What Factors Do Lenders Use for Personal Loans?
There comes a time in all of our lives when we need a personal loan. The reasons can vary from fixing a car repair and needing help with rent to unexpected medical expenses. Personal loans go by many different names, from a consumer loan to an unsecured loan and many other names. The different names and all fine print can make it all so confusing. Do not stress too much, just keep reading to find out everything you need to know, including factors lenders use for personal loans.
Lenders will for sure require proof of identity as well as proof of income. To do this, you need to provide some documents, such as pay stubs, bank statements, tax returns, and even student loan paperwork, if applicable. Keep reading to understand these factors in more depth. We’ve also including videos and more in depth blogs we’ve written on the subject. Here we go into depth on personal lender factors such as income requirements and what exactly a personal loan lender looks at on your credit report. Knowing the game and playing it well could save you a lot on interest and the cost of the loan overall.
What Is A Personal Loan?
Personal loans can be a useful tool to help your financial situation. However, if used improperly, they can make your financial outlook even worse. A personal loan is when an institution lends you money that you must pay back. When you pay back the loan, you are making regular monthly payments for a set amount of time. The amount you pay per month does not change. You can use a personal loan for anything you choose.
However, some loans are for specific things, such as a mortgage for a house, or a car loan. There are unsecured and secured loans. An unsecured loan is one that does not have collateral to support your loan. Unsecured loans often have higher interest rates because they are a higher risk for the lender. There are many institutions that offer personal loans, including online lenders. If you decide that a personal loan is for you, you should do some personal loan shopping. A word of caution when it comes to online lenders.
Be sure that any online lender you use is a reputable one. Unfortunately, there are some people out there looking for individuals that are easy to scam. This helps you see what loans are available, as well as insuring you get the best deal.
What Do I Need To Obtain A Personal Loan?
If you are considering a personal loan, it is important to know the factors lenders use for personal loans. It is also important to understand what information personal loan lenders need from you when you apply for a loan. Lenders need basic information about you when you apply for a personal loan. Believe it or not, the most important thing you need is proof of identification. This is most often the first thing that you forget to bring with you. You have a few options to prove your identity. You can use your drivers license, a passport, or a military ID. It must have your name and your picture on it. You also may need to provide your social security number.
You should be prepared to be upfront if you have had recent or multiple changes in your address or jobs. Lenders look at frequent changes in these things as a sign that you may not be stable. Being prepared with a valid explanation can go a long way to setting a lender at ease. You may need to provide information about the other bills you have. You should bring documentation about lease agreements, utility bills, and insurance information.
The standard forms of identification are things like…
- Driver’s License
- Social Security Card.
- Military ID
- Official State ID
Income is A Big Factor Lenders Use For a Personal Loan
Almost every personal loan lender, will verify income when taking a loan application. How much income you need when getting a personal loan varies from lender to lender, but mainly based on the loan amount. If you take out a $100,000 personal loan vs a $2600 loan then obviously your total income requirement will change. Lenders have to have a way to understand what payments you can make against the loan on a monthly basis. A lender will also want to know what other overhead you carry on a monthly basis by reviewing you other monthly payment obligations like rent, cars, other loans and more.
Lenders will ask for proof of income and expenses. Here is a short list of what you should have prepared if your looking to get a personal loan:
- Recent Bank Statements
- Pay Stubs
- Tax Returns or W-2s
What Does It Mean If I’m Pre-Qualified or Pre-Approved?
You may have heard the terms pre-qualified and pre-approved. Many times, you receive invitations in the mail, or via email from lenders with those words. It is important to understand what they mean. The terms can be used interchangeably, but they aren’t always. It is important to know that they can be different and engage in a conversation with your preferred lender. These can be important factors lenders use for personal loans.
Pre-qualifying for a loan means that the lender has done a soft hit to your credit. That means that lender has looked at your information, but hasn’t done anything that would impact your credit score. The lender took a quick look at your information and believes that you may qualify for a loan with them. However, this does not guarantee your approval. When you fill out an application and the lender does a hard pull of your credit, you may be denied. A hard pull it a hit to your credit and requires your authorization. The lender is able to see everything on your credit report. At times, you may receive a pre-approval from a mortgage company. This is important when you are trying to buy a home. These often are more of a guarantee of an approval.
Why Does My Credit Score or More Importantly What’s on Your Credit Report Matter?
I am sure you know by know that your credit score is one of the factors lenders use for personal loans. Do you have a good understanding of your credit score? Do you know what it means for you? Your credit score is a three digit number that can dictate many things for you. It can control if you can buy a car, a house, rent an apartment and sometimes, it can prevent you from getting a job.
