Personal loans can be a great way to get your hands on the funds you need. How do you apply and qualify?
Are you looking for a simple loan that doesn’t use your house or any other assets as collateral? Consider the personal loan. Typically, banks offer these loans as unsecured loans, meaning you don’t have to put up any collateral. Most banks offer loans in the amount of $1,000 up to $100,000. Whether or not you qualify depends on your credit score and other qualifying factors.
Qualification Requirements and Applying for a Personal Loan
First, let’s look at the qualifications to get a personal loan.
Check your credit. Knowing your credit lets you know what lenders see. On average, you need at least ‘fair’ credit (580-669), but many banks require ‘good’ credit scores (670-739). Services like Experian and CreditSesame can get your credit score for free, and also help you understand how it is calculated. If your score isn't great, it's worth taking the time to boost your score before applying, as it could help you get a more favorable rate.
Set a budget. Before shopping for an unsecured loan, consider how much you can afford. Don’t rely on the number the banks give you, work the numbers into your actual budget to see what you’re comfortable paying.
Submitting a loan request. With your number in mind, apply for a personal loan with banks and credit unions. Check online banks as well as local banks. Banks will need proof of your identity, income, employment, and assets to make a decision. Online services like LendingTree, ZippyLoan or others can save you time by connecting you with a lender in their network.
Review your offer. Review your offer, looking at the total cost of the loan, not just the monthly payment. How much will the loan cost you in the end?
Know the terms. Make sure you know the terms of the loan, and read the fine print. Make sure there isn’t a pre-payment penalty or APR changes throughout the term.
Close the loan. Once you choose a loan and finalize the paperwork, you’ll receive the funds in your account (typically wired) within a few days depending on the bank.
Calculate Your Payment
A loan calculator can help you figure out how much your monthly payment will for a given interest and loan duration.
As you can see, your credit score determines the interest rate you'll qualify for, which can make a huge difference over the life of the loan. Boosting your credit score before applying can save you a lot of money.
Is a Personal Loan Good?
Personal loans can be good in the right situation. If you are in over your head in credit card debt and want to get out of it, an unsecured loan can consolidate your debt into one loan. But, if you have other low-interest options that may help you get out of debt, you may want to exhaust them first.
A personal loan can be a bad idea if you consolidate your debt and then rack the credit card debt up again. It can also be bad if you take out the loan ‘just because.’ Make sure the funds have a purpose and one that will benefit you in the end.
Consolidating your credit card debt saves you money on interest and using the funds to fix up your home gives you a higher return on your investment when you sell. It’s the spending that doesn’t have a return, like paying for a vacation or just keeping the money around ‘just in case’ that isn’t the best choice.
Alternatives to a Personal Loan
Personal loans do have alternatives that you should consider too:
- 0% APR credit card
- Home equity line of credit
- Peer-to-peer loan
- Small business loan (if for business purposes)
- 401K loan
Before you take out an unsecured loan, make sure you understand the terms both currently and in the long run. Ensure that the loan makes sense, that you can afford it, and that it will benefit you financially in the end.