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If you need money to meet basic expenses, fund your wedding or take a vacation, you’ve probably considered getting a personal loan. A personal loan is a loan where you don’t put up any collateral, such as your house or your car, that the lender can repossess if you default. Because the lender has no guarantee for the loan other than your own reputation, you’ll have a higher interest rate than you would with a collateralized loan.
When used correctly, personal loans can save a significant amount compared to payday loans, overdrafts and pawnshops. But they also have their pitfalls. Unfortunately, there are many unscrupulous lenders who may try to bleed you with fees and high interest rates.
These six tips will improve your chances of getting approved and help you qualify for better terms.
Determine What Type of Personal Loan You Need
When people talk about personal loans, they are usually referring to unsecured, closed-end installment loans. Technically though, auto loans, mortgages, payday loans and credit cards are also personal, as opposed to business loans. Make sure you understand what type of loan you are applying for.
If a lender realizes that your credit is not high enough to get prime interest rates or perhaps qualify for a loan altogether, they may offer a secured loan option instead. If you are willing to put your vehicle or home up as collateral, you may be able to qualify for better rates with a title loan, mortgage or home equity loan. However, these are secured personal loans, which means you could lose your property, if for some reason you are unable to make the payments.
Check Your Credit Score
Avoid applying for loans you know you don’t qualify for, just to “try your luck.” Every time you apply for credit, it gets reported on your credit report and your credit score takes a small hit. If an application is rejected, the damage is even greater because you may have to report that rejected application in future attempts to obtain credit, which could set off all kinds of alarm bells the next time a loan officer looks at your credit application.
Request your credit report for free at least once a year and make sure there are no false or inaccurate statements on it. You should also request your free credit score from a reputable online credit reporting company. Once you have armed yourself with this information, ask your lender what guidelines they follow when assessing loan applications before you apply.
Improve Your Credit Score
Your credit score is not set in stone. Take steps to improve your credit score before you apply for a personal loan. This is particularly important if your credit score is close to the next classification bracket.
Excellent Credit 760+
Good Credit 700+
Fair Credit 640+
If your credit score is 770, your score is already excellent and increasing it to 780 will not help much. On the other hand, if your credit score is at 680, pushing it over the 700 mark could increase your chances of getting approved and save you a lot of money when you qualify for lower interest rates.
You can improve your credit score by always making sure you pay your bills on time and reducing your debt-to available credit ratio. If you have a late payment or some other negative item on your credit history, waiting for six months and making sure you’re not late on any other payments will help. If you have an ongoing relationship with the lender that reported the negative item, try writing them a nice letter requesting that they remove the negative item.
Find The Right Lender For Your Credit Score
If your credit score is below 700, expect to be turned down by most major banks. Those that don’t turn you away will surely demand higher interest rates. If your credit score is below 640, your chances of getting approved for a personal loan will be slim to none with conventional lenders.
Even if your credit score limits your options to the types of lenders that specialize in high-risk borrowers, you should still be selective about who you do business with. Avoid short term payday lenders at all cost. The loans they offer have ridiculously high fees and are designed to push you into a cycle of repeatedly renewing loans, which will usually push your APR to over 400%, and sometimes even higher.
Look for an online lender that specializes in low-credit borrowers. Many lenders are not legally required to report payments to the credit agencies, but if you find one that will, this is an excellent way to improve your credit score.
Only Consider Reputable Online Lenders
Shopping for a personal loan online is smart. You save time and money otherwise wasted running around between brick-and-mortar lending institutions. Additionally, since online lenders have lower operating costs, you may also benefit from the lower rates they are able to offer.
However, there are plenty of shady online lenders who guarantee loan approval but are nothing more than advance fee loan scams. Make sure your online lender is a state-licensed financial institution that has no past or pending lawsuits, and check with the Better Business Bureau to view their profile and see how they are rated.
Pay Attention to Your Debt-to-Income Ratio
Apply for as little money as possible, and be sure not to under or over-report your income. Loan officers may overlook a borderline credit score or a couple of credit indiscretions, if your income is high when compared to the amount you wish to borrow. Unless otherwise specified, provide your pre-tax earnings and make sure you include all sources of income. When the lender’s guidelines allow it, include your spouse’s income as well.
Having said that, it is important not to fall into the habit of inflating your income or lying on a loan application. If a lender does not require documents to prove your income level, it can be tempting to get a little too creative. Make sure you can justify and provide evidence of any claim you make about your income. If you lie about your income you could face criminal charges, particularly if you are unable to make payments on the loan that you obtained while being less than honest..