Everything you need to know about personal loans

Everything you need to know about personal loans

Sometimes we need a little help with our finances. Unexpected expenses can require cash that we don’t have at the moment, so getting a low interest loan might just be the solution.

A low-interest loan is usually a good idea because it means that the overall cost is lower. Lenders usually offer a range of interest rates that you can get, depending on several things like your credit history. How to qualify

As we mentioned, lenders will base their decision on their own criteria, considering these factors:

Credit score: the higher your credit score, the better conditions you will get. And better conditions mean lower interest rates. Work on your credit score by paying your bills on time and paying off debt.

Credit history: lenders take into account not only how high your score is, but also for how long you’ve been using credit. This is why it is important not to close your accounts, as you will reduce your credit history length.

Debt-to-Income ratio: lenders will compare your monthly income to your monthly obligations and they will use that information to decide whether you can take up more debt or not. 

Employment: last, but certainly not least, lenders will look at your employment to make sure you have a stable job and earn enough to make monthly payments.

How to find low-interest loans

First thing first: shop around. There are a lot of lenders out there that offer a wide variety of conditions. Compare them, read reviews and, in some cases, you can even provide some basic information and get a quote.

Ideally, you will be able to get several quotes and compare them. Also, consider visiting your bank and asking them what their personal loan conditions are. It’s also important to check what type of customer service they provide, in case you need it.

If you receive quotes that are higher than what you can afford, consider getting a co-signer. This can usually help lower the interest rate. 

A co-signer is the person who is responsible for paying your loan in case you stop making payments, so if you know someone with good credit that is willing to cosign on your behalf, ask them!

´Will a personal loan affect my credit score?´

A personal loan can be used for anything and it is a real lifesaver sometimes. But when you get one, your credit score fluctuates. Here’s everything you need to know.

As most personal loans are unsecured, lenders use your credit score to determine if you get approved or not. During the life of the loan, your score might fluctuate in different stages.

What are those stages?

When you apply for the loan

Before actually getting a personal loan, you need to apply in order to get approval. Lenders will base their decision on your credit score, so the higher it is, the better conditions you might get. 

They do this by performing a hard-check, which means you give permission to a certain company (usually, the potential lender) to check your credit history. Every time a lender triggers a hard inquiry, your credit score will temporarily decrease.

When you get your loan

Once you get your personal loan, you increase your credit mix, which is basically 10% of your total score. So at this stage, your score might get a little boost. But as you are also increasing the amount of debt you owe, a personal loan could also cause it to drop.

An important thing to keep in mind when choosing a lender is that they report your repayment history to the three major credit bureaus. Lenders are not required to report your payment history, and if they don’t, then you won’t be able to show that you worked hard and never missed a payment.

When you repay your loan

Before taking a loan, you need to make sure you can pay for it. Depending on your credit score, your loan conditions might be different. If you have low credit score, you might have to pay higher interest rates, so make sure you include that in your budget.

Keep in mind that your credit score has different factors, but the most important one (around 35%) is your payment history. If you miss one single payment, your score can drop dramatically.

If you are diligent when making payments, it will show, too.

What to do before applying for a loan

If you’re thinking about applying for a loan, you should check your credit score first, for many reasons. Here are some advice regarding your approach to this task.

Check your score through FICO

Even though your lenders could see a different score than the one you’ll get, it won’t be so different if you check it through FICO. This isn’t a good enough reason to lay back and think that getting your score won’t matter if it can be different as the one your lender will see.

You should still get a good idea of what your credit score is before applying for a loan, mostly because it’ll help you see how good or bad it is. There’s the possibility that you’ll need to take some measures to change it, which is why it’s better to know your situation in advance.

Improve your score before applying

If your credit score isn’t as good, it may be better to wait for a while to apply for the loan. This will allow you to improve your score and get a better deal afterward. You can achieve this with the help from several software that’ll help you manage your personal finances or other ways to rebuild your credit score.

If you use other credit score calculators than FICO, such as Credit Karma, you can get similar scores and other interesting results. This company offers featured services that can tell you where you can improve your credit score, what’s causing harm, and what you’re doing well.

Don’t take too long to apply

It’s obvious that your credit score can change over time, which is why you shouldn’t be surprised if the score that your lender receives is different as the one you’d got a few months earlier. In order to avoid any surprises, don’t take too long to apply for the loan after you’ve checked your score if it’s already good.

Choose your loan

There are many different kinds of loans, each with a specific use and designed for certain people. In this article, you can find some basic information about loans, which can hopefully help you choose the most adequate one for you.

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