The thought of applying for a personal loan may be intimidating as many feel it is a time-consuming process and more complicated than applying for a credit card. In this three-step guide, we have covered most of what people struggle with while applying for a personal loan.
Eligibility and comparison
Pre-qualifying is a crucial step as it gives you a fair understanding of the rates, monthly payments, and terms. Most online lenders and some banks offer a pre-qualification check that can be done online on your computer or smartphone in about five minutes. It is advised to check your credit report and fix any errors before you pre-qualify, as credit scores are a significant factor in determining your eligibility for a personal loan. You need not worry if you get a low score as many lenders cater specifically to borrowers with bad credit (if your FICO score is lower than 629).
In order to pre-qualify, you will need to provide the following information. While only some are mandatory, it is advisable to keep all of them ready.
- Personal information along with monthly rent or nortgage.
- Purpose for the loan.
- Requested loan amount. Lenders usually offer personal loans from $1,000 to $50,000.
- Your desired monthly payment option and loan repayment term: You can enter your option after assessing your finances. The terms typically range from two to five years.
- Some lenders request your Social Security number during pre-qualification.
It would take about a few seconds or minutes for verification after you submit your information. Then, if you qualify for a loan offer, you will be shown possible rates and terms. You may also receive an email from the lender with details like customer service and the next set of steps to help you complete the application.
Choosing your loan and gathering documents
You may receive offers from multiple lenders and might struggle to make a decision. Comparing offers with your requirements, options, and financial condition will help you choose the one suitable for your needs.
The most critical factor to look out for is the annual percentage rate (APR). It is the total cost of borrowing. It includes your interest rate and the additional fees. You should look for a lower APR because lower APR equals lower the cost of the loan. However, APR will vary based on certain factors, like your credit score and income.
You must make sure you can comfortably afford the monthly payments; hence, it is essential to assess your monthly expenditure before choosing the offer. Most lenders have additional features like flexible payment, assistance to raise your credit score, or direct payment to creditors if you’re consolidating debt.
Once you’ve finalized an offer with the rate, terms, and features that best fit your budget and borrowing needs, it’s time to complete the loan application. You should keep the following ready before applying:
- Photo ID.
- Proof of address.
- Proof of employment status.
- Financial information like total savings, retirement assets, and outstanding debt.
- Social Security number.
Submitting the application
It is mandatory to read the terms and conditions before signing a loan application. Most of us may ignore this step, but make sure you’ve read it and understand them before clicking the submit button. The agreement certifies that all the information you’ve submitted is accurate; thus, ensure you provide the correct details. Soon, the lender would take steps to verify your information by either contacting your employer or reviewing your credit reports. If you have successfully applied without any pending documents or information, you could be approved for the loan on the same day. However, if you need to provide additional documents, the lender will reach out to you and get the required materials.
After approval, you sign the loan agreement. The time taken for you to receive the money will depend on the type of lender you have chosen. Many online lenders provide same-day funding. However, most traditional lenders like banks will transfer the funds to you within five business days.
After receiving the funds, in most cases, you should be prepared to pay the first loan payment within 30 days. If you’ve opted for automatic bank payments, you should plan your expenses accordingly, as the funds will be automatically debited from the bank account you provided. Submitting the loan application can wipe off up to five points from your FICO score and could remain on your credit report for two years.