Consolidating loans, paying for minor home repairs or taking care of unexpected expenses are just some of the reasons why people need to take out a personal loan.
A personal loan is one of the most popular types of loans that banks and other financial institutions offer as it doesn't require borrowers to have a collateral, such as a car or house. Because it's considered an "unsecured" loan, however, a personal loan is often more difficult to get and has more stringent qualification requirements compared to other types of loans, such as a secured loan. Here's what it takes to get a personal loan.
Checking Credit Report Most banks will look primarily at the borrower's credit report, including his or her credit history, credit score and debt-to-income ratio, which is a measure that compares a person's debt payment to his or her overall income, to determine whether he is eligible to get a personal loan. If he qualifies, the maximum amount he can borrow and the interest rate would also depend on his or her credit report.
While credit scores vary depending on the bank, they are typically classified by lending institutions as follows:
- Bad credit: 300-629
- Fair or average credit: 630-689
- Good credit: 690-719
- Excellent credit: 720 and above
Before applying, a borrower should improve his or her credit scores and debt-to-income ratio. Some of the biggest factors that affect credit scores include paying outstanding balances on time, refraining from spending more than the available credit limit and increasing income.
Getting Prequalified Getting prequalified is the initial step in applying for a personal loan, and it's generally quite easy. A borrower would just have to provide the bank with his or her personal and financial information, including his or her proof of identity and address, proof of income, employment history, loan information and educational background.
After evaluating the borrower's personal and financial background, the bank can give him an idea whether he qualifies for a personal loan, and if so, how much and at what rate. Borrowers can get prequalified online or over the phone, and it's typically free of charge. Loan prequalification doesn't include an in-depth assessment of a borrower's credit report. Banks would just run a "soft credit check" during the process, so it doesn't affect the applicant's credit score.
Shopping Around and Comparing Options Shopping around and comparing options help in getting a personal loan that comes with a lower interest rate. Thus, borrowers should check interest rate at multiple banks or lending companies. They shouldn't be worried about this as it won't affect their credit scores, but they should check it first with their bank. Even getting an annual percentage rate that is one percent lower can save them a lot of money over the long run. Compared to banks, credit unions may offer more flexible terms and lower interest rates. Credit unions are also a good option for getting a small loan, such as $2,500 or less.
Considering Other Options If a borrower has a bad credit, it's more likely that the bank will disapprove his or her application. But, he can consider other options like having collateral or a co-signer. Having either option not only helps a borrower gets approved for a personal loan, it also helps him qualify for better rates.