paperwork and wait for a response.