You may need a personal loan to pay off your credit card debt, to spend on home improvement, to use for an emergency, or any other purposes. Is it your habit to look around and research or you focus more on getting the money right away?
According to a survey done by US News, 21 percent of borrowers don’t do comparison research before they file for a loan while 51 percent don’t use any preapprovals to compare the rates, requirements, and fees.
However, it is crucial to do comparison research when you are about to engage in a major financial commitment even if there are online lenders that make the entire process convenient and fast. The following are some of the aspects that you have to check before you get a loan:
Check your credit score and credit history.
These two factors are what lenders often consider reviewing loan applications. A good credit score will make it easier for you to get a loan and receive a more favourable interest rate from the lender. Credit history, on the other hand, can affect the lender’s decision whether to approve your loan application or not and the amount of interest you will be offered.
Some lenders also look into the applicant’s debt-to-income ratio. This is the total of debt payments divided by the gross monthly income. This will guide the lender in understanding how you will manage your repayment if your personal loan is approved.
Apply for a prequalification.
Prequalification is the process in which the lender will review the information you shared with them. This is for them to give you the loan you are qualified for. Once you become prequalified, the lender will conduct a soft credit inquiry which will not affect your credit scores.
Being pre-qualified does not mean your loan has been approved. It helps you to understand whether you are more likely to be approved and the specific loan terms that you qualified for. If you decide to accept the prequalified offer for a loan, you must submit a formal application directly to the lender. What follows is a hard credit inquiry which will affect your credit scores.
Compare loan offers.
Once you submit your information, you will be receiving numerous loan offers that you prequalify for. You have to compare the information listed on these offers such as the lender, loan amount you may qualify for, estimated monthly payment amount, estimated interest and fees, estimated annual percentage rate or APR, and loan term. Don’t forget to check on the prepayment penalties and origination fees.
Apply for the chosen loan.
Once you are done with the comparison research and have chosen a specific loan, you can proceed to the application process. The lender will tell you directly the requirements you need to submit. Some of the information you need to provide include income verification, ID verification, monthly housing cost, and Social Security number.
Wait for the approval from the lender.
Give time for the lender to review your application, decide if you will be approved for the loan, and send you the final documents once you are approved. The documents will contain the details of the loan which include the interest rate, length of the loan, the amount of the loan, and monthly payments.
After reviewing the details, you have to sign the documents and the funds will be deposited to your bank account.
Personal Loan Requirements
The usual IDs that are acceptable when applying for a personal loan are the following: driver’s license, passport, state ID, birth certificate, certificate of citizenship, utility bill(s), and military ID. Lenders usually require at least two government-issued IDs.
Almost all lenders require their applicants to meet the minimum income requirement. When you fill out the application form, it is necessary for you to provide some basic information and other details to verify your income. These are the documents that are often required: tax returns, bank statements, and pay stubs.
Lenders also ask applicants for information about their assets, debts, and liabilities. It means it will be more convenient for you when you bring other documents such as current credit card and loan statements, proven additional/alternate sources of income, an estimation of your current expenses, and a current rent or mortgage statement.
The lender will also verify your current employment. That’s why they often ask for your current employer’s name and the contact details in your full loan application. If necessary, the lender may call your employer to verify your employment and income information. However, this is more common when applying for mortgages and not for personal loans.
Common Terms Used
There are some common terms you have to be familiar with when you apply for a personal loan. The following are some of them:
Principal-This refers to the amount you borrow. The lender calculates the interest they will charge you for the loan based on the principal. As you keep on repaying the loan every month, the amount of the principal decreases.
APR-This stands for Annual Percentage Rate. APR is the consolidated amount from your interest rate and the lender’s fees that will provide you a clearer picture of your actual loan cost. It’s useful to compare APRs for you to determine the loan’s affordability and personal loan value.
Unsecured Loan-Personal loans are often unsecured loans. It means you don’t need to provide a collateral for the loan. In a home or auto loan, the property itself serves as the borrower’s collateral to the lender. A personal loan if usually supported by the borrower’s good credit standing or a cosigner. However, some lenders require collateral for personal loans for them to be able to offer better rates than the unsecured personal loan.
Monthly Payment-Every month within the loan term, you will have to pay a monthly payment to the lender. This payment will include the amount you have to pay for the principal amount you owe the lender. It also includes the interest of the loan within the loan term.
Term– This refers to the number of months you are required to pay the loan.