Getting a personal bank loan can be easy should you meet all of the lender's requirements and therefore are flexible with the interest rates you'll pay. With the range of uses for unsecured loans, it's no wonder that a lot of people choose this option. Whether starting a business, consolidating debt or tackling home improvement projects, about 25 million Americans take advantage of personal loans, based on Experian data.
While there are lots of factors that go in to the personal loan approval process, once you understand what lenders are searching for, it might be easier than you think. Continue reading to find out more about unsecured loans and how they work.
Is It Hard to obtain a Personal Loan?
Obtaining a personal loan could be a easy process, but to qualify, lenders usually require information about your credit report, income, employment status and current debt obligations. Your earnings must be high enough to pay for the loan repayment amount as well as your other monthly expenses. This is typically determined by your debt-to-income (DTI) ratio, that is calculated by dividing your monthly debt payments from your gross monthly income.
Other factors can impact how easy or hard it is to be eligible for a personal loans:
- Secured or short term loans: Most personal loans are unsecured, meaning they do not require collateral to be sure the loan. Because unsecured loans are riskier for lenders, they've stricter eligibility requirements than secured loans.
- Size of the loan: Smaller loans may be easier to qualify for because you'll likely have a smaller monthly payment which may be manageable together with your income and expenses.
- Income: Lenders want to know your earnings can support repayment on the loan. Minimum income requirements vary among lenders and loans, but you will need to show evidence of income when there is a requirement.
- Credit score: Most personal loans need a minimum credit score to qualify, but that minimum varies by lender and loan.
What Credit Score Should i Get a Personal Loan?
Different lenders have different minimum credit score requirements, so doing your research to find a lender whose criteria align with your financial profile is crucial. Most lenders focus heavily on your credit rating since it offers insights into your reliability like a borrower.
Typically the higher your credit score is, the greater low-interest personal bank loan opportunities you'll be able to explore. If you have what is considered a great or excellent credit score—usually 670 or above—you'll be more likely to obtain a competitive rate of interest and favorable terms in your loan.
If you have fair credit, you might still qualify for certain loans; however, rates of interest will likely be higher. There are ways to get a personal bank loan with a bad credit score, but they may be costly and put your financial security at risk.
Knowing your score will help you discover the type of personal bank loan you're most likely to qualify for.
- Unsecured personal loans: An unsecured loan isn't backed by any collateral, so borrowers with good or excellent credit are likely to be eligible for a these kinds of loans. Borrowers with fair credit may still qualify and can likely be charged a greater interest rate, increasing the cost of the loan.
- Online lender loans: Many online lenders work with individuals with lower credit ratings or limited credit history. Some don't place just as much focus on credit scores as traditional banks and instead focus more on income. Other modern lenders might put more emphasis on the area you work in, your educational background or future earning potential when making a choice.
- Secured personal loans: These loans require a good thing, such as property or automotive title, as collateral to increase the chances of you getting approved. Be mindful, however: If you get behind on payments or default on the loan, the lender has the right to seize your asset as payment for debt.
How to Get a Personal Loan
Getting a personal loan can feel intimidating, but it is pretty straightforward. When you are clear on your financial targets and just what you aspire to achieve from getting an unsecured loan, there are a few steps you'll need to take to prepare:
- Check your credit rating. One of the first steps you should take when it comes to a personal loan would be to check your credit score to determine what you're probably to qualify for. In case your score isn't where you would like it to be, take time to enhance your score before you apply.
- Compare multiple lenders. Once you know your credit score, you can start shopping for personal loans. When comparing offers, read the small print and recognize all the conditions and terms from the loan before receiving anything. Seriously consider the eye rate, the repayment schedule and then any fees associated with the loan. With Experian CreditMatch™, you are able to compare personalized loan offers according to your credit profile. This lets you compare multiple offers you likely will be eligible for a one place.
- Gather all the information and documents you'll need. When you apply for a personal bank loan, you will typically have to provide information much like your name, address, birth date, Social Security number and employment information. You may also need to submit financial documents like tax returns, bank statements or pay stubs.
- Fill the application. Once you have chosen a lender and decided just how much you want to borrow, it's time to apply for the borrowed funds.
- Make an agenda for repayment. Before taking out an unsecured loan, be sure you are able to afford the monthly payments. Unsecured loans normally have fixed interest rates, which means your monthly payment won't change within the life of the borrowed funds; however, it's worth double-checking to ensure the rate isn't variable. Be sure to element in the eye rate when calculating your monthly payment which means you don't default on your loan.
The Bottom Line
Taking out an unsecured loan can be a great way to finance large purchases or consolidate debt, however it does require preparation. You'll need to make sure you satisfy the lender's requirements, possess the necessary documentation and shop around for the greatest deal.
Even though there's no guarantee you'll get the personal amount borrowed you would like, one of the best methods to improve the odds of getting a solid offer is to remain on your credit and work on improving it having a resource like Experian Boost®o. Experian Boost provides you with credit for that charge already pay, like utilities, streaming services and rent. Additionally, it enables you to access your free Experian credit report and FICO® Score☉ and includes free credit monitoring.
With some research, you'll find personal loan terms that work for your unique situation and make the private loan process easier and more affordable.