Personal loans are borrowed money that can be used for different purposes. These loans are commonly used for personal expenses, be it for special events, medical bills, and some unexpected or emergency expenses. Hence, the name.
In going through the process of applying for a personal loan, knowing the necessary information will increase the likelihood of loan approvals. Thus, looking at different information and considering different factors will help you prepare further before applying.
1. Types of Personal Loans
There are two main types of personal loans: secured and unsecured.
In the secured type, the borrower is required to provide collateral to proceed with the loan. Collaterals are a person’s cash or physical assets, including a valuable or property. These collateral are given to the lender to protect their financial stake should there be instances when the borrower fails to pay back the loan on time.
On the other hand, an unsecured personal loan is a collateral-free way to borrow money. To be approved for the unsecured loan, the borrower must have high credit scores. In terms of failed payments, a collection agency will be the one to collect the debt from the borrower.
Lenders who commonly provide personal loan services and options include banks and credit unions. However, the growing and expanding opportunities brought by technology has also enabled fast application and easy personal loan online, highly achievable with trusted and credible online lenders.
2. Credit Score and Credit History
Before applying for any personal loan, one must first understand the importance of credit score and credit history. Your credit score and history will show your ability to pay debts on time.
Therefore, good credit can mean easier loan applications and higher chances of approval from banks and lenders. The considered ideal credit score is 670 to 739. Any score below that line can mean or signify fair to bad management of debt, which can result in a more complicated loan application process or a higher interest rate.
Looking closely at your credit score is vital to avoid any errors that can negatively impact your loan application. How do you maintain good credit history? As mentioned, paying debts on time is an effective way to maintain good credit. Some other ways to achieve this are by making automated payments and not going over the recommended credit utilization ratio of 30%.
3. Assess the Costs
Applying for a personal loan can come with numerous costs and charges. Some of these may include charges during prepayment or processing and monthly debt obligations, while there are also existing fees when one fails to pay on time. Looking at these possible costs can help you effectively manage your finances and evaluate if you can afford and pay off the loan over time.
Assessing the loan costs also comes with evaluating your capacity to repay it. Looking at your income through documents such as proof of income, tax returns, and bank statements may be required during the application process. These documents are vital to know what are your income sources.
Considering these factors can help you estimate the right loan amount for your specific needs and efficiently create your repayment plan if you decide to pursue a personal loan application.
4. Compare Personal Loans
Comparing and knowing the different borrowing options available for you is necessary to have an overview of what loan you are most likely qualified to apply for. As mentioned, banks, credit unions, and online lenders can help you give advice and eventually decide.
When comparing personal loans, looking closely at certain details, such as interest rates, borrowing limits, and collateral requirements, is vital to ensure you get a personal loan that can fit your specific financial needs.
5. Understand How Personal Loan Works
After knowing some of the basics before applying for a personal loan, understanding how it works is what’s next for you to explore. Although the processes when applying for a personal loan can vary depending on where you plan to apply, common steps may include the following:
- Applying to a lender. Again, one can apply for a personal loan in a bank, credit union, or online personal loan lender.
- Completing application. You'll most likely be required to provide personal information, including employment information, bank statements, the desired loan amount, and the purpose of the loan. Some other requirements may be required depending on the lender’s request.
- Review and Decision. The lender will now check if you're qualified for the loan, given all the documents you sent them. Following the criteria set, the lender will approve or deny your application.
- Finalizing Paperwork and Funding. Given that you're approved to get the loan and you agree with the terms and conditions, what’s left for you to do is finalize the loan paperwork. When all documents, paperwork, and necessary information are completed, you can get the funding through a direct deposit or a check.
Conclusion
Having enough knowledge and understanding of the personal loan processes will help you decide what to proceed with. Understanding how it works and what to consider before applying for one is essential to experience a smooth and easy loan transaction.
