If you've considered the options and feel confident that a personal loan makes sense, the next step is to ensure you have the highest chance of approval. In this article, you will learn more about how personal loans work and how to apply for them.

What Is A Personal Loan?

A personal loan offers the easiest and fastest way of raising cash for current financial needs. Unlike other types of loans, you don't need an excellent credit rating, a six-figure income, or collateral to apply. Personal loans are mostly used to meet basic expenses, consolidate debt, and deal with home maintenance and repairs. However, they can also be used to pay one-time costs, such as medical bills or funeral and wedding costs. These loans usually come with a term between two and five years, with interest rates running the gamut, depending on your credit rating. While most come with fixed interest rates, some exceptions come with fluctuating interest rates.

Personal Loan Eligibility

Banks typically base eligibility for a personal loan on a combination of credit history and current debt-to-income ratio. Ultimately, your income, coupled with your credit score, determines a lender will approve you and, if so, the terms they'll offer. Borrowers with good credit scores stand a higher chance of securing personal loans. However, this does not mean that lenders always turn down applications with lower credit scores. Lower credit scores will, most of the time, limit the amount of money one can access.

Furthermore, a strong credit score can boost your chance of getting a personal loan at a much lower interest rate. A good credit score for personal loans is one that ranges between 725 and 759. A score of between 760 and 859 is considered excellent and would most of the time, command lower interest rates. Another important thing that lenders look at is the applicant's source of income. A reliable source of income will increase your chances of a successful application. Lenders also look at monthly debt payments that should be at least, below 43% relative to monthly income. Data points on college grade point or career may also be used to ascertain one's ability to handle a personal loan. The idea behind this background check is that some careers or jobs are stable than others, thus placing one in a position to repay their loans on time.

Where Can I Get A Personal Loan?

Local community banks and credit unions are some of the best financial institutions for personal loans. Credit Unions can be an exceptional resource for low-interest rate loans as they are not in the business of making profits. Online lenders such as Lending Club also offer personal loans at competitive rates. Their rates are usually lower than those offered by banks because they have fewer physical assets and fewer expenses. Pawnshops also provide personal loans in exchange for valuable items such as jewelry electronics or artwork. The merchandise, in this case, acts as a collateral.

Read The Fine Print

Personal loans are usually paid over a specific period. Failure to do so could result in lawsuits as there is no collateral involved for a lender to use to recoup his investment. Some scammers use false advertising to lure people into bad agreements such as having to pay an 'advance fee' for loan processing. Carrying out a background check on a lenders terms is essential if you want to avoid any hidden costs that may come into play, especially with low-interest personal loans.

Many lenders who offer personal loans at low-interest rates charge significant fees that show up in the overall amount folded in monthly payments. Understanding the terms of a personal loan and demanding answers on unclear matters is essential if one is to avoid future disagreements with a lender. One of the things to look out for include prepayment penalties, which some lenders charge in instances where one pays off the full loan amount early. Some lenders automatically charge payments from checking accounts. In this case, one should consider setting up a low balance alert to avoid overdraft fees from a bank, if the inevitable happens.

Resources:

1.https://www.lendingtree.com/personal/what-are-personal-loans-used-for/ 2.https://www.myfico.com/credit-education/whats-in-your-credit-score/ 3.https://www.thebalance.com/how-your-credit-score-influences-your-interest-rate-960278 4.https://www.gobankingrates.com/credit/credit-report/read-credit-report/ 5.https://www.finder.com/new-employee-personal-loans 6.http://www.randelltiongson.com/factors-that-affect-your-personal-loan-application/ 7.https://www.finder.com/personal-loan-scams