A personal loan can be economically feasible when you take into account other sources of financing. A personal loan can be used for any purpose as opposed to an auto loan or a home loan, which may be used for a specific purchase. Personal finance can either be secured loans, wherein, the borrower must offer an asset in the form of collateral for the loan or unsecured loans. Generally, most personal loans are unsecured.
A personal loan is a practical option if you:
- Have a good credit score
- Want the loan customized for your requirements
- Want to consolidate other debts
The following is some of the information you might need while applying for a personal loan.
- Identification proof
- Address proof
- Income information
- Other personal details (date of birth, social security number, address)
- Information related to the loan like amount, Annual percentage rate (APR)
- Employment history
- Qualifications
Lenders typically look for the following signs to determine if you are eligible for a personal loan.
Credit score
A high credit score allows you to receive a relatively lower interest rate on your loan. A score of 680 or more is considered good across the board. Lenders will also look into individual factors that contribute to your credit score such as credit history, recent defaults, bankruptcy, and open trades you have.
Debt-to-income (DTI) ratio
Lenders will also examine your debt-to-your income. They want to see a DTI of 36% to 40% i.e. debt at 36% of your monthly income. They will also examine how you plan to pay back the loan and your annual income.
Employment history and education
Some lenders go quite far to determine your creditworthiness and it may include factors like the college you have attended, your grade point average (GPA), and the career you have chosen. The idea behind this is to check if you have a stable career and if there is a recession, how stable your job will be.
Factors to consider before taking a personal loan
Let us examine the factors you should consider before making a decision.
Annual percentage rate (APR)
Personal loans generally come with fixed interest rates. Even an APR, which is a percentage point lower can save you a lot of money, so it is best to choose wisely.
Different sources of finance
Credit unions and other marketplace lenders may offer better rates on personal loans. However, it is always best to trust a reputed organization before signing on the dotted line and get a second opinion. You can also consider a balance transfer card with a promotional 0% interest rate.
Applying with a co-signer
It is best to avoid payday loans as they have huge penalties on default. If you are desperate and have a poor credit score, getting a co-signer can make a big difference to your APR. Furthermore, if you have a good relationship with your bank or credit union and have been banking there for a while, they may overlook some of the discrepancies in your application.
Before applying for a personal loan, ensure you do extensive research, compare existing plans with new players in the market, and read the fine print to avoid additional fees and expenses.
