Getting a loan is not something to be taken lightly. A personal loan can help you in case you need urgent financing. The process involved is fast, with some borrowers getting financing on the same day they submitted their application. There are a lot of money lending institutions, which makes it a challenge to pick the best. Read on to know what to consider before you apply for a personal loan.
Purpose of the loan
This refers to the reason why you want a loan. Most people apply for personal loans to pay for education, hospitalization, and weddings. Personal loans are not recommended for businesses looking to increase their stock to generate higher returns. Knowing the purpose in advance will help you decide on the amount to borrow.
Types of personal loans
They are of two types:
- Secured loans: Such loans are backed by collateral, such as savings. In case you fail to make the payments, the lender can claim your assets to pay for the loan.
- Unsecured loans: For these loans, lenders rely on your financial history. There is no need for collateral.
It is essential to check your credit score before you apply for a loan. A credit score helps you know the probability of the loan getting sanctioned. Pay off any pending credit card dues to avoid this being reflected in your credit history. To improve your score, you can close credit cards that are not necessary such as store cards. A credit score is vital when assessing an application for unsecured finance. Lenders rely heavily on your history of repaying loans in the past, and a good credit score means you can access the best rates. On the other hand, a less perfect credit score means you will pay a higher fee. There are reputable agencies that you can use to access your credit score.
Most personal loans are unsecured because the amount offered by lenders is not very high. People rely on personal loans mostly for minor expenses. This means that such loans can attract a high-interest rate. Compare the interest rates offered by banks and other financial institutions carefully. Ideally, you want a personal loan with the lowest interest rate. Typically, secured loans have a lower interest rate because they are backed by collateral.
Other charges apply when you take a personal loan. Penalty charges are put in place in case you are not able to make a payment on time. Make sure you know the exact amount regarding the penalty to be prepared in case such a situation comes up in the future. Some money lenders charge origination fees that cover the loan processing costs. Typically, the amount is 1 to 6% of the total loan. Also, there are prepayment penalties in case you decide to pay off your loan early. Knowing all these details in advance will help you see if you can afford the loan you are wanting to take out.
Look out for the best deal
Banks are not the only money lending institutions. There are credit unions and nonprofits that offer lower fees and rates compared to banks. Take your time and explore all the available options before settling for a specific personal loan provider. The best deal is one with a lower interest rate. If you want a loan that you will pay for a longer duration, choose a loan that offers flexibility.
If possible, make sure you don’t skip a payment as it will affect your credit profile. Also, it means you pay more interest and service fees. Cut back on unnecessary spending and dedicate this amount to repaying the loan. Remember to take a loan you’re sure you can easily pay back and don’t live beyond your means.