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Sure, it’s ideal to always have enough savings in the bank for life’s major expenses, such as medical bills, home improvements or paying off credit card debt. But sometimes life happens, and you need to get a personal loan in order to afford something important.
While some people turn to credit cards, depending on your circumstances, it may be difficult to find a high enough credit limit or reasonable interest rates.
Personal loans may be better options for larger expenses. A personal loan is a fixed-rate, unsecured installment loan with predictable monthly payments.
Use the following steps to get a personal loan:
Step 1: Budget
If you’ve determined a personal loan is the best option for you, make sure to look at your budget and determine how much you need to borrow. Figure out how much you can reasonably afford to pay every month.
Step 2: Decide on a lender type
It’s important to figure out what type of lender you want to use.
Do you want to use a big bank or local credit union you’re already familiar with? These types of traditional lenders are more well-known, but they often have strict underwriting criteria, require significant amounts of paperwork and can take a while to process.
Notably, there are also an ever-increasing number of online-only lenders for personal loans, such as LendingClub, Best Egg and Upgrade. These lenders may be more lenient with underwriting criteria than traditional financial institutions. They also typically fund faster with less paperwork and overhead.
3. Get a quote
To apply with one of these online lenders, you’ll go to their website and input a few pieces of basic information, such as your income and loan purpose. They will also run a soft credit inquiry (which doesn’t impact your credit) and give you a quote.
4. Evaluate offers and apply
If you want to move forward with an offer from an online lender, you’ll need to complete the full application. The lender will run a hard credit check, which can impact your credit score. And they may also require documentation to verify your income and employment.
Once approved, the money will be transferred to your bank account, typically anywhere from one to seven days.
When to consider a personal loan
A personal loan is only a wise financial move for people in certain situations, says Steve Branton, a certified financial planner at Mosaic Financial Partners in San Francisco.
It could make sense to use a personal loan to pay for a short-term need, such as a wedding or home renovation, he says. That is, of course, as long as you have the income to pay for the ongoing monthly payments.
Personal loans can also make sense for debt consolidation. For instance, “When you want to consolidate high-interest credit card debt down to a single loan with a lower interest rate, as part of a credit card debt payoff plan,” Branton says.
When to look for other options
You should never take out a personal loan for any reason if you can’t truly afford it. It should be used for a short-term, cash-need only — not as a substitute for good budgeting, Branton says.
“If you are taking out the personal loan but don’t have enough the income to make the monthly payments for the length of the loan, it’s a bad idea,” he explains.
Additionally, it’s a bad plan to take out a personal loan to consolidate credit card debt if you think you might charge more debt on the card again, notes Branton. It will just perpetuate a cycle of debt that will be challenging to ever escape.
What it takes to qualify for a personal loan
In order to qualify for a personal loan, your credit needs to be in good shape and you typically need to have steady income.
While you may be able to qualify for a loan with less-than-stellar credit, your interest rate can be extremely high — sometimes upwards of 30%. If you want to qualify for a low rate, you typically need a high credit score, generally 750 or higher, Branton says.
It’s also wise to add up your monthly rent or mortgage costs, any other monthly loan payments (like student or auto loans) and any monthly minimum credit card payment amounts, Branton says. Divide that by your monthly income to calculate your debt-to-income ratio.
“The lower the DTI ratio, the easier it is to both qualify for a personal loan and the lower the rate you will be given,” says Branton.
Personal loans can be a helpful financial tool if you need short-term funds for a specific purpose, as long as you can afford the monthly payment.