9 Things to Know Before Taking Out a Personal Loan
Taking out a personal loan can be a huge help if you find yourself in a situation where you need money, now. However, it is also a big decision to make with potential consequences if not done for the right reasons. We have compiled a list of nine things to consider before applying.
Things to Consider Before Applying for a Personal Loan
When you need a loan, it’s easy to dive headfirst into the application process without considering the impact it will have on your finances.
However, if you get ahead of yourself, it could result in a poor decision.
Rather than take this risk, here are nine things to think about before taking out a personal loan.
1. Your credit score matters more for personal loans
As an unsecured loan — meaning there is no collateral — your credit score plays a big role in whether or not you receive approval.
With a good or excellent credit score, there’s a greater chance of finding a lender that can provide you with the funds you’re seeking.
2. The interest rate may be higher than you expect
Lenders take on more risk with an unsecured loan, which results in a higher interest rate.
3. A personal loan is not a long-term solution
A personal loan is a good short-term solution, such as if you want to take on a home improvement project or pay for a child’s wedding. However, you shouldn’t expect it to solve any long-term financial concerns.
4. A personal loan can be a great way to consolidate debt
There are many ways to use a personal loan, including debt consolidation. This allows you to bring multiple types of debt under the same roof, thus saving you on interest and eliminating some stress.
5. Banks aren’t the only option
While most traditional banks offer personal loans, there are other options. Search for online banks and peer-to-peer platforms that offer the same type of loan product.
6. You might be better off with a different type of loan
If you need to borrow money, a personal loan is not your only option. For example, a home equity loan — which is secured by your home — gives you access to the funds you need at a lower interest rate.
7. Personal loans shouldn’t be used for certain expenses
A personal loan isn’t the right solution for every expense. For example, don’t take out a personal loan to purchase luxury items for your home, such as a big-screen television. There’s no good reason to take on a monthly loan payment when you don’t have to.
8. Personal loans have higher monthly payments than credit cards
When you compare the minimum payment of a personal loan to a credit card, you’ll soon find that a personal loan requires much more money to stay current.
9. Watch out for hidden fees and extras
No matter what type of loan you’re considering, keep an eye out for any hidden fees and extras that could cost you at inception or in the future.
The Best Loan Comparison Platform
You now have a clear idea of the things to know before taking out a personal loan. At this point, you can turn your attention to finding the best lender.
Monevo is the best personal loan comparison tool, as it takes all the guesswork out of the process.
The primary benefit of Monevo is the ability to filter results by loan amount, loan purpose, and estimated credit score. This saves you the time of connecting with lenders that don’t match your financial circumstances.
From there, you can complete one personal loan application that gains you access to multiple lenders.
You can then compare each personal loan provider based on what they offer, consumer reviews, and other key details.
If you want to find the perfect personal loan lender — and you probably do — Monevo can manage the entire process for you.
What to Look for in a Lender
There are many things to consider before taking out a personal loan, but nothing is more important than finding the right lender.
Here’s what you should look for:
Experience and credibility
An experienced and credible lender with positive reviews is one that you should strongly consider. You don’t want to take a risk with such a big decision.
Your personal loan interest rate will greatly impact your monthly loan payment. Keeping your loan repayments to a minimum starts with securing the lowest possible interest rate.
What repayment period are you most interested in? Does the lender offer flexibility in its terms?
Once you complete the loan application process, it’s your hope that you receive a final answer in the immediate future. Any response time over 48 hours should have you considering other options.
Personal loan shopping is full of twists and turns. A dedicated customer service team will put your mind at ease.
Different types of personal loans
There are two distinct types of personal loans:
- Unsecured loan: This is the most common type. An unsecured loan means that you don’t have to put up collateral.
- Secured loan: A secured loan allows you to put up collateral, which is less risky for the lender. This can result in a lower loan interest rate.
Before you complete a personal loan application, compare the pros and cons of both types to ensure that you go down the right path.
Typical Loan Application Documents
The personal loan application process is full of paperwork. For this reason, you want to get all the required documents in place upfront. These generally include:
Proof of identity
You need to prove that you are who you say you are. Ask your lender what type of proof is acceptable. Generally, a driver’s license is more than enough.
Employer and income verification
Your lender wants to know that you have a steady income. Verify your employer and income with a recent pay stub.
Proof of address
There are many ways to provide proof of address, such as a recent utility bill or bank statement.
Note: your lender can provide you with a list of documents they accept.
Frequently asked questions (FAQs)
With the above information, you have many things to consider before taking out a personal loan.
However, all of these details are likely to result in a handful of questions. Here are some of the most frequently asked questions pertaining to personal loans.
What is a good credit score?
Experian defines a good credit score as 700 or above.
How do personal loans work?
Upon receiving approval, you will review the terms and conditions and decide if you want to accept the funds. From there, the lender will wire the funds to your bank account.
What is a secured loan?
A secured loan is one that’s secured by collateral, such as your home.
What is an unsecured loan?
An unsecured loan does not require collateral. This is the most common type of personal loan.
Do personal loans impact your credit score?
Your credit score is one of the most important parts of your personal finances. A personal loan will impact your credit score. As long as you pay in full and on time, it can boost your score.
How much can I borrow for a personal loan?
This depends on everything from the personal loan provider to your financial situation.
For example, one personal loan lender may offer you a loan of $25k based on your current income. Conversely, another personal loan lender may only offer you $20k.
This is why it’s so important to shop around.
Do loan companies check your bank account?
Yes, lenders generally look at your bank statements to gain a better overall feel for your personal finances.
Do personal loan lenders contact your employer?
This varies from lender to lender. Some will verify your employment by contacting your lender. Others will do so through the submission of documents, such as a pay stub.
Either way, they’re doing so to ensure that you earn enough income to make your monthly loan payment.
Do you need to give a reason for a personal loan?
Your lender may ask you how you plan on using the money, but you’re not required to give them a definitive answer.
Overall, the detail that matters most to the lender is that you can manage the loan repayment.
What’s the best way to find a personal loan?
The personal loan comparison process varies from one borrower to the next. In today’s world, the internet allows you to find and compare lenders in a fast and efficient manner. Personal loan shopping can take some time, so don’t rush through the process.
This is a long list of the many things to know before taking out a personal loan. Should any other details come to mind — such as questions around which repayment period is best for you — address them before signing your name on the dotted line.
A personal loan is a big financial decision, so compare the details, pros, and cons before you do anything else.