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Personal loans are a very popular way for people to pay for certain types of expenses in their lives. They may want to buy a new car or fund some renovation work on your home. Whatever the case may be, there is plenty you will first need to consider before going headfirst into getting a personal loan.
Every lender is different and every loan they offer is also different. From interest rates to loan terms, from flexibility to other fees, there is a lot to take into account when looking for your loan. Compare your different options smartly and pick up the right loan for your needs.
There are a number of reasons for taking out a loan, but this can also influence the average loan amount. In this chart with LendingTree customer data, you can see that credit card refinancing has the highest average loan amount followed by debt consolidation.
Naturally, you will need to prove to the lender that you are going to be able to repay the loan before you are given the funds. There are a few different ways that this will be assessed, including an assessment of your credit score, existing debt, and current income. Most major banks will offer people personal loans, as well as the likes of credit unions. In recent years, online lenders have been increasingly popular.
It is vital that you complete your due diligence before you commit to a given lender. The last thing you want to happen is to be faced with high-interest rate payments or other types of hidden fees. This guide will walk you through all of the common mistakes people make with personal loans.
Mistake 1: Not Shopping Around
It’s an easy thing to shop around for a loan that looks appealing on impulse and apply on the spot. You may even feel accomplished for doing so. As you might buy a pair of sneakers, and ten minutes later you see an even better-looking pair and regret your prior purchase, it’s important to shop around for a loan so you won’t regret it later.
During the process of looking around for a loan, it’s common for people to solely focus on the interest rate and the amount they have to pay back. Moreover, it is a good thing to take both of these into account.
Here are important rules to follow while looking for personal loans:
- Don’t just take the interest rate and the amount you have to pay back into account when choosing a personal loan. Your loan service provider could be a difficult person to relate to or communicate with.
- Make sure to check out penalties and charges for early or late payment fees.
- Be sure to research credit card companies’ reviews online. If they are popular, there will be reviews about them for you to view. Hearing what people have to say about them is very important.
- It’s important not to apply for multiple loan accounts in a short span of time. Doing so damages your credit score. Shopping around doesn’t mean that you apply for every single loan that passes you by. Your credit score would suffer a terrible blow.
- Also, keep in mind that comparison sites don’t show every single loan provider. Even though it’s good to look at comparison sites, they are not the all-in end-all. Some loan providers, that are good, may not have their information on those sites.
- Remember to take the process at a slow pace no matter what situation you feel like you’re in right now. Rushing into things causes more regret than thinking everything through.
Overall, being patient while you’re shopping for a loan and not rushing into things will save you a lot of trouble in the long run.
Mistake 2: Not Considering Other Options
Even though you have the potential to be an excellent candidate for a personal loan, it’s best not to apply for it in haste. For instance, a small loan can have interest and fees accrue just like, and even more than a larger loan. If you miss payments with a smaller loan, it still damages your financial stability. This is why it is important for you to think everything through before signing your signature on the loan.
The overall aspect of making this decision is to ask yourself is why you need the money. Getting a personal loan isn’t the only option to consolidate your debt. Moreover, there are various credit cards that allow you to consolidate your debt by you utilizing a balance transfer. Most lenders offer 0% intro APRs on balance transfers too. Obtaining a balance transfer is a cheaper route because you don’t have to pay interest if you pay the balance off in full during the 0% introductory period.
If you choose to get a personal loan instead, the lender requires you to pay interest from the begging. Even though this is true, there are still some things you need to consider.
Consider the Balance Transfer Fee
You still have to pay a balance transfer fee that’s usually 3% or 5% of the balance you’re transferring (you can even reduce it a bit by negotiation). In addition, you won’t have much time to pay off the balance.
If you’re confident that you can pay the balance off in full before the 0% introductory period ends, getting a balance transfer is the better option. You can read balance transfer credit card reviews to get the latest news on the top credit cards that have good balance transfer terms.
Furthermore, if you want to make a large purchase, getting a card that offers a 0% intro APR on purchases is a great option. The reason why is that you have the chance to spend using your card without interest accruing on your purchases. If you qualify for a rewards card, you will also earn rewards as you continue to make purchases; it’s a win all day long!
For instance, if you have Chase Freedom Unlimited, new cardholders get 15 months on purchases and balance transfers. The Capital One Quicksilver also offers 15 months on balance transfers and purchases and Citi Double Cash card offers 0% intro on 18 months on balance transfers.
Mistake 3: Accepting Irresponsible Repayment Terms
Even though most lenders have strong guidelines they follow, there are some that still have irresponsible repayment terms. This can range from lenders requesting a lot of money upfront to implement a very high-interest rate. Even though repayment terms that are irresponsible are connected with the payday loans industry, you can still come across rates and terms that are questionable while searching out traditional loans.
Here are the following things to look out for:
- If the interest rates are too high; especially in the case of a lender offering you a short lending term.
- The repayment amount is too high. Typically, you will see this at the beginning of your loan term in order paying the interest quickly.
- Expensive admin fees and services, especially if you are paying them on a regular basis in accompany with your interest rate. It’s also good to ask what portions are the actual interest and what part are the fees, especially loan origination fee.
- Loans with no interest. Even though these may look attractive, they have very high admin fees that add up to a large amount with an equivalent interest rate.
Mistake 4: Not Checking Your Credit File
Because you have the right to obtain your credit report for free by law, it’s strange to apply for a personal loan or any other loan product without checking it to make sure that your information on it is correct.
Getting a personal loan is a huge decision because you are committing to sign a contract for something to be paid back for at least six months. You’re not only committing to making your payments, but also agreeing to all of the loan terms.
