When life throws curveballs, sometimes you need a loan to get back on track.
A personal loan is money lent to an individual, usually paid back with interest in fixed, monthly payments over a set term. Loans are attractive in part because they could have lower interest rates than credit cards and often come with a fixed rate, rather than a variable rate.
To get a personal loan, you’ll need to provide financial history. All other things being equal, borrowers with high credit scores often get the lowest rates, while those with low credit scores usually get higher rates. Rates can vary among lenders, so it’s important to shop around. Here are five steps to help put you on the path to a personal loan.
Lenders look at creditworthiness and ability to make timely payments, so you’ll want to check your credit and credit history to correct any errors. Your interest rate will partly depend on this. Lenders usually offer their lowest rates to those with high credit scores. Rates get higher as credit scores decline.
There are three major credit reporting agencies—Equifax, Experian and TransUnion. You can request a free copy of your credit report once a year from each of these agencies. You can also check all three at once through annualcreditreport.com. If you haven’t checked your credit for a while, go ahead and check all three reports. Besides knowing the score, you’ll also want to check for either false charges or wrong addresses. Errors might be more common than you think. In a study, the Federal Trade Commission found that one in four people identified errors on their credit reports that might affect their credit scores.
In addition to the credit score, lenders will also want to know your income and debt-to-income ratio. Though lenders will calculate your debt-to-income ratio, you might want to tally up your monthly debt obligations — that includes items such as student loans, mortgage or rent and car payments — to get an idea of what that might be. They will also want to know information such as your Social Security number, your address and your employer’s address.
If you’ve added up all your monthly costs, then you’ll already have a good idea of how much you can set aside each month to pay off a personal loan. There are several factors that affect the monthly payment amount — including the size of the loan, interest rate and length of time you have to pay the loan. Knowing your monthly budget will help you determine how large of a loan you can afford or the term of the loan.
Before you actually apply for a loan, do some research with various lenders. Some things to look for are the minimum required credit score, fees and terms. This information is available on many lenders’ sites. If not, go ahead and call. You want to be selective about applying for loans because each time you do so, the lender will typically make a hard inquiry into your credit report. Too many hard inquiries could cause your credit score to drop.
Some lenders now provide you your loan options with only a soft pull on your credit — this gives you an idea of the rate and monthly payment you’d have without affecting your credit score. The final terms could be different after a hard credit check. You can check if you qualify for a personal loan either online or over the phone.
If you receive loan offers, go ahead and compare. While rate is important it’s not the only factor to consider. Some lenders also offer attractive options such as letting you pick payment due dates. Some lenders will also send funds directly to creditors; that can be helpful to borrowers who are consolidating debt. Marcus by Goldman Sachs® gives borrowers the option to skip a payment after 12 months of in full and on-time payments.
Seeing your loan options only gives you a preview of the loan you might receive, such as the total amount and interest rate, based on a soft check on your credit. Those numbers could change when you actually apply because lenders will request additional information to verify your financial history.
Before signing a loan, check the small print carefully. Here are some keywords to look for:
Prepayment penalty: Some lenders charge a fee, called a prepayment penalty or exit fee, for paying off the loan early.
Origination fee: An origination fee is an upfront sign-up fee that a lender may charge to process your loan. You will want to know both the amount, which can vary, and how it is charged. Some fees are charged directly while others may be taken out of the loan proceeds.
Simple and pre-computed interest: Lenders use a few different methods to calculate interest. There is simple interest and pre-computed interest. Simple interest accrues every day on the amount currently owed. Because each payment reduces the principal amount, the amount paid in interest also gets smaller as you get closer to paying down the loan. With pre-computed interest, all the interest you would pay during the term of the loan is calculated and added into the balance in advance.
If you plan on making monthly payments through the full term of the loan, then it makes little difference how the interest is calculated. But if you plan to prepay your loan early, you will not get as much of a reduction in interest charges with pre-computed interest.
With some research, you’ll know you’re getting a loan that fits your needs and budget.