How To Choose The Right Personal Loan For You
There are many options available for a personal loan, and it is essential that you choose the best personal loan. The terms of personal loans, rates, and fees vary widely from lender to lender, so you need to do some research to get the best loan for your solution. Here is what you need to know.
The Amount You Need
Before you get a loan, you need to know how much you need. Typically, the least personal loan starts around $500, with most lenders offering a minimum of $1000 to $2000. You may not need a personal loan if you require less than $500 as you may save up or borrow from a friend or family.
When you are given a personal loan, the money is usually delivered into your checking account. You may ask the lender to skip your bank to pay off a creditor if you are using the loan for debt consolidation. Therefore, it’s crucial that you consider where the money will be deposited depending on the purpose of the loan.
The Loan Tenure
Loan tenure can last from a year up to 10 years. It’s crucial that you choose the right loan tenure as it affects your ability to pay it off. Long loan tenures have smaller installments, which is why many people opt for them. A longer loan tenure also gives you a chance to pay off the loan earlier on, while if you are overconfident to choose a shorter loan period, you may not be pay off the loan on time and suffer penalties.
Be Aware of All the Fees and Charges
There are a few fees and charges that are associated with personal loans. You should be aware of them, so none take you by surprise. There are other fees like processing fees, which you are not required to pay since banks are no longer allowed to charge. Bank may charge you fees for early termination of your loan agreement. This means that you can be charged a percentage of the outstanding amount. Late payments also carry a penalty fee of about 1% of the remaining amount.
Go Through the Requirements
There are different requirements for different types of personal loans. These may include your age, minimum annual income, employment status, nationality, or employment sector. It is advisable to apply for a personal loan where you meet the most requirements to raise your chances of being approved. If you are rejected by one bank, it may be difficult to get a loan from another bank.
You are not required to give the reasons for getting a personal loan, but this does not mean you should be reckless when borrowing. Ensure that you have justified reasons and a financial plan to sustain in the long term. If used for the right reasons, a personal loan can be a useful tool to ease up your cash flow and help you out in times of an emergency. However, if it’s not carefully thought out, it can ruin your credit score and put you in a financial crisis.
Consider Your Credit Score
Your credit score plays an important role when applying for a personal loan. Most personal loan lenders, especially online banks, look for applicants with a good credit score. You may get a favorable deal if you already have a relationship with a bank and you have a good history of honoring the terms of your past loans. You may also get lower interest rates on personal loans from credit unions if you have average or fair credit scores.
If you want to maintain a good credit score, you need to focus on credit utilization and on-time payment. You may boost your credit score by adding a new installment loan, but you may not need to take on debt if you don’t need it. Using a personal loan to pay off revolving debt can increase your credit score and improve your chances of getting another higher personal loan.
Find an EMI you can Afford
There are penalties involved if you are unable to repay the loan on time. Therefore, you need to calculate the equated monthly installment (EMI) payable on the loan amount. This is done by factoring in details such as loan tenure, processing fee, amount, interest rate, and pre-payment possibilities. This will give you an idea of the amount that will be deducted from your account every month as loan EMI. A higher loan amount means you will be deducted more EMI. It is also essential to ensure that your total monthly EMI deductions are not more than half your income.
The Interest Rate
The interest rate depends on many factors, including the length of time you will be paying the loan back, the amount, and your credit score. Interests loans can be as low as 3% and as high as 30% or more. A good or excellent credit score will earn you a low-interest rate if you choose a short repayment term.
If you opt for a secured personal loan, then you will need collateral to back the loan. This can be your vehicle, house, or investment accounts. The value of the collateral is usually equal to the amount of the loan. If you put up collateral, you may enjoy favorable rates since the lender knows they can repossess the collateral if you default. You may also be approved for a secured personal loan even with a low credit score if you provide collateral. There are different types of secured personal loans offered by a lender, and they have different underwriting criteria. Ensure that you ask the lender for specific requirements for a secured loan.
Personal loans are usually preferred over 0% APR credit cards, but it’s also important that you have a solid repayment plan. After considering all the above, you can make a soft inquiry on the lender’s website for more information and ensure that your credit score is not ruined. If you are satisfied, then you can go ahead and apply for a personal loan.