Some special plans in life get us thinking on how to get a personal loan. After all, it seems like such an easy way out of financial hurdles, such as a wedding or putting a down payment on your new apartment. Tell us honestly, wouldn’t a few thousand dollars help you achieve your current life goals?
In that case, this is the article for you! Find out everything you need to know about personal loans and their applications. But be careful: you shouldn’t take a loan on a whim. While they can be a great help in avoiding credit card debt or overcome a financial problem, they have to be planned out.
Taking out personal loans without previous planning will actually be a problem further on. You could have trouble paying the installments or even see your plans go wrong. So review your finances thoroughly before actually applying. Remember as well that after the application, a financial provider usually does a hard check on your credit score, that should take your numbers down a little bit.
So we recommend you start off by reading this guide, finding out everything you can about how to get a personal loan and check how your accounts are faring lately before making any decisions. Ready to start learning? Find out how to apply for loans and tips to get an approval below.
What is and how to get a personal loan?
Before we explain how to get a personal loan, we must explain what it actually is. You probably heard about them before, but probably don’t know the details. In simple terms, these types of loan allow you to get a certain amount of money upfront and pay it in installments over time. Everything with the interest defined by the lender.
You can make a personal loan using collateral, such as a car or family home. These properties are the guarantee that your lender, usually a bank or financial services provider, will get their money back. Otherwise, they can auction your goods to get the full amount they are owed.
There are also the unsecured loans, those that don’t use collateral. While it seems great to keep your house or car safe, we must remind you that, as is the case with unsecured credit cards, the interest rates tend to be higher.
Step by step: how to get a personal loan
It’s time to learn how to get a personal loan! Many people use this as an opportunity to either pay off debt with higher interest rates, such as credit card balances, or get ahead on their life plans. You could use the cash to start your business at last, buy a new car or do some house reformations.
However, it’s important to think things through before actually applying for a loan. The money could be everything you needed to start a new and better chapter in your life. But there is no shortage of stories about people who fell into a debt trap because of a poorly planned personal loan.
If you already made your decision and know this is the best for you, then we’ll get started and explain how to get a personal loan. Everything is explained in a few simple steps below.
1. Determine your needs with your personal loan
The first thing we want to explain on how to get a personal loan is to determine exactly how much you need. There are many types of loans and sometimes we get attracted to the higher amounts that we find. It certainly seems like a good idea to have some extra cash that will give you spending money even after you finish doing what you had to.
But over time that’ll be quite the expensive loan. You’ll have to pay interest rates on the money you lent. Let’s say you get $1.000 with 7% interest (which is really low and not realistic, just for an example). If you pay it in 2 installments, that’ll amount to $1014, now imagine if you pay in more installments or get more money.
The interest would cost you quite a bit. So only borrow what you actually will need! Otherwise, saving up or investing will be a much better option for your financial health.
2. Check your bank’s loan eligibility criteria
Many times we start looking around for personal loans and forget what should be our first pick: our own bank. Yes, online financial service providers usually offer better interest rates and payment conditions than conventional banks. But that is the case with those who don’t already have a longstanding relationship with the institution.
Most banks have pre-approved personal loans for account holders with special conditions. You won’t know if that’s your case until you look for it. But before you fill in any pre-application form, check the eligibility criteria. That way, you’ll avoid unnecessary credit checks that damage your score.
Take a note of your bank’s conditions and then you’re ready to start looking elsewhere. After that, all you have to do is compare and find out what is more advantageous for you.
3. Check your credit score
Most financial services providers check your credit scores to decide if it’s safe to give you a personal loan. The recommended score for that is between 630 or 690, but the requirements vary across lenders. We can assure you that the best option is to have an excellent score (above 690) to guarantee lower interest rates and better payment options.
Sometimes we apply for a loan with absolute certainty that we have a perfect score, however, we didn’t check first. That’s a problem, because even someone who never defaulted on previous loans could have some issues with their credit history. Let’s say you sometimes forget to pay your credit card and do it after the due date, that is enough to get your numbers lower.
Many credit cards allow you to check your score for free and you can also get your full reports on the official providers website. After you visit Experian, Equifax or TransUnion you’ll know if you have a good score. If that isn’t the case, you can always hold on a bit before getting a loan and start building up your numbers. Would you like some tips? We have a whole part of this blog dedicated to improving your credit score.
4. Consider alternative options
After you learn how to get a personal loan you’ll see that it’s a life changing opportunity, for the good and for the bad. That’s why you shouldn’t take such a huge decision within the first few minutes after visiting a financial service’s website. Check out all of your options, after all, there are a variety of lenders you could choose from:
- Banks: these are the most traditional choices for a personal loan. They are really helpful to users who aren’t very familiar with the financial world since the loan officer will guide you through personalized solutions. There is only one problem: banks usually have higher eligibility criteria;
- Credit unions: in a similar way to banks, credit unions allow you the opportunity to meet with a loan officer and find out which loan is the best for your case. The main difference here is that it tends to be easier to apply and the interest rates might be lower;
- Non-banking financial institutions (NBFIs): these are online and traditional financial companies that cannot accept deposits. They do, however, offer other services, such as credit cards and personal loans. The main advantage of these firms is the fact that they often accept loans that banks do not. But their interest rates are higher, so you should watch out.
As you can see, there are plenty of options to choose from. Anyone who has great credit scores can research freely and use the one that offers the best payment options and lower interest. But those who have a problem in that area might have a more limited range of providers.
5. Provide the initial documentation for a personal loan
Did you find the ideal financial provider in our guide on how to get a personal loan? Great, now you’ve reached the pre qualification phase. Here we have an important tip: don’t apply for many loans at once to see which one actually accepts you. Choose a single provider and go for it!
Many people attempt to get multiple approvals at once. However, that creates another type of problem: your credit scores will take some damage. Whenever a financial provider makes a hard check, the kind that is used for loan approvals, you lose a few points on your score. Normally, you’d be able to recover within a few months by paying your loan on time every month. But multiple hard checks will be a problem for you.
Once you choose your provider, it’s time to fill out a form on their website with your personal info:
- Name;
- Address;
- Social security number;
- Income;
- How much you want to borrow;
- Proof of residence.
Remember that each financial provider is different. Sometimes you’ll have to provide additional documentation to get your loan approved. In case you provide the wrong documents, the financial company wll reach out to you in order to explain how to get it right.