Personal loans are considered a great way to solve cash flow problems. They can help the borrower to consolidate borrower’s debt, pay bills, or help him out of an unexpected financial bind. The borrower can even use a personal loan to fund a new business venture.
Personal loans are however considered great for many purposes as long as he does not use the money for frivolous things which he really cannot afford. Additionally, any time he takes on new debt, he should understand what he is getting into.
Things to know before applying for a personal loan
Know your FICO scores
- A large part of what determines whether or not the borrower is or not approved for a loan and how high the interest rate depends on his personal loan credit report.
- A lender would typically pull credit reports from either Experian, Equifax, and Trans Union and then compare credit scores from all three.
Check your credit reports
- While the borrower is looking at his FICO scores, he checks his credit report for errors.
- Often the people end up with lower scores than they should because of the errors on their credit report.
- Find and then correct these errors before applying for a personal loan.
- It would improve the chances of getting favorable loan terms.
- It can take up to 30 days for the bureaus to resolve these errors.
Know the Fees
- Almost all the personal loans have fees besides the principal and interest.
- The borrower should examine all his loan offers carefully and should look for “hidden” fees.
- Sometimes a lender may thus charge a lower personal loan interest rate but charge higher fees to make up the difference.
- In these cases, he may want to make sure that he knows the total cost of the loan so that he can compare before opting for it and to choose wisely.
Figure out what you can afford
- The longer the borrower has a loan out, the more interest he pays.
- Before the borrower even applies for a loan, he should know how much of a monthly payment he can reasonably afford.
- Once you determine the monthly amount, try to get a loan agreement that allows you to pay back the loan as fast as without going over the budget.
- Lenders lose interest if the borrower repays the loan early.
- Some lenders would include penalty fees for paying off the loan early.
Type of Interest Rate
- There are two types of interest rates, which are
- The variable interest rate, and
- Fixed interest rate
- Fixed interest rates thus tend to be higher comparatively, when you stake the loan out, but the monthly loan payment would always remain the same.
- Variable interest rates may thus below when borrowers take out the loan, but as the personal loan interest rates change so does his loan payments.
- On the surface, a variable interest rate may also seem attractive, but a fixed interest rate is the safest bet.
Unsecured vs. Secured Personal Loans
- Unsecured personal loans tend to come with a higher interest rate because the lender is thus taking a bigger risk.
- If the borrower has any assets that he can use as collateral to secure the loan, he would most likely get a better interest rate.
Get documents ready
- The number of personal loans is rejected every day simply because the applicant did not provide all the financial documentation which were required.
- Even worse, the loan underwriter may also charge the borrower a higher interest rate because the borrower did not know the complete financial picture.
- The borrower must be sure to gather important paperwork like
- Tax forms
- Checking account statements
- Title etc.