Are you in need of some extra cash? Personal loans can be a helpful tool if you need a lump sum of money right now that may otherwise take a while to save up. Perhaps you’re looking for a loan to start a business, add a room onto your house, fund a wedding, or take a bite out of your compounding credit card debt – or maybe you have unexpected auto repairs or medical bills. Whatever the case may be, this article will help you to understand the in’s and out’s of getting the right personal loan for you.
Before you get started
Before you decide to take out a loan, it’s important not to borrow more money than you can afford to pay back. Not sure what you can afford? Use this handy loan calculator. According to the Financial Association Education Foundation, you’ll need to be able to afford to make your loan payments regularly, without fail. (Source)
And you’ll need to commit to paying a certain amount over a period of time (weeks, months or years) until the loan is paid off in full . Also keep in mind, there will most likely be fees if you pay the loan off sooner than scheduled (this is so the lender can compensate for lost interest they won’t receive if the loan is paid off quicker than planned).
Types of loans
Secured loans are a good way to get a larger amount of money, and they typically offer a lower interest rate and longer terms. But you must be able to offer a valuable asset, such as your home or your car, as collateral for the loan. This means the finance company or bank will hold your deed or title until the loan has been paid in full. Other items such as stocks, bonds, or personal property such as jewelry can be used as collateral as well.
The risk with a secure loan is if you don’t repay the loan in full and on time (if you default on the loan), the collateral you offered becomes the property of the lender, which they can sell to recoup their money. This is why your valuable collateral makes it a more “secure” bet that you won’t default on the loan.
Unsecured loans offer shorter terms and you don’t have to offer up any collateral. Since lenders are taking more of a risk by loaning you money, they’re going to charge you a higher interest rate. But this type of loan only requires your signature, and, depending on the lender, a credit check.
Common types of unsecured loans include credit cards, student loans and payday loans. Payday loans usually offer a minimum of $100, which helps when you need cash fast before payday, but there’s typically an extremely high interest rate on these loans, and incredibly high penalties and fees if you’re late or fail to pay it back.
According to the American Financial Services Association Education Foundation (AFSAEF), when you apply for a loan that is unsecured, you’ll be judged based on the five C’s of credit: character, capacity, capital, collateral, and conditions.
Character, capacity, capital, and collateral refer to your financial responsibility and ability to repay the debt. Conditions take into consideration your personal situation as well as general economic factors.
Types of Lenders
Your first hunch may be to go to your bank or credit lender to see about getting a loan, and that can be a good place to start. However, keep in mind there are many online lenders who can also offer you a good interest rate.
Be sure to shop around, and don’t just go with the first lender who gives you an offer, even if you’re in a rush to get the cash. It’s a competitive market, so be sure to compare the interest rates and requirements from different creditors.
AFSAEF also advises to be careful not to get sucked into high-pressure tactics from lenders. A reputable lender won’t pressure you to sign on the dotted line.
When you apply
When applying for a loan, lenders will ask you to complete a credit application that generally includes the following: your name; social security number; date of birth; current and previous addresses and length of time at each; your current and previous employers and length of employment; your occupation; your sources of income; total gross monthly income; and financial information on existing credit accounts. (Many states do not require you to claim alimony or child support as income, however check with the laws in your state). You’ll want to be sure to collect all this info before applying for a loan.
They’ll also pull your credit report which will show a lender how safe (or risky) it’s to loan you money, and how likely it is that you’ll repay the loan on time and in full. Your credit history will show a variety of items including: open and closed accounts, your bill-paying history, late payments, collection actions, and any outstanding debt you may have. [Keep in mind that when a lender pulls your credit report it’s considered a ‘hard pull’ and may lower your credit score a few points.
However, some lenders offer a soft credit pull to generate loan offers and SuperMoney allows you to identify those in its personal loan comparison listing.
If you need a co-signer
You may need a co-signer if you don’t have any credit or your credit is poor, your income is too low to qualify, or you have too many bills or debts. Your co-signer will assume equal responsibility for the loan, and your loan will be reflected on the co-signer’s credit history too. Of course, you will have to choose a solid co-signer who has great credit, sufficient income and doesn’t have too many financial obligations.
Before you sign
Before you sign on the dotted line, AFSAEF offers these tips:
- Take the time to know and understand all of the terms, conditions and costs of the loan. Ask questions about anything you don’t understand.
- Don’t sign a contract that has any blanks because a signed contract with blanks can be completed after the fact and it will still be legally binding.
- Keep your contract in a safe place so if questions come up later, you’ll have your agreement in writing.
Keep in mind that the Truth in Lending Act requires creditors to give you written disclosures of important terms of the credit agreement, such as APR, finance charges, monthly payment amounts, payment due dates, total amount being financed, and length of the credit agreement and the consequences of not making a monthly payment.
The anatomy of a loan
Your loan will have certain elements that you’ll want to be sure you understand:
- The total dollar amount you are given is the amount financed
- Annual Percentage Rate( or “APR)” is the rate of credit expressed as a yearly rate
- Finance charge is the charge you pay to have the loan.
- Fixed rate financing is when the interest rate and the payment remains the same over the life of the loan (equal monthly payments of principal and interest are made until the debt is paid in full)
- The length of payment is the total number of months you have to pay the credit obligation
- A late payment fee is charged when payment is made after its due date
- Monthly payment amount is the amount due each month to repay the loan
Know your rights
When applying for a loan, it’s important to know your rights. According to the AFSAEF, here are four laws you should be aware of:
- The Federal Trade Commission’s Credit Practices Rule:
- Requires creditors to provide a written notice to potential co-signers about their liability if the other person fails to pay
- Prohibits late charges in some situations
- Prohibits creditors from using certain contract provisions that the government found to be unfair to consumers.
- The Equal Credit Opportunity Act prohibits the denial of credit because of your sex, race, marital status, religion, national origin, age, or receiving public assistance.
- The Fair Credit Reporting Act gives you the right to learn what information is being distributed about you by credit bureaus.
- The Fair Debt Collection Practices Act prohibits third-party debt collectors from using unfair or deceptive practices to collect overdue bills that your creditor has forwarded for collection.
Ready to get started?
If you’re ready to start shopping for a personal loan, a great place to start is SuperMoney’s reviews of Best Personal Loan Companies. Check it out now!