Personal Loans

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By David Krug David Krug is the CEO & President of Bankovia. He's a lifelong expat who has lived in the Philippines, Mexico, Thailand, and Colombia. When he's not reading about cryptocurrencies, he's researching the latest personal finance software. 11 minute read

You’ve decided that you need a personal loan for one of many good reasons and that you satisfy the minimum requirements for such a loan. The next step is to submit an application for a personal loan, whether secured or unsecured.

There are several steps involved in submitting an application for a personal loan. It might take a few days up to a few weeks, depending on your credit history, the reason for your loan, the lender you choose, and other considerations.

How to Apply for a Personal Loan

There is no assurance that you will be approved for the loan after going through this procedure. Following these guidelines and remembering a few basic rules, however, will improve your odds of success significantly.

Determine Your Financial Capability

You should start by calculating how much of a loan you can comfortably make. The best way to do this is to calculate the highest possible monthly payment within your financial limits. The amount you must pay each month to pay off your loan is influenced by a number of variables, including:

  • Principal. A loan’s gross financing amount, or the principal balance plus any fees and interest due at the start of the loan’s term. Borrowing more money means you have to pay more each month.
  • Cost of Origination. A lender may impose this fee to cover their expenses and secure a higher profit margin from the get-go. If you’re getting funded for less than the principal because of origination fees, that makes sense.
  • Scheduled Repayment Period. A loan’s repayment term is the timeframe during which monthly payments are made. The typical length for a personal loan is between two and five years (24 and 60 months), however loan periods can be as short as one year or as long as seven years. The larger the total amount repaid over a longer time period.
  • %Interest Rate. A loan’s interest rate reflects the lender’s assessment of the borrower’s ability to repay the debt. Interest rates are often higher for those with poorer credit scores. To add insult to injury, the interest rate has a direct impact on the total cost of borrowing money.

Your loan’s specifics will determine the exact components of each monthly payment.

  • If you pay off your loan early or make extra principal payments, you may be subject to a prepayment penalty.
  • Instance-specific charges, as those assessed for payment delays or cancellations

How to Calculate the Monthly Payment on a Personal Loan

You may estimate how much you’ll have to pay each month by playing with the loan’s interest rate, principal amount, and payback duration using a personal loan payment calculator, like the one offered by Credit Karma.

Your mission is to calculate how long a personal loan would take you to pay off, how much of a monthly payment you would be comfortable with, and whether or not a personal loan would even be possible for you.

In some cases, you may decide that a shorter loan term with a larger monthly payment is justified because of the early payoff and lower total interest charges, while in other cases, you may decide that a longer loan term with higher interest payments is justified because of the lower monthly payments.

In other words, attention to detail is crucial. Credit Karma estimates that the monthly payment for a $15,000 loan with a term of five years and an annual percentage rate of 9% will be $311. Paying down the same debt in three years results in a higher monthly payment of $477.

Examine Your Credit Score

Either way, your consumer status is going to be based on your credit score. A high credit score might make opportunities available, while a low one can close them quickly.

The terms and interest rate you’ll be offered for a personal loan depend greatly on your credit score. Your interest rate is inversely proportional to your credit score, meaning a better score will get you a cheaper rate and vice versa.

You should check your credit score and report before applying for a loan so you know where you stand.

Obtaining a Free Credit Score and Report

Every year, you are legally entitled to one free credit report from each of the three main consumer credit reporting bureaus. It may be obtained by visiting AnnualCreditReport.com.

Sign up with a free credit score subscription service, like Credit Karma, to get your score updated more frequently. If you have an account with Credit Karma, you may view your credit score whenever you like, free of charge. Products like ScoreSense are worth considering if you need even more detail.

When you do a check like this, it’s called a “soft pull,” as opposed to the “hard pulls” that lenders do when you apply for new credit or a loan. A gentle inquiry won’t hurt your credit history.

