What To Go Over When Getting a Loan

Personal loans are an option when you have an expense that is above what you normally spend money on. Everyday expenses include rent, mortgage payments, insurance payments, food shopping, entertainment and savings. When you have a special expense, such as moving out of town, taking a trip overseas or purchasing a wardrobe for a new job, a personal loan can help make it affordable.

But is taking out a personal loan the right choice for you? Before you rush out and fill out a bunch of applications, take a moment to consider the personal loan pros and cons.

How’s Your Credit?

Nerd Wallet recommends checking your credit as your first step to considering a personal loan. The state of your credit will have a huge impact on whether you get approved or not, and if you do, what your interest rate will be. If your credit score is 720 or above, you’re golden. The lower your score dips, the more trouble you’ll experience getting a loan.

Correct What You Can

Take a look at your credit report. Is everything accurate? There may be credit card accounts and loans on there that don’t actually belong to you. One of your creditors may have accidentally reported you as being late when you’ve been consistently on-time. You may even have a negative mark linger on your report long after the seven-year cut-off mark. Address each of these issues before applying for a personal loan.

If everything on your report is accurate, do what you can to increase your credit score to the good or excellent range before borrowing money. Make several on-time payments. Lower your debt-to-income (DTI) ratio. Experian points out that most creditors look for a DTI of less than 43%. You can find your DTI by adding up all of your monthly payments and dividing that total by your gross monthly income. Lower your personal DTI by paying your credit cards down, paying off loans and increasing your credit lines without using that available credit.

Shop Around for Personal Loans

When you know where you stand with your credit, it’s time to see what offers are on the table. Before you do this, remember that every hard inquiry results in a loss of points from your credit score. Experian notes that the credit bureaus are more forgiving when they see you’re shopping around and all of your hard inquiries come from similar sources. Keep this shopping period limited to a one- or two-week period to minimize the impact on your score.

Pre-approvals are a good way to see what you qualify for without submitting to a hard inquiry. Creditors will perform a “soft pull” of your credit report, which is the credit inquiry equivalent of peeking around a door instead of barging into the room. When you get several pre-approvals in hand, compare them. See what the interest rates are, examine the loan origination fees and compare the ultimate amount you’ll be paying back.

Have Your Ducks Lined Up

Personal loan applications sometimes involve quite a bit of paperwork. Forbes points out that it saves time if you know what you need to bring before you apply. Call the bank and ask. Lenders typically need the following information to complete your loan application:

  • your photo I.D.

  • your social security card

  • proof of income (bank information, pay stubs)

  • your employment information

  • your monthly expenses

  • proof of your lease/mortgage payments

  • proof of your other monthly expenses (bills, loan agreements)

  • the name of the college you attended and your major

  • contact information

Gathering all of this may take a bit of time. Make copies as you go in case you lose something or wind up applying with more than one bank.

Consider Alternatives

What if your credit history isn’t good enough to get you approved for the personal loan you want? Does it mean it’s time to give up?

No. If what you’re getting the loan for is important, you may have to think outside the box. Most personal loans are unsecured loans, which means they depend solely upon the state of your credit. But you may be able to get a secured loan. If you own your own home, have a vehicle that’s paid off or have some other valuable belonging, like real estate, a boat or jewelry, the bank may consider using that item as collateral. Additionally, consider using a cosigner if you know someone with perfect credit who is willing to vouch for you.

A personal loan can be the answer to the financial problem you’re dealing with. If you make your payments on time, they can also build your credit and boost your score. Be smart about how and when you apply for one, and a personal loan can be a very positive thing.