There are times in life where you might need some extra cash. You may be struggling to pay for a big life event like a wedding or have a financial problem like mountainous debt or medical bills. Here’s where a personal loan can come in handy.
A personal loan, also known as an unsecured loan, isn’t backed by collateral like a mortgage or car loan. But like other loans, it accrues interest and must be paid back monthly.
“Personal loans can be a useful tool for anyone who has a healthy credit score and the ability to affordably repay the amount they borrow,” says Bruce McClary, spokesperson for the National Foundation for Credit Counseling. “The key is to be sure that loan repayment will not get in the way of other financial obligations, most importantly savings.”
Keep reading to learn how a personal loan might be useful to your financial situation and find out about the credit profile you’ll need to qualify for one.
Common Personal Loan Uses
One of the most common reasons to take out a personal loan is to consolidate high-interest credit card debt. It’s most beneficial “if the terms are more affordable and the credit cards are not used until the consolidated balances are repaid,” McClary says.
Managing your debt this way allows you to take advantage of an installment loan with a fixed interest rate and monthly payment amount, rather than using the revolving, variable-rate credit typical of credit cards.
Other common personal loan uses include financing the purchase of big-ticket items like appliances and furniture, car repairs or travel expenses, McClary says.
The Application Process
The personal loan application process is similar to other loan processes in that you can usually apply online. Funding can happen more quickly than other loan types, however.
You should first decide which lending route you’d like to take: traditional or alternative. Banks and credit unions typically offer personal loan products. So do companies known as “marketplace lenders,” or platforms that offer peer-to-peer loans funded by an investor to an individual.
Each lender’s requirements vary, but most will evaluate your credit profile, income, other debt obligations and monthly cash flow.
While there is no single perfect consumer of a personal loan, lenders will be looking for a minimum acceptable credit score. What’s acceptable varies from lender to lender, but it usually falls within a range of 600 to 700+.
“People who qualify for the best financing terms typically have a FICO credit score in the high 700s or better, supported by a history of timely payments on their past and present financial obligations,” McClary says.
Lenders will also take into consideration the purpose of the loan and any other pertinent information about your financial situation, such as other debt. In most cases, the applicant will need a checking account into which the lender can deposit the funds directly, pending approval.
Applicants with a low credit score may face very high interest rates on loans from banks; they might be better off using a peer-to-peer lending network or drawing up a non- or low-interest loan contract with a friend or relative.
What if You’re Denied?
What do you do if your personal loan application is rejected? Start by finding out why.
“Lenders are required by law to disclose the determining factors,” McClary says. “It may be possible to quickly address some of the issues with additional documentation or an updated loan application, but rejection due to poor credit may be a sign that help is needed to get finances back on track.”
Take a look at your credit report and contact the appropriate credit reporting bureau to correct any errors. You should also work on consistently paying your bills on time, whittling down credit card balances and being sure you don’t skip any payments.
Ultimately, however, the best way to qualify for a personal loan is to get on the right path by responsibly paying back your debts.
Jordan Rosenfeld is a freelance writer, editor and author of seven books. In addition to MoneyGeek, her work has appeared in such places as The Atlantic, Daily Worth, GOOD Magazine, Medical Economics, The New York Times, Scientific American, The Washington Post and many more. Follow her on Twitter: @JordanRosenfeld.
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