At some point in everyone’s life, they find themselves in a financial bind. Maybe you’re a little short for rent this month or are in the process of making a large purchase. Whatever it may be, a personal loan is a common solution for many. If this is your first time considering a personal loan, here is everything you should know or research before applying.
Personal Loans are Unsecured
An unsecured loan is a loan only backed by the creditworthiness of the borrower, rather than by collateral. Collateral is usually in the form of an asset, such as a car, a house, or any other property. The lender uses collateral as security for the loan in case the borrower fails to repay. Since creditworthiness is the only security for unsecured loans, the lender usually requires higher credit scores and charges higher interest rates. They’re still often lower than credit card interest rates. Average credit card APRs are currently 16.5%, according to the Federal Reserve, while personal loan APRs can be as low as 10%, depending on credit score.
They Affect Credit Score
Some lenders will perform a hard credit check when you apply for a loan. This is a thorough evaluation of your credit history and usually knocks less than 5 points off your FICO score, but hard inquiries only stay on your report for two years and only affect your score the first year. Additionally, not every personal loan lender performs hard credit checks, some just do soft pulls, which do not harm scores.
Missing repayments will also affect credit score. Depending on the lender, being a few days late may not affect your score, but payments 30 days late or more are reported to all three major credit bureaus. This could lower scores by 90 to 110 points. On the other hand, making on time payments can actually help boost your score. Payment history accounts for 35% of your credit score. Developing a history of on-time payments helps build credit in the long-term.
Lastly, it can help improve your credit score by lowering your credit utilization. Credit utilization ratio – how much of your available credit is used – accounts for 30% of overall credit score. Personal loans also help improve your credit mix. It adds installment credit to your report, a different form of credit than the revolving credit, which is associated with credit cards.
They Typically Have Fixed Interest Rates
Interest rates for personal loans vary, depending on your credit score, but they currently range anywhere from 3.34% to 35.99%. Typically, personal loans come with fixed interest rates, meaning they remain the same over the life of the loan, so you’ll always know exactly what you’ll pay. Variable-rate loans are the opposite. They typically start low then fluctuate to reflect current market conditions. This could work out in borrowers’ favor if rates are trending low, but they’ve been on an upward slope for some time now. Fixed interest rates are typically what borrowers prefer, as it takes the stress of question out of the situation.
Fees and Repayment Terms Vary
Before applying for a loan it’s important to read the fine print. Some lenders charge additional fees or prepayment penalties. The first fee is usually for processing your loan, which typically ranges from 0% to 8%. Prepayment penalties are when lenders penalize borrowers for making early payments. Not all lenders do this, but it’s important to read the fine print to be aware if they do.
Additional information to look for are the terms of the loans, as they can vary drastically. You’ll want to pay attention to repayment terms and APRs because it can significantly impact how much you end up paying in the long run. A shorter loan typically means monthly payments will be larger, but you’ll pay less in overall interest. You’ll want to find lower APRs as well. This is basically your fee for borrowing the money and the higher the rate, the more expensive the loan.
What You Need for Your Application
If you settle on a lender and decide to go through with the application process, there are a few things you’ll want to have on hand. This includes:
- Proof of identity: You’ll need to give your date of birth, social security number, driver’s license number, address, along with a phone number and email address.
- Income information: Almost every lender requires a minimum income amount, to ensure you’ll be able to pay back the loan. For this portion you have to confirm employment with pay stubs, bank statements, tax returns, or whatever they require.
- Banking information: Along with credit history, you’ll be asked to provide your account and routing number and possibly a few other pieces of information. Some lenders may ask for things such as estimation of current expenses and rent or mortgage statements.
- Credit score: Often times lenders use credit score as an additional way to verify you will be able to repay the loan. FICO credit score is based off of 5 factors: payment history, the amount of money owed, length of credit history, amount of new credit, and types of credit in use. While it is beneficial to have a high credit score, it isn’t necessarily a make or break for all lenders. You can learn more about bad credit loans with TLC here.
Personal Loans from TLC
At Total Loan Company, the loans we make are as individual as the people who apply for them. If you need a personal loan, we can help. Application is quick and painless, and no need to worry about secret or hidden costs. With TLC you know exactly what you pay with fixed rates and absolutely no extra fees. You are with a reliable company that offers outstanding customer support and full data protection.