Personal loans may assist you in financing your dream project or cover unexpected expenses.
This article is the first part of a series of two. You can read the second part here.
You may have decided to begin planning the kitchen renovation you have been planning for a long time. (Goodbye, the old backsplash!) You may want to settle the credit card. Perhaps a sudden injury has resulted in a costly medical bill. Consider a personal loan.
Millions of Americans look for personal loans to get fast cash and flexible financing every year. However, what do you know about personal loans? We will explain all the details, including how to get a loan and how to use these loans.
Key Takeaways
- Personal loans provide flexible financing for almost anything, including debt relief for medical expenses.
- The requirements for qualifying vary from lender to lender; however, your score on credit, your debt-to-income ratio (DTI), and your credit history are among the most important factors that lenders look at.
- Prequalifying for a loan allows you to compare loans that could affect your credit score.
What is a Personal Loan?
Personal loans are money you get from a financial institution, credit union, or any other institution that you pay in installments, typically within one to five years. They are generally unsecured (meaning they do not require collateral), and your creditworthiness can significantly determine your chances of getting approval.
The money can be used to pay for everything, including celebrations of important landmarks (like the wedding ceremony or a dream trip of a lifetime), to pay for unexpected expenses. With lower rates than credit card loans, many individuals also use personal loans to consolidate high-interest debt to reduce their interest.
A personal loan may give you the security of knowing regarding payment because these loans typically have fixed repayments and interest. This means the same amount is due every month, making it much easier to budget your repayment.
When you are comparing loan options for personal use, Do not only look at rates. Make sure you look for fees, specifically penalty charges for prepayment, imposed for paying the loan off in advance.
You may be thinking, what is the deal? It sounds too appealing, to be honest. In most cases, personal loans can provide the kind of flexible financing and help you require. However, prior to going to your bank branch to get an individual loan, there are some points you need to know.
How Do I Qualify for a Personal Loan?
You have decided that an individual loan could be suitable for you. What next? To secure the most favorable conditions, you must be able to meet the requirements of a lender. The requirements vary between lenders; however, here are some of the most commonly used guidelines.
Your Credit Score Counts
The credit score of your client is among the most crucial elements. For a quick refresher, the credit score ranges between 300-850. The lower score, the higher the perceived risk from a lender’s viewpoint. A score below 600 marks could hinder the ability to obtain a loan. The majority of lenders view a score of 800 as excellent.
You can verify your credit score with the various credit bureaus available at AnnualCreditReport.com. The link opens in a new tab/window and redirects you to a site owned by a third party. We hope you enjoy the information. However, Jenius Bank is not responsible for the information, privacy policies, or other available terms and conditions. I.
On-Time Payments Make a Good Impression
Did you know a single late payment can be left in your credit file for seven years? Lenders examine their payment records to verify your full and punctual payment history.
Pay history also goes hand-in-hand with our final point since it accounts for 35 percent of your credit score FICO2 which is an additional reason that making timely payments is essential to increase your chances of being accepted.
Proof of Reliable Income
There is no reason to be surprised; lenders search for applicants with enough income to repay loans. The income requirements differ, but lenders want to ensure you have enough money to pay the loan repayments and any current debts.
When you are ready to provide information regarding your earnings, you will need to collect recent tax returns, bank statements, pay stubs, or letters signed by employers stating your earnings if you do not have pay statements. If you are self-employed or freelance, lenders might allow alternative ways of proving the amount of income you earn.
Your Debt-to-income Ratio
Debt-to-income (DTI) percentage is the ratio of the monthly payments to debt and your income per month before taxes. It is the amount of debt you have relative to your earnings.
What is the significance of this? When you submit your loan application, the lenders will look at their DTI percentage to decide if you can manage your payments. Also less your DTI is, the better you appear to be a suitable applicant.
To calculate your DTI ratio, add all your monthly debt repayments. This includes car payments, credit card bills, alimony, child support, and more. When you include credit card charges when calculating the DTI calculation, most lenders employ the minimum amount for the payment. The DTI does not include costs like your utility bill or gym membership.
Divide the total amount of debt by your monthly gross income (the amount you earn before tax and other deducts) and multiply by 100.
For example, if you are liable for $2,000 per month in debt and your monthly pre-tax income is $12,000, you must divide the 2,000 amount by 12,000. Multiply 100 by 12, then you will find the DTI ratio. In this instance, the ratio would be 16.6 percent.