How to Manage Your Credit Score

Your credit score is just one indicator of your risk as a borrower, along with things like your income and debt load. The five parts that make up your FICO score (the industry standard for credit reporting) are:

  • Credit utilization ratio (total revolving debt balances divided by total available revolving credit)
  • Payment background (including timely and seriously late or missed payments on credit accounts going back seven years)
  • Duration of a credit file (the average age of open and closed accounts going back up to 10 years)
  • Credit blend (types of credit, including installment loans, credit cards, and retail accounts)
  • Fresh credit (volume of recent credit inquiries and newly opened accounts)

Don’t rush into applying for a loan if your credit score isn’t as high as you’d like it to be; instead, focus on taking steps to raise it in the near future.

One strategy for improving credit is to apply for and use a new card, then pay it off in full each month. This will reduce your credit usage ratio and provide a positive precedent for making payments on time. In addition, Experian Boost may help you raise your credit rating by looking at your utility and cellular bill payments.

Finding out your credit score can also help you gauge the likelihood that you will be approved for a personal loan. Even if your credit score is lower than 640, there are plenty of personal loan companies willing to work with you. However, you should anticipate that the conditions of any loans offered to you will be less favorable than they would be if you had a higher credit score.

Obtain Prequalification

The next step is to become prequalified for a loan and check rates using an online personal loan broker (quote aggregator) like Fiona or Credible. To begin, you must define:

  • The reason you need a loan, whether it’s to pay off bills or make some much-needed repairs to your house.
  • The sum you wish to borrow (although your actual offer may be lower than your goal)
  • Considerable approximation of your credit standing

It’s possible that you’ll also be asked for some background details about your finances. In order to proceed, you will be asked to verify your identity and enter an email address.

Following the identification verification step, the bulk of the prequalification steps will be undertaken. One might anticipate being asked personal and financial questions such as: who you are and what you do for a living, how much money you make, and how much schooling you have completed (assets and credit history). You will need to provide your approval for a soft credit draw that won’t count against you at some point in the procedure.

Concerns About Your Identity

Details about the author’s background and location are shared. You should know these information quite well by heart:

  • Your full legal name, including any aliases or past names
  • Your current mailing address and previous residences, if you haven’t resided at your present address for an extended period of time. Your phone number and email address.
  • Your number issued by the Social Security Administration

You may also be required to supply extra information, such as the name of your husband and the maiden name of your mother.

Concerns Regarding Your Income and Employment

In this part, we will discuss your:

  • The employee’s current employment situation. Lender-specific, but often include the likes of “regular employee,” “self-employed,” “independent contractor,” and “company owner.”
  • Taken alone, these terms refer to one’s resources. Personal income includes money made from working, running a business, and other legal means (such investments that generate a tax bill). Child support and alimony are two examples of income that might be disregarded.
  • The Money Coming Into the Household. What you’ve just entered is your family’s yearly revenue. It is customary for married or domestic partners to combine their incomes, after subtracting any non-reportable amounts.

More information regarding your work may be required by some lenders. In the case of a conventional workplace, this information may include the company’s name and contact information, as well as the employee’s job title and term of employment with the company.

To register a business, proprietors may be asked to provide the company’s full name, annual income, and length of operation. Keep in mind that you may be asked to provide evidence for your claims at a later stage.

Concerns Regarding Your Education

Expect to be questioned about your education level, including if you have a high school diploma, some college, an associate’s degree, a bachelor’s degree, or a master’s degree. Certain loan providers need additional information, such as:

  • Your undergraduate, graduate, and, if relevant, professional institutions.
  • Your year of graduation (s)
  • Your degree
  • Your outstanding balance on student loans (this may come up in the next step)

Questions About Your Financial Profile

The last part of the prequalification process consists of answering some standard questions regarding your income and debts. To be clear, when you formally apply for a loan and accept a loan offer, the lender will do a complete review of your credit report and financial facts, however you may be asked to provide an overview. You may count on being questioned on the following topics:

  • Your readily available funds and taxed investment accounts
  • Real property and transportation are examples of tangible assets.
  • Financial history details such as loan amounts and kinds
  • Is it your intention to have a friend or family member cosign your loan?

These inquiries may be somewhat superficial at this stage, depending on the lender, with the bulk of the work occurring later in the application process. Lenders will verify this information with a credit record check, so be truthful. Your application might be rejected if there are inconsistencies.

Loan Offers Comparison

The majority of online lenders make a decision on a borrower’s initial approved application within minutes.

