9 Questions to Ask Yourself Before Applying for a Personal Loan
There are many things to consider before taking out a personal loan. A focus on the right details will give you the confidence you need to make an informed decision.
What to Ask Yourself Before Applying for a Personal Loan
There are a variety of questions you should ask and answer before completing a personal loan application. Here are nine of the most important:
1. Do I meet the requirements to qualify for a personal loan?
Do your research to better understand the requirements to qualify for a personal loan. Is your credit score high enough? Does your income meet the minimum threshold?
2. What is the personal loan for?
If you don’t know why you want a personal loan it’s best to hold off for the time being. Even if you qualify, it’s never a good idea to borrow money just for the sake of doing so.
3. What are the interest rates?
Personal loan interest rates will vary from vendor to vendor. This may impact your decision on which personal loan to choose, as it will affect how much you pay monthly and over the course of your loan.
4. What are the fees associated with a personal loan?
This varies from lender to lender. Interest is the most common fee, but you may also run into others, such as a processing fee and application fee.
5. What is the term of the loan?
Check with your personal loan lender to understand the terms that are available to you. For example, your lender may offer terms ranging from 12 months to 96 months.
6. How will you pay it off?
As an installment loan, you’ll make a fixed payment every month. If you pay just this amount, it’ll take the entire term to pay off your loan.
7. Can I afford to pay more than the minimum amount each month?
Ask your personal loan provider if you’re able to pay more than the minimum amount each month. Doing so saves you money on interest.
8. Are there any better alternatives to a personal loan?
There are other types of loans to consider, such as a home equity loan. Compare the pros and cons of all your options to determine what’s best.
9. What will I do if my application is declined?
The personal loan application process could end in disappointment. If your application is declined, find out why and then determine what you can do to improve your odds of approval in the future.
The Best Loan Comparison Platform
Personal loan shopping is easier today than ever before, thanks to the ability to compare loans online.
If you need help with the personal loan comparison process, Monevo is one of the many tools to consider.
With this platform, one application gives you access to multiple lenders. This saves you time comparing lenders and loans.
You can also filter results based on your loan amount and estimated credit score.
Don’t let personal loan shopping sour the experience. Use an online platform — such as Monevo — to bring speed and efficiency to the process.
What to Look For in a Lender
It’s easy to assume that every personal loan provider is basically the same, but that’s not true.
Knowing what to look for in a lender is critical to making an informed decision. Here’s where you should spend most of your time.
Experience and Credibility
No matter the type of loan, you should only consider lenders that are experienced and credible. There’s never a good time to take a risk with your finances.
Your personal loan interest rate will impact your finances, including your monthly budget. Compare lenders with the goal of finding the one that offers the lowest interest rate.
What monthly loan payment are you comfortable with? What terms are available to you? Is there repayment flexibility? The best lenders work with you to find a loan that suits your budget.
It’s frustrating to apply for a loan, just to find that your lender is dragging its feet. Response times are important from the start.
Your personal loan comparison should focus heavily on customer service. A lender that truly cares about your business is one that’s available and willing to answer all your questions.
Different Types of Loans
Personal loans fit into one of two categories:
Most personal loans are unsecured. With an unsecured loan, you’re not required to put up any collateral. This is riskier for the lender, so you can expect a higher interest rate (such as when compared to a home equity loan).
A secured loan requires collateral. It’s not common with personal loans, but you may find a lender that offers this option.
Typical Loan Application Documents
When it comes to things to know before taking out a personal loan, documentation should be somewhere near the top of your priority list.
You want to collect all the necessary application documents upfront, as this allows for the process to unfold more smoothly.
Proof of Identity
The easiest way to prove your identity is with a copy of your driver’s license. If your lender requires another form of identification, a birth certificate or Social Security card will do.
Employer and Income Verification
You can verify both your employment and income by providing your lender with a recent pay stub.
Your lender may also contact your employer to verify your employment.
Proof of Address
A utility bill or mortgage statement is generally enough for proof of address.
Frequently Asked Questions (FAQs)
Just the same as anything with your personal finances, you’re likely to have questions about a personal loan before applying. Answering these questions will help put your mind at ease.
What is a good credit score?
Experian notes that a good credit score is one that falls between 700 and 850. If you’re short of this, consider the steps you can take to boost your score before applying for a loan.
How do personal loans work?
Once you apply for a loan and receive approval, you will review the terms and conditions. It’s during this time that you’ll learn more about available repayment periods and the interest rate you qualify for. If you accept the funds, you’re then required to repay them monthly over the term of your loan.
What is a secured loan?
This is one of those things to consider before taking out a personal loan that some people overlook. A secured loan requires collateral. This is not common with a personal loan, so it’s not generally something you have to plan for.
What is an unsecured loan?
The majority of personal loans are unsecured, meaning that your lender does not require collateral. While this is a benefit to you, it also places more risk on the lender. They will mitigate this by charging a higher rate of interest.
Do personal loans impact your credit score?
Yes. Most importantly, your loan repayments become part of your credit report, which affects your score. By paying in full and on time, you can use a personal loan to boost your score.
How much can I borrow for a personal loan?
This depends on many factors, such as your personal loan lender, income, and credit score. No matter how much you qualify for, be sure that you’re only borrowing what you need.
Do loan companies check your bank account?
Loan companies want to learn as much as they can about your personal finances. So, most lenders check your bank account to verify your income and take a closer look at how money comes in and out.
Do personal loan lenders contact your employer?
At some point in the loan application process, your lender may contact your employer. They do so to verify your employment.
Do you need to give a reason for a personal loan?
When completing a personal loan application, your lender may ask how you plan on using the funds. You don’t have to provide a reason, but there’s no harm in doing so (as long as you need the money for legal purposes, of course).
Can you afford to repay your loan based on the terms and conditions offered?
Your repayment period will impact how long you make payments, as well as the amount. Make sure you’re comfortable with loan repayments before you accept funds. You don’t want your monthly loan payment to bog you down.
Final Thoughts on Applying for a Personal Loan
These are the types of things to know before taking out a personal loan. With this guidance, you should feel more comfortable with the process, the impact on your personal finances, and the way a personal loan can benefit you.
If you’re uncomfortable with any detail of a personal loan, step back to reassess your situation and determine what to do next. The more questions you ask and answer, the easier it becomes to proceed with confidence.