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Whether you’re in need of a loan to fund home improvements or make your dream family vacation a reality, it’s important that you approach the process strategically as they’re not always as simple as they appear. With personal loans, you take out a fixed amount of money and pay it back over a fixed period of time with a fixed interest rate. Though this process may sound simple, there are a lot of intricacies of personal loans that may not be immediately obvious. For this reason, we’ve put together a list of eight tips to consider before you take the leap and apply for a personal loan:
Research Your Loan Options Before Applying
There are so many personal loan providers that it can be hard to know which option is best for you. Don’t be deterred by the research, as looking into all your options in advance will help you make a more strategic decision in the long run. The last thing you want to do is get swept off your feet by a super attractive loan option only to realize later that you didn’t read the terms and conditions and now you’ve found yourself in a pickle.
Shop around with credit unions, banks, online banks and online lenders to see what everyone has to offer before you make any concrete decisions. All lenders will evaluate applications differently so while one may not like that you’ve been laid off, the other may still qualify you because you have an “excellent” credit history. Most of the application process may be determined by factors and evaluation criteria that are beyond your control. Don’t accept the first offer that comes your way and make the time to do your homework so you know that your final choice is the best choice, and not just the easiest.
Look For The Best Interest Rate
Personal loans tend to have higher interest rates than some other lending options because there’s no collateral taken by the lender. This means that even the smallest drop in rates can lead to big savings. Keep in mind that if you choose to make smaller monthly payments over a longer repayment term, the convenience will come with a higher interest rate so be sure to read all the fine print and ask any necessary questions about rate options in advance.
Make Sure You’re Eligible For The Loan
The last thing you want to do is assume you qualify for a loan and start making plans to acquire one, only to learn that you don’t meet the criteria or can’t access the funds you need. It’s advisable to get pre-qualified for a loan if you’re unsure of what you could qualify for based on your current financial circumstances. Getting prequalified doesn’t mean you’re preapproved, it just helps you better understand if you’re likely to be approved and if so, what your loan terms may look like as a result of the information you’ve provided.
Prequalification is a quick, simple process and you can get prequalified by an unlimited number of vendors. It’s wise to get estimates from at least three lenders so you have a better understanding of what you’ll likely be offered and how the terms will work based on your current credit profile.
Improve Your Credit Score
Your credit score is a vital metric when it comes to how much money financial institutions will lend you and at what interest rate. The better your score, the better rates you’ll have access to. If you’re unsure what your credit score is or how to improve it, you’ll want to start by signing up for an online credit reporting service, that allows you to monitor your score regularly. Once you know what your credit score is, you can focus on how to improve it, if steps are necessary. Focus on not exceeding your credit limit by 30%, avoid applying for new credit cards, make a plan to repay your credit card debt and ensure you keep your oldest credit card active to improve your credit history.
Check For Prepayment Charges
Hidden fees are never a welcome surprise, especially when you get dinged for doing something you thought was responsible, like paying back your loan early. Prepayment is the settlement of the loan prior to the official due date, and while option is only allowed by certain banks and loan providers, it typically requires the borrower to make an additional payment that can only to be done after 12 months of the loan being sanctioned. Little details like this mean that it’s very important to go through the prepayment terms of the loan prior to accepting any funds.
Check For Additional Charges
Part of the research required for personal loans is to ensure that you’re well aware of any extra fees you may encounter as part of the process. You’ll want to keep an eye out for these three additional charges so you aren’t caught off guard after signing any paperwork:
Interest Rate And Duration
Your interest rate and the duration you choose to pay off your loan can lead to additional charges or fees. Choosing a longer repayment term to shrink your monthly payments may seem convenient, but it can lead to a much higher interest rate. Should you choose a longer loan term to be safe and then decide to pay your loan off sooner, you could face prepayment charges as mentioned above. Be well aware of your interest rate and duration options before you lock into anything.
You may encounter processing fees as part of your personal loan application so it’s wise to inquire about these in advance so you can be prepared to make that additional payment at the onset of the process. Generally speaking, processing fees tend to range from 0.5% – 1.5% of the total loan amount so they can add up quickly.
Secured Or Unsecured Loan
You’ll want to know if the loan requires you to put up your bank account as collateral, or if it doesn’t require any collateral at all.
Make Your Payments On Time
Making payments on time is crucial. Lenders will expect you to make payments diligently for months/years. Paying on time not only protects you from unwanted penalties, but it also protects your credit score from being damaged in the process. Maintaining a good repayment history is crucial for keeping your credit score high (credit history accounts for 35% of your score) and will only help you in the future should you require additional loans or funding. If you’re notorious for forgetting or worried it may slip your mind occasionally, consider setting up automatic withdrawals or reminders.
Opt For A Shorter Term Loan
In your search for a loan, some lenders my tempt you with long repayment periods and significantly lower monthly payment options, but it’s important to do your research. The longer the loan term, the higher your interest rate will be in exchange. This means you’re likely to pay much more in interest over the lifespan of this longer loan, than you would if you had opted for a shorter term with a lower interest rate. Should you find yourself able to repay your loan sooner than expected, you could even be penalized with prepayment charges so it’s best not to choose a longer term as a safety net.
Want to learn more about personal loan applications and next steps? Reach out to our team and get the conversation started!