Everyone needs to borrow money at some point in their lives. Being smart about how you borrow money prevents you from falling into lending traps. Determining how much money you need is the first step in selecting a personal loan. The lowest possible personal loan amount is roughly $500, while the norm is between $1,000 and $2,000. Saving up ahead of time or asking a family member or friend for a small emergency loan might be an option if you need money for an expense that won’t exceed $500.
Do I want to send money to my bank account or pay my creditors directly?
A personal loan is a loan taken out by an individual and paid back via the borrower’s bank account. However, if you’re consolidating debt, some lenders will transfer the payments straight to your creditors without going via your bank account. Have the money transferred to your bank account if you’d rather have more control over the situation or if you won’t be utilizing the money to settle your debts but rather for another purpose.
How long do I have to make payments?
Within 30 days, you will have to start making monthly payments to the loan company. The standard payback period offered by lenders is between 6 months and 7 years. The loan duration you pick will affect your monthly payment and interest rate. The most important thing to focus on is to pay back the money as quickly as possible, without accepting payments that are too high to consistently make on time. As long as you’re comfortable with the payment amount and are sure you can make them every month, then you should move forward with the loan.
How much interest will I have to pay?
Your interest rate is based on a number of things, like your credit score, the amount of the loan, and how long it will take you to pay it back. There is a wide range of possible interest rates, from 5% to 29.99% and beyond. With a high enough credit score and a short enough payback period, you may acquire the best interest rate available.
The annual percentage rate (APR) of loans is typically fixed, meaning it does not change over the term of the loan. This means no matter the payback period you choose, you don’t have to worry about the interest rate increasing, which would cause your payment amounts to balloon.
Can I make the payment each month?
If you need money quickly, a personal loan may be the ideal option since you can tailor the repayment terms to your specific needs. Lenders will sometimes give you a 0.25% or 0.50% lower APR if you set up automatic payments. Some individuals pay off their loans over many months or years to lower their monthly payments. The biggest monthly payment is chosen by those who want to pay off their debt promptly.
Interest rates tend to be greatest for those who choose for the lowest monthly payment and the longest repayment period. Smaller monthly payments mask the fact that you wind up spending more on the loan overall. Personal loan lenders are more lenient than mortgage lenders when it comes to debt-to-income ratios above 43%, particularly if you have strong credit and evidence of income.
A higher debt-to-income ratio makes it more difficult to be accepted and taking on too much debt might strain your finances. If you have emergency money or a partner’s salary, you may do this temporarily, but a long-term plan that includes high monthly payments may not be a feasible solution to your financial needs at this time.
Is there a fee for the personal loan?
Lenders of personal loans may charge a fee to start the loan, called an “origination” fee, but most don’t charge any other fees besides interest. To cover administrative and processing expenses, your lender deducts an origination fee from your loan. Sometimes it’s a flat cost, but normally it’s between 1% and 5%. Most people don’t notice the fees, as they’re included in the monthly payments that you make toward the balance of your loan.
Do I have a credit score that is good enough?
It is important that you be aware of your credit score prior to beginning the application process for personal loans in order to ensure that you will be accepted. Most personal loan lenders, especially online banks, look for applicants with good credit. If, on the other hand, you already have a connection with a bank, and you have a history of paying your bills on time and obeying the conditions of your previous loans and accounts, you may be eligible for a more advantageous deal that the bank is willing to provide you.
Personal loans from credit unions sometimes have cheaper interest rates and are available to applicants with ordinary or even poor credit. Becoming a member and opening a savings account are common prerequisites for getting a loan, however. If you have an existing credit union relationship, you should try to søk for a loan with them before you turn to online lenders for a loan.
What else do I have for options?
If you want to pay off debt, you can also use balance transfer cards. A debt transfer credit card with a 0% interest promotion rate for a certain period of time may save you hundreds of dollars. You may also be allowed to transfer several credit card balances on the new card, depending on your scenario.
There are certain downsides to using a balance transfer card, however, such as transfer limitations that are lower than your total card limit and fees that average about 3%. However, it can help to consolidate your debt, giving you one payment to make, and typically at a lower interest rate than having debt spread across multiple accounts.
When will I need the money?
Depending on the lender, some personal loan companies will deposit the money the same day or the next business day. Other lenders may take up to 10 working days. If you need money quickly, make sure to choose a lender who can give you the money quickly. You’ll be able to see the time period it will take to deliver the loan to you on the loan documentation prior to accepting the loan. Be certain it is a time frame that will work for what you need.
What will happen to my credit score if I get a personal loan?
Credit cards are a type of revolving credit, while personal loans are a type of installment credit. Your credit mix will be stronger if you have both types of credit. Having a mix of different kinds of credit is good, but it’s not everything. Focus on making payments on time and using credit to keep your credit score high.
Although getting an installment loan won’t do much to improve your credit score, paying off high-interest credit card debt with a personal loan will have the most impact. After paying off your cards, spend less than 10% of your credit and see the difference. High usage of credit will lower your credit score and make it harder to get loans in the future.
Bottom line
Personal loans are a good alternative to credit cards with 0% APR, but like any other financial product, they work best when you have a plan. After answering the above questions, you may check your loan alternatives with a “soft inquiry” on the lender’s website or a “third-party lending marketplace.” This won’t affect your credit score in any way. After you find out what you qualify for, you should only then make a hard inquiry. This prevents you from lowering your credit score with too many credit inquiries.