One or more official loan offers will be made if your loan application is conditionally accepted. There are a few possible outcomes if the lender rejects your application due to insufficient information:

  • Requested to elaborate on previous statements
  • Referred to one of the lender’s affiliates, where underwriting requirements may be more lenient or more suited to the borrower’s circumstances.
  • Not deemed creditworthy by the lending institution

Credible is a multi lender network where you may be eligible to receive:

  • Loans from a variety of sources
  • Your choice between one or more loans from a single provider that are the greatest fit for your personal circumstances.

In either case, it’s important to check out potential lenders to ensure they’re legitimate. Once you have many offers, compare them.

Reading a Truth-in-Lending Disclosure

The Truth-in-Lending (TIL) disclosure is a plain-English disclosure document required by law and controlled by the Consumer Financial Protection Bureau, and it must be included with every offer of a personal loan.

Details about TIL that should be included in your offer are as follows:

  • Incurred Total Finance Fees. Over the course of your loan’s duration, this is the sum you will be responsible for repaying.
  • APR. Your loan’s annualized cost, including interest and costs like your origination charge, is known as your annual percentage rate (APR). Your annual percentage rate (APR) is more than simply your interest rate; it’s likely to be much greater than this.
  • Amount Financed. The whole total of your loan is this. Interest is calculated on the whole amount of your loan, not including the origination charge (if any).
  • All Payments Combined. This includes everything from interest payments and debt reductions to mandatory service costs. A loan with an origination fee of 2% and financing costs of 2% would have a total payment of $12,000.
  • Planned Expenditures. The schedule and amounts of your payments are shown here. Fixed monthly payments are required at all times.
  • Fees. The lender’s right to levy late payments and other penalties is outlined here.
    Plan for Advance Payments. Any fees associated with paying early are detailed below. Prepayment penalties on personal loans are typically small, but they might add up if you happen to take out a loan and then pay it off early.

It’s time to put the knowledge you gained from each TIL to use by deciding which program is the greatest match for you.

Gather Application Documents

When you have all the required paperwork on hand, applying for a personal loan is a breeze. Get the documentation you’ll need to prove your application’s claims before submitting it. A few examples of this are:

  • Documents such as bank statements and pay stubs
  • Most employers will want to see your most recent tax returns, especially if you’re self-employed.
  • In addition to the above, please provide any and all asset documentation, including stock account statements and car titles.

Fill out the Loan Application

You’re at the point where you can take a loan offer, but you shouldn’t. This loan offer will likely contain an expiration date, which is used as a scare tactic, but it is not a firm deadline. 

Waiting a few days or weeks after the initial question might pay off, as some lenders try to sway on the fence sitters with more appealing offers, such as lower interest rates or longer repayment periods.

Close on the Loan

At some point, your lender will decide yes or no as to whether they will provide you a loan. If everything seems fine, you may proceed to the last phase of the procedure, closing on the loan.

Personal loans are simpler to close on than real estate transactions. In most cases, you’ll need to fill out far less paperwork. However, you will still need to e-sign essential documents that confirm your relationship to your lender and encode your pledge to repay.

You’ll also need to arrange regular monthly payments; doing so automatically from your primary bank account is ideal and may even get you a reduction on your interest rate of 0.25 percent.

At that point, the lending institution has the initiative. The loan funds (minus any origination charge, if applicable) should be deposited into your funding account within a week of signing the loan agreement, although this will vary from lender to lender and from loan to loan. It may take up to two full business days to fund some loans.

Bottom Line

While the personal loan application process isn’t as time-consuming as the home loan application process, it still takes several days to go from researching loan options to receiving funding for a loan that has been accepted.

There are several exits from the procedure. You may decide that your loan may wait till you have strengthened your borrower profile after researching the finest personal loans available and reviewing your credit score. After your loan is conditionally approved, you should review the Truth-in-Lending disclosure carefully. The personal loan with the higher interest rate might not be the best option if you find a 0% APR balance transfer offer at the last minute.

You should take the application procedure for a personal loan seriously under all conditions. What you don’t want is a heavy commitment that you can’t afford to repay a few months or years from now.

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