Personal loans can be a great way to get your hands on the funds you need. Learn how to apply and qualify.
If you are looking for a simple loan that doesn't require property like a house or car as collateral, you might consider apply for a personal loan. Many banks offer this type of unsecured loan (one which does not require collateral).
Because there's no collateral involved, the amount you can borrow is lower than you might with an asset-backed loan, such as a mortgage. These types of loans can range from a few hundred dollars up to $100,000 in some cases. Whether or not you qualify depends on your credit score and other qualifying factors.
Qualification Requirements and How To Apply
First, it's important to understand the basic qualifications you'll need to satisfy to present a strong application:
Your credit score matters a lot. This is probably the most critical factor, and knowing your credit score will help set your expectations before you get very far. On average, you need at least a 'fair' credit score (580-669), but many banks won't consider you without a 'good' credit score (670-739). Services like Experian and CreditSesame can help you get your credit score for quickly online for free, and also help you understand how it is calculated. If your score is too low, you might not be a good candidate. If your score is under 700, it's probably worth taking the time to boost your score before applying, as it could help you get a more favorable rate, which will save a lot of money throughout the loan.
Know how much you want to borrow. In essence, you should set a budget before shopping for an unsecured loan. Consider how much you can realistically commit to repaying each month. Don't rely on the number the banks give you – work the numbers into your actual budget to see what you're comfortable paying and be sure to leave a little headroom if you have any financial setbacks.
Apply for more than one loan. It always pays to shop around. Apply with local banks and credit unions. Check online banks as well as local banks. Banks will need proof of your identity, income, employment, and assets to make a decision. Online services like LendingTree, ZippyLoan or others can save you time by connecting you with one or more lenders in their network.
Review your offers. Review the offers you receive and evaluate the loan's total cost, not just the monthly payment. How much will the loan cost you in the end, including interest?
Be sure you understand the terms. Make sure you know the terms of the loan and read the fine print. Make sure there isn't a pre-payment penalty or APR changes throughout the term.
Close the loan. Once you choose a loan and finalize the paperwork, you'll receive the funds in your account (typically by wire or ACH) within a few days, depending on the bank.
Calculate Your Payment
A loan calculator can help you figure out how much your monthly payment will for a given interest and loan duration.
As you can see, your credit score determines the interest rate you'll qualify for, which can make a huge difference over the life of the loan. A few points can make a big difference! Boosting your credit score before applying, even by just 10 or 20 points, can save you a lot of money in interest payments.
When Should You Consider An Alternative?
Borrowing money can be a good solution in certain situations, but not everyone is a good candidate. If you are in over your head in credit card debt and want to get out of it, an unsecured loan can consolidate your debt into one loan. But, if you have other low-interest options that can help you get out of debt, you may want to exhaust them first.
Taking out a personal loan can be a bad idea if you think after consolidating your debt, you'll rack the credit card debt up again. It can also be dangerous if you don't have a specific use for the proceeds. Make sure the funds have a purpose, one that will benefit you in the end.
For example, a loan for consolidation of credit card debt can save you money on interest, which is a good idea if you will be able to afford the new payment. If you are thinking of selling your house, borrowing money to fix it up so you can sell it for more can make financial sense. But paying for a vacation or just keeping the money around 'just in case' is a bad idea.
Alternatives to a Personal Loan
Several alternatives that you should consider include:
- 0% APR credit card
- Home equity line of credit
- Peer-to-peer loan
- Small business loan (if you are self-employed)
- 401K loan
Before you take out an unsecured loan, make sure you understand the terms both currently and in the long run. It's important that the loan make sense, that you can afford it, and that it will benefit you financially in the end.