Your credit score tells a lender if you should be a loan candidate. Your credit score is something you should work hard to protect. It does not take much for your credit score to decrease. But, it will take a lot of consistent, hard work to get the number to increase. You credit score reflects your history of making timely payments on money that you have borrowed, or bills that you owe. Typically, late or missed payments are the most common reason that causes your credit score to decrease.
A credit score falls between the range of 350 to 850. Obviously, 850 is an excellent credit score, but anything above 800 is considered excellent. Anything within the range of 670 to 800 is considered good. Most people have a credit score between 600 to 750. When your credit score falls between 580 to 669, it is considered ok, or fair. Anything that is 570 or below is considered poor, or bad. The credit score you need for a personal loan is less about the number in the end. The lower your score typically the more you will pay in interest and the amount you can borrow should be less.
Can A Personal Loan Impact My Credit?
Yes, a personal loan can potentially impact your credit score. A personal loan can positively or negatively impact your credit score. You are really in control of which one happens. If you currently have good credit, your credit may take a small hit when you obtain a personal loan. However, if your credit is in really good shape, it should not impact you too much. As long as you make all of your payments timely and you do not miss any payments, it may cause your score to go up slightly.
It will not cause it to go down. If you have good credit, but you miss payments, or make late payments, that impacts your credit score. It goes down as a result. If you become in default, which means you stop paying your loan, your credit score is heavily impacted. Your credit score goes down.
If you currently have a bad credit score, obtaining a personal loan can help you improve your score. If you make all of your payments timely and pay off your personal loan without any missed payments, you credit score should improve. In some cases, you may not have any credit at all. You have not made any late payments, but you just do not have any credit yet. In those cases, your credit score may be low. Obtaining a personal loan and making timely payments can help you build credit. Keep in mind your credit score is one of the factors lenders use for personal loans.
Can I Get A Personal Loan With Bad Credit?
It is possible to get a personal loan, even if you have bad credit. You may have to do more personal loan shopping to find one. You may ask
where to get a loan with bad credit? If you know you have bad credit, you may want to try to obtain a loan from a credit union. Credit unions typically have less stringent rules when it comes to loaning money. They also tend to be a little more forgiving when considering lending money to someone who has a spotty credit history. You could consider finding an online lender.
Often online lenders are more willing to lend money to those with bad credit. Typically, the application process is much faster. You can receive an approval in about 24 hours. Typically, the money is in your bank account within 24 hours of approval. Even with online lender, the factors lenders use for personal loans remain the same.
Typically, when you have bad credit, you will receive a higher interest rate on your loan. When you receive a loan from a lender, it has interest attached to it. That means that you are paying back more money than you borrowed. An easy example is a loan with a 10 percent interest rate. You borrow $10,000 with an interest rate of 10 percent. That means you owe the lender 10 percent of the $10,000, which is $1,000. You end up paying $11,000 back to the lender over a set period of time. Someone with excellent credit may get a loan at 5 percent, while someone with back credit, may get a loan with 30 percent interest. If the loan is for $10,000 that is the difference between $500 and $3,000 extra added on to the loan.
What Can I Do To Improve My Credit?
Knowing the factors lenders use for personal loans, it is important to make sure you get your credit in the best shape it can be. When you credit is in bad shape, it is not the end of the world. It is possible to improve your credit, but it will take consistent effort on your part. There are some tried and true ways to improve your credit. The first thing you should do is check your credit report. By looking at your credit report, you know what is on it. Once you know what is on your credit report and verify if it is accurate. Sometimes the information posted to them is wrong and if you know it is wrong, you can make an effort to correct it.
You should attempt to fix your late payments. You can dispute any late payments on your credit report. Even if they might be correct, the lender must provide proof of the missed or late payment. It takes time to gather the information, and they have a short time in which to do it. If they fail to provide the proper documentation timely, the late payment may be removed from your credit report. You could also contact the lender and negotiate payment for the missed or late payment with the lender. Sometimes, if you do this, they agree to remove it from your report.
Can I Really Use A Personal Loan For Anything I Want?
The short answer is yes, you can use a personal loan for anything you choose. You can obtain a personal loan to pay for your wedding or to take the trip of your dreams. You can use a personal loan to do home repairs or pay for medical expenses. Some people use personal loans to pay for unexpected auto repairs or when home appliances break and need replacements. However, that does not always mean that you should. When it comes to factors lenders use for personal loans, they often want to know how you plan to use the loan. This may not be a deciding factor for them, but they always want to know. Deciding to obtain a personal loan should not be a decision that you make lightly. You should put thought into the decision and make sure it is the right one for you.
What If I Need Collateral?
There are many factors lenders use for personal loans and they may decide that you need to secure your loan with collateral. Maybe you are asking what exactly is collateral? Collateral is a piece of property that belongs to you, but you give ownership of it temporarily to the lender. This way, if you default on the loan, the lender has your item which becomes their item. Typically, the lender gives you a certain amount of time to make the loan current. The lender can then sell the item to get some of their money.
