Before you sell your soul to the nearest lender for a personal loan it is wise that you think about what you are doing. You need to know many things before you go taking out a personal loan.
Personal loans are the most popular type of loan to be taken out in the U.S. They are available everywhere as well, you can take out a personal loan at our bank or even get loan online.
At face value it seems really simple, but it's not quite so easy.
Millions of Americans will take out a personal loan every year, often used to cover expenses that occurred suddenly and without warning, to tackle renovations or repairs, and even to consolidate existing debts.
But, do not jump in blind. Here is what you need to know!
There Is An Application Process
You can't just pull a personal loan out of thin air and have it all work out. You need to fill in an application. It will ask you for personal information, ask you to prove your identity, may ask for pay stubs, bank statements, bills, and so on.
It can be a lot, you may have to show a lot of financial and legal documents, and of course, you will also need to understand that they will take a look at your credit report as well.
Personal loans actually have a fairly quick application process in comparison to the lengthy applications of other loans, however there is still much to fill out and provide. It can be easier if you have it on hand ready.
Note that your credit score will play an important role in the lender determining whether or not you get the loan.
Always Think Of Other Options First
Just jumping in can be bad, you should always survey your alternative options first.
You need to survey whether you actually need the loan. Loans can keep you in debt for a very long time, and therefore you should not jump in too fast.
If you do not need a huge amount, consider if you could borrow from friends or family instead, perhaps you could get help from a local charity, or maybe your savings will just cover it.
If you use a personal loan to pay off a debt, then perhaps a debt management plan is actually more beneficial to you, with more attractive terms. This is especially true for those with less than great credit.
You could easily get a better deal altogether, so look at what other options are available to you before you immediately decide to take out a loan.
Shop Around For Good Rates
If you decide that you need to take out a personal loan and nothing else will cut it, spend some time shopping around for good rates. Good research can go a long way, and in this case it can save you money.
Look at online lenders of course, but do not forget about banks, credit unions and so on as well. Everywhere will have different rates, so you should always shop around for the best deals.
In the end it could end up saving you a few hundred dollars, or even a few thousand, just by choosing a different lender.
While you do this, always keep your credit score in mind, because some lenders rates will fluctuate greatly depending on credit scores.
Know What Fees Might Add Up
It is good to understand the rates that you will likely face, but this is not the only thing you should think about. You will often find an origination fee with personal loans. This can be anything from a measly 1% to 8%, of course you should expect other fees too.
Interest rate and APR are obvious fees, but there are other fees as well.
Do note that some fees, like origination fees will often be taken of the total amount of the loan. So, if you needed $20,000, but if this fee is 8% then you may want to ask for $22,000 or similar instead.
Understand What A Personal Loan Is
It should go without saying, but you need to understand what a personal loan actually is before you take one out. Personal loans are given out by online lenders, credit unions and banks, they can range from $1,000 to a massive $100,000.
Personal loans are often repaid at regular intervals. This is often monthly payments over a period from a single year to seven.
These loans are also unsecured, meaning you do not have to put down any collateral, but this does mean that you will often face higher interest rates than found with unsecured loans.
The money will come to you in a lump sum, and you will generally need to start paying it back straight away. Personal loans do not have a specific use, but you must pay them back, if you do not, it will do damage to your credit.
They are an easy type of loan to manage, but they can be just as damaging as others if not understood.