Getting a Personal Loan

October 22, 2020

People turn to personal loans to obtain money to use for whatever purpose they see fit. One borrower may want funds to pay for a dream wedding or a family vacation. Another could use the money to cover a medical procedure or to adopt a baby. Though the reasons behind seeking a personal loan differ widely, the basic premise remains the same – a financial organization grants a lump sum now that gets paid back in monthly installments over an agreed-upon amount of time along with interest.

Personal loans offer a great deal of flexibility. However, finding a loan tailored to certain common reasons people borrow money may prove a better deal. Directly seeking an auto loan, for instance, may yield lower interest rates and easier qualifications than a personal loan because the vehicle itself is collateral. If you default, the lender seizes the car. Similarly, the property you buy serves as security to the lender for a home loan. When paying for college, student loans oftentimes offer more friendly terms.

Turning to a personal loan to pay off higher-interest existing debt is an act some people choose. A potentially better option (if you qualify) might be obtaining a credit card with a low- or zero- interest introductory period. Transfer balances to that card, and then pay off the amount during that special timeframe.

Qualifying for a Personal Loan

Your ability to secure a personal loan depends on many factors. Potential lenders look at things such as credit score, income, and existing debt. People who are not particularly attractive candidates oftentimes can still get a personal loan, but their rates likely will be higher and/or the loan amount approved lower. You also may be able to have someone with a better financial profile co-sign for the loan.

Most lenders allow loan seekers to check to see if they pre-qualify. This action does not guarantee approval, but it lets the person who wants to borrow money know the likely outcome and the estimated interest rate on the requested sum. This prescreening is known as a “soft inquiry” and does not affect your credit score.

When you decide on the appropriate lender, you must formally apply for the loan. This process – known as a “hard inquiry” -- involves the lending institution pulling records and verifying the personal and financial information you put down. While necessary in order to finalize the loan, hard inquiries can affect one’s credit score. Thus, avoid doing them in large quantities over a short timeframe.

Where to Get a Personal Loan

People often begin their search for a personal loan at their local bank or credit union. This action can yield good results, especially if you have a solid history with the institution. However, other options exist if you get turned down or want to explore the possibility of finding better terms.

The Internet has made it easy to identify potential lenders and compare what each can offer. Read carefully, and be certain you understand everything.

Prequalification letters should clearly state things such as:

• expected loan amount
• interest rate (including whether it is fixed or variable)
• monthly payment
• loan length
• fees
• penalties (such as for late payments or for paying off a loan early)

Also, look into the organization itself to make sure it’s reputable. Better to investigate before signing on the dotted line than to experience problems later on.