Whether you're planning your dream vacation, financing your wedding expenses or just looking to consolidate your debt, you might be in the market for a personal loan. Personal loans are a popular choice because they often feature interest rates significantly lower than those of credit cards and can provide quick cash to help you cover a pressing expense. Below are some questions that you may want to consider before you find a loan and take on this type of financial commitment.
What is my credit score?
If you're a borrower who has a phenomenal score, you are more likely to receive low interest rates on your loan. Borrowers that fall in the highest ranges have credit scores that reflect reliability and are therefore considered to be a lower risk. On the other hand, borrowers with lower credit scores can often be seen by lenders as a greater risk so interest rates tend to be higher. If you have a low score, you could always consider whether it might be worth it to hold off on applying for a loan. It may make a considerable amount of difference if you choose to raise your credit score before applying. If you're considering this, you can always utilize our Credit Score Simulator to see how specific actions may impact your score and to find out the best way to get your score up to a more desirable level.
Why do I need this loan?
Don't lie on your application! Personal loans are used for a variety of reasons and being honest about why you need the loan may lead to some new options that were not previously considered or presented to you.
Secured or unsecured?
When a loan is unsecured, this means it's not backed by any collateral from the borrower. Unsecured loans typically result in a higher interest rate because the lender is accepting a higher risk in case of default. A secured loan requires collateral from the borrower, which in turn results in a lower interest rate. Collateral is most commonly in the form of property but could be any valuable asset legally owned by the borrower. Of course, you should never go into the process expecting to default on a loan, but it's always smart to keep this collateral in mind when choosing the right offer for you.
What's my payment period?
How long do I have to repay the loan and how does this affect my overall payment? Lower monthly payments mean a longer payment period. A longer payment period means you'll be paying interest rates for an extended period of time, which could potentially translate to a larger interest rate overall. Think about how you should base the term of your loan. Are you willing to reduce your monthly repayments but to pay more interest in turn? The best advice would be to figure out what is the maximum amount of monthly repayments you feel comfortable with, so you can better avoid the possibility of interest rate payments piling up.
How many loans should I apply for?
It's best to not apply for multiple loans at the same time. Bear in mind lenders will be looking at your credit history and report. Lenders become skeptical if they see multiple loan applications, as to lenders this is a sign that a borrower may be desperate for money. However, if you have a certain amount of money that you just need to borrow and you're having a difficult time finding decent terms on that one lump sum, taking out more than one loan at once might be the answer to your conundrum.
Is this lender legitimate?
Research your lending options to get a better sense of which seem legitimate. I'd suggest checking out the Credit Karma Reviews section before committing to do business with any lender, just to make sure you understand who exactly you're going to be dealing with.
Regardless of your financial position, being prepared and doing your research are always the best first steps to getting the most out of your loan. So if you're itching to grab a loan for that vacation you've been obsessing over or that major purchase you've been eyeing, check out Credit Karma's Personal Loan Page to get personalized recommendations and find the best personal loan for you!
About the author: Tresha Lim joined Credit Karma's team in October 2013 as a Member Support Specialist. She holds a BA in Economics from UC San Diego. Prior to joining Credit Karma, she worked as a sports information intern and is now diving into the financial tech industry. When she's not answering questions about all things Credit Karma, you can catch her cheering on her favorite sports teams.
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