Money makes the world go round. Whether that statement excites you or frustrates you, it’s the truth. You need money to travel the world, buy a vehicle, start a business, or replace a broken dishwasher. But what if you don’t have the money? Often, a personal loan is the best option.
“Personal loans are known as ‘unsecured’ debt because they are not backed by collateral, such as your home or car, as is the case with a mortgage or auto loan, respectively,” finance expert Diane Moogalian explains. “Lenders will use your credit score to help determine whether to give you a personal loan and at what interest rate.”
What most people, yourself included, want to know is how they can obtain a personal loan and get a favorable rate. Here are some helpful tips:
When it comes to obtaining a personal loan, you have a number of choices. There are banks and credit unions, hard money lenders, online lending platforms, and other alternative sources. Shop around and make sure you’re getting competitive rates.
Before you even you start the process of looking for a personal loan, you need to do a little personal finance audit to understand how you appear to potential lenders. Specifically, you should take a look at your credit score. If your score seems low or inaccurate, pull a credit report and verify its accuracy. The credit bureaus do make mistakes and you wouldn’t want erroneous information to cost you.
The funny thing about your credit score is that you need credit cards in order to have a high score. However, you have to stay up to date with your balances and show that you’re responsible enough to pay them off.
“Even if you are paying your credit card bills on time each month, carrying a balance every month can count against you,” Any Credit Personal Loans notes. “You should pay off as much of the balance as possible before you take out a loan.”
On a related note, it’s a good idea to increase your credit limit whenever you can. Your credit utilization rate is one factor that goes into determining your score. If you have a credit limit of $10,000 and only spend $1,000 in a month, your rate will be better than if you have a $5,000 limit and spend the same amount.
Lenders are always looking at your debt-to-income ratio. As the name suggests, this is a term used to describe the percentage of your monthly income that goes towards paying off debt. (You can use this handy calculator from Bankrate.com to help you determine your percentage.)
Because a personal loan is unsecured, a lender is much more likely to give you a loan if your debt-to-income ratio is low. From their perspective, they know they’ll be the last one to get paid, should you come up short, and will only put themselves in this situation if the risk is low.
Whether you’re applying for a mortgage on a home or a small personal loan to pay for a car repair, lenders are always watching to see whether or not you exhibit the signs of a responsible borrower. Even if you’re not currently in the market for a loan, you should always pay attention to how you’re handling yourself financially.
Pay your bills on time, avoid bad debt, and make smart choices. If you do these things, you’ll never have trouble getting approved for a personal loan when the need arises.
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