Written by: Guest | Best Company Editorial Team
Last Updated: December 8th, 2020
Personal loans are generally a bit different than other types of loans. You might need a personal loan to meet your everyday expenses, plan a vacation, or even pay for a wedding.
When you are in the process of applying for a personal loan, it's important to know what to expect so you can increase your chances of approval. The following tips will help you learn how to qualify for a personal loan that meets your needs in the best way possible.
1. Decide on a Loan Type
Make sure that you understand what kind of loan you are applying for. There are a number of different types of personal loans. For example, you have the option to apply for a secure or unsecured personal loan.
Unsecured personal loans don't require collateral such as your home, car, or other personal property. Interest rates are typically higher for unsecured loans due to the additional risk to lenders.
If you default on an unsecured loan, the lender cannot foreclose your home loan or repossess your vehicle.
Secured personal loans, on the other hand, require collateral that secures your loan and can be seized in the event of default.
Other personal loan options include fixed-rate and variable rate personal loans, installment loans, lines of credit, and short term loans.
2. Improve Your Credit Score
Your credit score will make a significant difference in the interest rate you will be offered on your personal loan.
For example, with a subpar credit score, you will likely be paying more than 20 percent in interest. With an excellent credit score, your interest rate could be lower than 5 percent. Credit scores are usually categorized as follows:
- 760+ Excellent Credit
- 700 Good Credit
- 640 Fair Credit
Remember, your credit score can always be improved. If your credit score isn't what you'd like it to be, you can raise it by settling your bills on time and never missing a payment.
Believe it or not, there is actually a way you can be approved for a loan without any credit history at all.
3. Find the Right Lender
Take the time to consider your options and shop for the right personal loan for you and your needs. Available financing sources include banks, credit unions, and online lenders.
Loan variety and interest rates vary by institution, so it's a good idea to do your own research first before consulting with company representatives.
Furthermore, avoid applying for as many personal loans as possible. This might seem like a good idea at first, but it has the potential to hurt your credit score in the future.
4. Only Take Out What You Can Afford
Assess your current financial situation to figure out how much you can afford to borrow with a personal loan. Don’t take on more than you can handle.
Some lenders might try to push you into taking out more money than you need, which could leave you in a lot of debt. Make up your mind about the amount you need before meeting with a lender.
5. Read the Fine Print
When you do meet with a lender, be sure to ask for a full disclosure of all the loan terms and read the fine print of the contract so you understand all terms, monthly payments, fees, late payments penalties, and repayments options attached to the loan.
If you know exactly what you're signing up for, it will make the process much easier and less stressful.
You might find it difficult to choose a financial institution that will meet all of the personal loans qualifications you are searching for.
BestCompany.com makes this process easier by ranking and reviewing multiple personal loan institutions. Based on the input of industry experts, we’ve developed a ranking criteria that takes interest rates, contract length, time in business, and other important factors to consider when choosing the best personal loan company for you.
Most importantly, we’ve aggregated reviews about the financial institutions from real consumers so you can read what they think about the companies you are researching.