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If you’re looking for extra cash, applying for a personal loan can be one of the best, but often overlooked, ways to fund any goal or future expense. Unlike other types of loans, such as home mortgages or car loans, personal loans can be used for any purpose you want.
When your personal loan application is approved, you typically receive funds as a check or electronic deposit into your bank account, sometimes on the same day. Then you repay it according to a set interest rate and term.
Here are key points to know before applying for a personal loan:
1. Your credit is a factor in the terms you pay
Whether you get approved for a personal loan depends, in part, on your credit score. Your credit also plays a part in the interest rate and repayment term that comes with your loan.
In general, the better your credit, the lower your interest rate. And paying as little interest as possible is ideal — it will save you money in the long run.
But if your credit score is lacking, getting a personal loan can sometimes be frustrating, especially when it comes to consolidating debt.
“Qualifying for a loan can be a Catch-22,” says Gerri Detweiler, credit expert and Head of Market Education for Nav. “Consolidating your debt with a personal loan can increase your credit score. But if your score is low, getting approved for that personal loan can be a challenge.”
That makes it important to review your credit reports before making a personal loan application.
You can get one report from each of the three nationwide bureaus (Equifax, Experian, and TransUnion) for free every 12 months at annualcreditreport.com.
When you check your credit, review it carefully and look for errors, such as an account that isn’t yours, incorrect personal information, or any negative data that isn’t correct. Dispute any mistakes and make sure that they get corrected right away.
Detweiler says that in July 2017, millions of civil judgments and tax liens fell off of consumer credit reports due to stricter reporting standards.
If you haven’t checked your credit reports or scores in the past several months, you may be pleasantly surprised.
2. Your income is a factor in getting approved
While your credit is important for getting approved for a personal loan, lenders also look at other factors, including how much you earn and how much debt you have. They want to make sure that you can afford to repay what you borrow.
When applying for a personal loan, you must typically provide lenders with documentation such as your paystubs from the past several months or your last tax return. Other required paperwork typically includes a copy of your identification, such as a driver’s license or passport, and proof of your residence, such as a utility bill or signed lease.
Here’s a quick tip: If you gather all the necessary documents before you apply for a personal loan, the process will be faster and easier.
3. Repayment terms can vary
Personal loans are paid back in installments over a set amount of time. You receive a lump sum of cash up front to spend any way you like, but you’re expected to repay it (with interest) in fixed monthly payments until the loan’s term is up.
How much you can borrow over what period varies by lender — here are some examples:
- One Main Financial offers personal loans from $1,500 to $25,000 with a term of one to 5 years.
- Marlette Funding offers personal loans from $2,000 to $50,000 with a term of 3 to 5 years.
- Sofi offers personal loans from $5,000 to $100,000 with a term of 3, 5, or 7 years.
4. Interest rates and fees can vary
The interest rate you pay on a personal loan depends on your financial situation and the lender you choose. Because they’re unsecured (not backed by collateral), the rate on a personal loan is typically higher than for a secured loan, such as home mortgage or auto loan.
However, in many cases, the rate may be lower than credit cards. That’s why it can be a smart move to use a personal loan to consolidate higher-rate credit card debt.
Some personal loans may also charge an origination fee, which is a one-time charge to process the loan. It can typically be deducted from your loan proceeds.
5. You can spend it any way you like.
As previously mentioned, you can use a personal loan for any reason you want. Borrowers often use them to:
- Consolidate higher-rate debts
- Pay medical bills
- Remodel a home
- Pay for education expenses
- Make repairs to a car
- Buy a boat, motorcycle, or recreational vehicle
- Pay for a special event, such as a wedding or vacation
If you’re considering a personal loan, shop around to compare the best interest rates and terms available. Evaluate several different lenders to make sure you get the best deal for your situation, and only borrow amounts that you know you can afford to pay back.