This is common with mortgages. If you default on your mortgage, the lender can and will repossess the house. This often occurs with type of personal loan called a title loan. With a title loan, you are giving the title of your vehicle to the lender. Once the lender verifies how much the vehicle is worth, they offer you a loan in an amount less than what the vehicle is worth. This protects the lender. One benefit to obtaining a loan with collateral is the interest rate is lower. The obvious downside is you could lose some of your property. If you are going to use something for collateral, you should make sure that you are going to pay off the loan on time. Or you better be prepared to lose your property. Make sure you know the factors lenders use for personal loans before you offer collateral.
Are There Any Fees For A Personal Loan?
There are often fees associated with personal loans. It is important that you understand these fees before you sign a contract. You know about interest rates, so you should always make sure you are getting the best one you can. All loan contracts have fine print and loan terms associated with them. Be sure to read all of it. There are two types of loan rates available to you. One is a fixed rate and that means the rate stays the same. This also means that your loan payment remains the same every month for the length of the loan. Variable rates are exactly that, variable. This means they can change, and most likely will. A variable rate changes when the market changes. They typically start lower but can increase. When the rates increase, so do your payments. They could increase many times over the course of your loan.
When it comes to fees, some loans have an origination fee. This fee is to pay for all the paperwork and checks that must be made for your loan. This usually is not a high amount and it gets rolled into your repayment amount. This way you do not have to pay out of pocket before you get the loan for the origination fee. Some loans have an application fee. This is a fee simply for applying for the loan. This is something you have to pay ahead of getting the loan. You also have to pay the application fee if you are approved for the loan, or not. You should avoid a loan with an application fee. An early termination fee occurs when you pay off your loan early. Some lenders charge this fee because by paying off the loan early, they are losing some of the interest. They charge this fee to recoup some of those losses. Be sure to verify your loan does not have an early termination fee. Plenty of loans do not; find one of those kinds of loans.
What Do I Need To Be Aware Of With Personal Loans?
So, you know all the factors lenders use for personal loans. Is that enough? Probably not. Make sure you arm yourself with knowledge when it comes to personal loans. We told you about the fees that may come with your loan. The fees are not the only things for which you should be aware. A lender may try to sell you on additional loan insurance. The lender may tell you that in the event of your death, this insurance pays off your loan. Your life insurance policy should handle this, as well. They may also offer you unemployment insurance. If you feel that your job is secure, you may not need this.
Do not just blankly believe the lender when they try to sell you on these types of insurances. Ask questions and make sure you really understand what you are getting with the insurance. Also, make sure you need it before you commit to it. Remember, lenders are still salespeople trying to up-sell you. The best thing you can do is educate yourself before obtaining a loan. You know the factors lenders use for personal loans. Some lenders are hoping that you do not know anything at all about loans.
Personal Loan Scams…Really?
Yes, really. Be aware that there are people just waiting in the shadows looking for someone desperate. They think people are more vulnerable when they are desperate. But, you do not have to be. Be knowledgable. Know the factors lenders use for personal loans. If something does not feel right, walk away. There are plenty of real lenders available. There are ways to determine if a lender is legitimate. Lenders must be registered in your state to loan you money. Make sure your lender is registered in your state before continuing.
Research any lender you are considering using, especially if it is a short term lending company. Pay attention to phishing attempts. If an offer seems too good to be true, it probably is. Research, research, research any and all lenders. Remember the basic factors lenders use for personal loans. If a lender is promising they do not need any of those things, beware.
So, you think a personal loan is right for you. Before you make the final plunge to get a personal loan and sign the contract, be sure you are sure. You know the factors lenders use for personal loans. This is good information, but it may not be all the information you need. You need to be sure that you can afford to repay the loan. Failure to do so puts you in a worse financial position. If you miss payments, or make late payments, you are doing worse damage to your credit. If you know from the start that you cannot afford to repay the loan, do not do it. Before you get that loan, make sure your budget has room for another bill.
Check your credit report and work on getting it into better shape before taking on more debt. Be sure you are sure. A personal loan can do wonderful things for your credit, if you can afford to repay the loan. Keep in mind the factors lenders use for personal loans. Most importantly, do not put yourself in a worse financial place just to get a little extra money up front. It may not be worth it in the long run. You are the only one who can answer that question.
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Julia Peoples is a long-time business manager focused on providing decision making assistance to the public. She works with people at key points of their lives who are making important retirement and financial decisions. She has had many articles published that educate the public on sound financial decision making.
Julia writes for those who are working towards financial freedom or a better understanding of how finances work. She has shared her financial insights with individuals on a one on one basis for years.