Personal Loan

There comes a time in the lives of most people when a loan may be needed to bridge a gap between current and future earnings.

However, going into your first personal loan application process can be daunting at the outset. Here’s everything you need to know before going in for a personal loan.

What is your Income and How Much Do You Really Need?

Before you come up with the notion to apply for a personal loan, you probably already know why you need it. You may need to consolidate debt, buy a new home or a luxury item, or cover unexpected expenses.

Whatever the reason, make sure to account for all of the fees and expenses that will be associated so that you can apply for a loan that is big enough to cover the unforeseen but not so big that you sidle yourself with an unaffordable repayment plan.

Moreover, every loan category will have a maximum, and many also have minimums, so ensure that your need fits within this spectrum.

How Will Your Credit Score Affect Your Application?

Unfortunately, for many lenders, the applicant’s credit score has a big impact on a decision to lend. To the lender, an applicant’s credit score signifies the level of risk they will be taking on.

But the good news is that not all loans are credit-based. Some loans rely on collateral instead. In this scenario, the lender is not going to be as concerned about your past repayment performance.

Instead, they can rest assured in the knowledge that you have staked an asset as collateral. Assets that can be staked as collateral can be varied but most commonly include homes, vehicles, or boats.

Is There Room in your Budget For the Monthly Repayments?

In life, we all have debt and income, and it’s important to ensure you have a manageable ratio between these amounts. This is known as the debt-to-income ratio or DTI.

Lenders typically will not approve loans for those whose DTI is over 36%. Moreover, a person will likely not be living comfortably with a DTI over 43%.

How Long Will Repayment Take?

Every loan is going to have different repayment specifications. Some loans are short-term – 48 hours or 30 days. At the same time, other debt repayment schedules can go on for decades.

What you’ll want to pay the closest attention to is the interest you will be paying and what the monthly payments look like. Interest rates are linked to various factors, including market interest rates, as well as the level of risk taken on by the lender. Risk is defined either by your credit score or by the level of collateral available for contingency.

Are There Any Fees Associated with the Loan?

Many loans will have different fees associated, which might include initiation fees, early repayment fees, late payment fees, and so forth.

Lenders will not always make their fees overt, so this can be one of the most important points to linger on and ask as many questions as possible about. Consider even taking the time to add up all the fees you might incur in different scenarios.

What Are Your Assets and What Are the Alternatives?

Loans are never the only option. There are a few different ways of leveraging capital in a pinch. These can include:

  • Credit cards
  • Lines of credit
  • Home equity loan or line of credit
  • Salary advance
  • 401 (k) advance
  • Small business loan
  • Peer-to-peer loan

What Documents Will You Need to Have

Before going in for a personal loan appointment, gather together the documents you will need, especially since some may take a little bit of time to get together.

  • The application itself: Even if the loan application is primarily online, it’s a good idea to at least go through it thoroughly and try filling out as much as possible ahead of time. This will give you a jump start in your first meeting, bring to light potential questions, and inform you of any documents you need.
  • Identification: Whether collateral or non-collateral based, your loan must be tied to your person, and this requires you to present government-issued identification.
  • Income and employment verification: Again, whether the loan is tied to collateral or your personal credit, no lender wants to see you default on the loan and go into debt. This is why they will want evidence that your income is sufficient enough to make your monthly payments.
  • Proof of Address: Lastly, lenders will want to know how to get in touch with you, this will require proof of your address, such as a paystub or credit card bill.

Any time you are applying for financing, whether through loans, lines of credit, or credit cards, the process can be overwhelming, but it doesn’t have to be. By taking the time to make proper preparations and do your research, you can set yourself up to be in the best possible position to get the funds you need fast.