7 Important Things to Know Before Getting a Personal Loan
Are you considering taking out a personal loan? If so, there are some essential things to know before getting a personal loan.
There are various types of personal loans for all types of reasons. Some likely possibilities include:
- Paying for a wedding
- Taking care of an Emergency
- Consolidating debt
- Making home improvements
- Paying the Bills between jobs or a payday
- Funding for moving expenses
- Medical bill payment
- Funeral expenses
- Paying off credit cards
- Buying a boat, car or RV
- Taking a vacation
Used correctly, personal loans are an excellent way to advance your life goals over time. Used poorly, they can cause monetary hardship and damage your credit.
There’s no reason to dwell on the negatives of personal loans as long as you’re prepared, however. Armed with the right knowledge, you’ll be ready to do what’s best for you and your family.
For starters, here are seven things to know before getting a personal loan.
1. What credit score do I need for a personal loan?
Does the quality of your credit score matter when getting a personal loan? You bet it does.
That pesky, three-digit number can tell plenty to lenders with one split-second glance.
Your score helps lenders decide how much of a risk you pose. A fair to good credit score will allow you to get the loan and borrowing amount you desire. On the other hand, a poor credit score could prevent you from getting a loan altogether.
Generally speaking, you’ll need a credit score of at least 660 to apply for a personal loan. FICO credit scores typically run between 300 and 850. FICO stands for Fair Isaac Corporation and is the most trusted scoring model in the US. The higher your number, the less risky lending to you will be considered.
There’s more to getting a personal loan than just your credit score, though. As we’ll see next, your income also plays an important role.
2. Income is a factor when applying for a personal loan
Income matters when it comes to personal loans since they’re generally unsecured. This means there’s no collateral that can be used if you don’t pay your loan back. Your lender won’t be able to seize your house, boat or car to make up their losses, for instance.
Because of this, financial institutions lean heavily on your income level when deciding whether to lend to you.
It’s a solid rule of thumb that the more you earn, the more you’ll be able to borrow. That probably doesn’t surprise you much.
Some lenders also have a cut-off when it comes to lending based on income figures. They won’t lend to you if your income is under a certain amount.
3. What are the Interest Rates and Fees of a Personal Loan?
Before getting a personal loan, it’s wise to factor in interest rates and fees. These will increase your loan amount and monthly payments.
What are normal interest rates for a personal loan?
One common question borrowers wonder is, “Why are interest rates on personal loans so high? This is one of the many important things to know before getting a personal loan.
As we’ve discussed, they’re higher because of the inherent risk borrowers take without collateral. Because there’s no collateral involved in most personal loans, investors must increase interest rates. This helps to offset the higher risks of lending.
Interest rates vary widely depending on who you borrow from and your credit score. You can expect your interest rates to usually fall somewhere between 5% and 36% from a prime lender.
Your credit score will be the greatest influencer in how lenders determine your APR (annual percentage rate). A great place to start in gauging what your interest rate may be is using a personal loan calculator.
What personal loan fees should I expect?
Regardless of the personal loan you choose, you can expect to pay fees or charges. Here are some of the more common types you may run into.
Pre-Payment Fees: Some loans charge a pre-payment fee if you pay them back in full too early. Others allow you to avoid as much interest by paying them back early.
Origination Fee: This fee covers the costs of getting the loan started. It helps to cover the expenses and time of determining your interest rate and completing loan paperwork.
Late Payment Fees: You’re probably already quite familiar with this type of fee. As long as you keep up-to-date on your loan payments, this is one you won’t have to worry about.
4. Personal loans can save you a lot on debt you already have
Sometimes, personal loans can save you a lot on debts you’ve incurred. This is especially the case if you’re getting dinged with high fees because of late penalties. Also, if you’re only paying the minimum monthly amount on your credit cards, you may be drowning in high-interest debt.
Loanry.com gives some solid advice on this:
“If you get a personal loan with a smaller interest rate, you can use this to pay off your debt so you avoid paying more on interest costs in the long term.”
If you have multiple debts, it may be difficult to keep current on them. Paying off multiple debts each month can be dizzying and leaves plenty of opportunity for error or a missed payment.
First, you’ll need to decide if the money you ‘d save from taking out a personal loan would be worth it. Even if the amount you would save wasn’t huge, consolidating your debts would be way more convenient.
5. Know how much you can Afford to Pay Back
Just because you can get a loan out doesn’t necessarily mean that you should. The rules used by lenders to determine your loan amount are an imperfect although necessary tool.
You know better than anyone else what you can afford and what you can’t. It’s important to weigh the short-term rewards of your loan with the long-term impact your decision will have on your finances. Again, if you’re unsure about what you can handle, do some calculations first.
Ultimately, you’ll have to ask, “Will my personal loan become more of a problem than the initial problem I wanted to solve?” If you borrow more than you can handle, your personal loan won’t be worth it. Knowing whether you can afford to borrow is one of the most crucial things to know before getting a personal loan.
6. A personal loan is not a long-term solution
Personal loans can be a great option in the short term. They provide you with the money you need now to solve complex financial problems in your life.
That said, personal loans are not meant to be a long-term solution. They won’t fix things if you’re not bringing in enough money to start with.
A good rule of thumb is to never borrow money longer than you have to. No one’s goal should be to pay back more interest than is needed.
Those who benefit most from personal loans realize that they’re a tool to be used sparingly. Use them only at the most important financial crossroads of life.
7. Where Can you Shop Personal Loans?
Wondering where to shop personal loans? Depending on your needs, there are a variety of options.
Earlier in this article, we shared about how your income and credit score are big determiners of your personal loan interest rate. Although that’s true, it isn’t the final say. You’ll also want to shop around for the best possible interest rate.
Before going any further, remember to watch out for scam artists. Never pay an upfront fee for a loan. That’s usually a big red flag. Also, you’ll want to be careful that you don’t sign up for a predatory loan—One where the odds of paying it back are obviously unfair.
Here are a few valid places to go personal loan shopping:
Banks: If you have good credit and already have an account, this can be a viable option.
Credit Unions: You may have to be a member to get a personal loan with a credit union. If you can get a loan, you’ll find the interest rates to be lower than a bank. Credit unions also tend to be more forgiving if your credit is less-than-perfect.
Get Personal Loan Online: You’ll generally find competitive rates online although you will still want to shop around. Some additional benefits to online lenders are that they can give you quick funding and their credit requirements aren’t as strict.
Marketplace Lenders or Peer-to-Peer: Fair to average credit usually isn’t a problem with these lenders. You just may have a week’s wait until the loan gets going.
All of these lenders may provide you with personal installment loans online. That just means that you’ll make payments on your loan for a set length of time. This is the way personal loans are paid back.
Things to know before getting a personal loan: Concluding Thoughts
In conclusion, personal loans are not for everyone. It’s important to stay informed so you can do what’s best given your situation.
Now could be the perfect time for you to take out a personal loan. It’s equally possible that you should wait a while.
At Loanry, we’re all about making sure that you do what’s best for you. After all, when that happens, we both win.
Wondering about more things to know before getting a personal loan? Feel free to visit our personal loan blog!
Neal worked as a staff writer for the outdoor industry in the past and currently rights for various finance blogs as well. He written for a television personality, an outdoor booking agency and for several finance-themed blogs. Neal also wrote vignettes for commercials, pamphlets, emails, press releases and a pro-staff bio for Cabela’s website. His articles often required interviewing sources to give them more authority. Neal is a contributor and writing professionally creating palatable, actionable content in the realm of finance.