Moreover, it’s very important for you to read the terms and conditions before signing because you may have to pay additional fees such as an organization or payment processing fee that you are not expecting to pay. By doing so, there won’t be any sudden surprises down the road. If you notice anything you’re not sure about, feel free to ask your lender for clarification.
If you are unhappy with what the lender is informing you, you can always opt-ouat and look for another lender. Furthermore, it’s possible that you may have an inquiry from the previous lender that your new lender may not like. The main way to avoid a credit inquiry is for you to do your own research prior to applying. It’s important to know the loan terms, read the terms and conditions, and reach out to the lender if you have any unanswered questions. When you know your lender of choice and you have checked your prequalification chances, then you can apply for the loan.
Even when you don’t know if you qualify for a personal loan or another loan product, having a good credit report gives you the boost to apply with confidence. If there are any discrepancies on your credit report that are causing your credit score calculation to be lower than it should, it’s a good thing to get that sorted out before applying.
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What is a Good Interest Rate on a Personal Loan?
The annual percentage rate (APR), for a personal loan, will be determined by your credit score. While banks and credit unions may offer competitive personal loan rates for borrowers, online lenders are likely to offer the best rates, especially for those with good credit ratings.
According to the Fed's latest data, the average personal loan APR stands at 9.34%. The factors that will determine your personal loan APR include your credit score, credit history, income, and other factors such as the loan's term and size. You can control some of these variables, but others are out of your control.
Individuals with excellent credit (defined as any FICO credit score of between 720 to 850) should expect to find personal loans interest rates around 8% to 12%. Many may even be eligible for lower rates.
Personal loans with APRs of between average and poor credit will typically be higher than advertised APR ranges. Lenders can sometimes exceed or surpass 30.00%. A conventional personal loan may not be available to you if you have a lower credit score than 580, or have no credit history.
Payday loans can have APRs exceedingly high of 100%. These loans can make it easy to fall into a never-ending cycle of debt. Instead, you might consider applying for a loan from a local credit union.
It can be useful to compare different offers when you are looking for a personal loan. This will help you to determine the best interest rate for your situation and to negotiate the best payment terms.
In this chart compiled with LendingTree customer data, you can see that those with a 720+ credit score pay an average of 7.63%. At the other end of the scale, for those with a poor credit rating of less than 560, the rate shoots up to an eye-watering 113%.
How to Qualify For a Personal Loan?
1. Check your credit score and credit reports
Your credit scores and credit reports are important in lending decisions. It is a good idea to get a complimentary copy of your reports before applying for personal loans.
This will allow you to understand the criteria that lenders will use when considering your application. You can always check your credit score as many times as you like.
After you have reviewed your credit reports, you will be able to determine what type of loan is available. Lenders are more selective than others in approving applicants.
If they provide them, you can find out the minimum credit score requirements of lenders to see where you stand.
People with high-quality credit ratings usually get the lowest interest rates. If you don't have good credit, it might be difficult to find a personal loans at a low rate. Before applying for a personal loan, if you have a lower credit score, it might be worth spending time improving your credit scores. This will increase your chances of receiving a low interest rate, and can help you save money over your loan's life.
2. Determine how much to borrow
You don't only have to repay the original loan; you also need to pay interest. You also have to pay interest, or “rent”, on the money that you borrow.
You don't have to pay interest on money that you don't use, so only borrow what you need. If you borrow less than what you actually need, you might have to look for more expensive loan options at the last moment.
Make sure that you are able to afford the repayments on any amount you borrow. It's not a good idea to overextend yourself financially. Instead, wait until your finances improve.
To determine if you are eligible for a loan, visit the lender's website or call them. Determine if you have to meet a minimum credit score requirement and if your income is required. Find out if you have to keep your credit history at least three years. Also, what is acceptable debt-to income ratio.
After you have eliminated any loans that you were not eligible for, you can turn to the lenders who are most likely to approve you for a loan. Many lenders will prequalify you or preapprove your application with a soft inquiry.
Preapproval or prequalification does not guarantee that you will be approved for the loan. It only means that you meet the financial requirements of other people who have borrowed money in the past.
3. Compare Lenders
Now' it's time to compare between the lenders. These are the points you need to pay attention when applying for a loan.
Interest Rate – You should take into account the impact of interest rate when shopping for a loan. Your credit score will affect the rate you receive, but rates can differ depending on who you choose and what kind of loan you are getting.
Monthly payment – Each month, you'll have to pay a monthly installment. The monthly payment will be used to reduce principal and pay a portion of the total interest for the term.
Fees – Review your borrowing agreement to find out what fees and additional costs are associated with your loan. These fees include prepayment penalties, late fees and origination fees. These fees can increase the cost of borrowing, so make sure you understand all details.
Term – It is crucial to understand the term or the period for which you will repay your debt. This information, together with the interest rate, can help you figure out how much each month will cost. Monthly payments that are lower for longer terms will be lower. The terms that are shorter are usually more costly. Remember that interest is charged on borrowed money over the term of the loan. The interest rate will increase the longer you delay repaying the debt.
If you're looking for a loan, limiting the number of applications you send can help to keep your credit score strong. A lender may request your credit report to approve a loan request. This is called a hard inquiry.
Hard inquiries may remain on your credit file for up to two years. If they are repeated, they can have a negative impact on your credit score.
4. Apply for a loan
Once you have narrowed down the field, it is time to apply for loans.
The preapproval letter should inform you of the additional documentation required to submit an actual application. These documents should be collected first. If you have not already provided it, you will be asked to show proof of income, such as W2 forms, pay stubs, housing costs, debt, or an official ID. Send your application and documents and wait for the results.