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Personal Loans
Personal loans are those loans that doesn’t require any type of collateral. Instead of relying on a borrower’s assets as security, lenders approve personal loans based on a borrower’s creditworthiness.
An Personal loan stands in contrast to a secured loan, in which a borrower pledges some type of asset as collateral for the loan. The pledged assets increase the lender’s “security” for providing the loan. Examples of secured loans include mortgages and car loans
Because personal loans require higher credit scores than secured loans, in some instances lenders will allow loan applicants with insufficient credit to provide a co-signer. A co-signer takes on the legal obligation to fulfil a debt if the borrower defaults. This occurs when a borrower fails to repay the interest and principal payments of a loan or debt.
If a borrower defaults on a secured loan, the lender can repossess the collateral to recoup the losses. In contrast, if a borrower defaults on an personal loan, the lender cannot claim any property. But the lender can take other actions, such as commissioning a collection agency to collect the debt or taking the borrower to court. If the court rules in the lender’s favour, the borrower’s wages may be garnished.
Also, a lien can be placed on the borrower’s home (if they own one), or the borrower may be otherwise ordered to pay the debt. Defaults can have consequences for borrowers, such as lower credit scores.
The application process for an personal loan is more straightforward than for secured loans, and you can often complete it online. Still there are a few important steps to take to ensure you’re getting the best deal from your lender. Follow these five steps when applying for an personal loan.
Borrowers should have a credit score between at least 610 and 640 to qualify for a personal loan, but the most competitive rates are reserved for those with a FICO score of at least 720. Use a free online service to check your credit score before you apply. Not only will this help you anticipate your likelihood of approval, checking your score gives you the opportunity to improve it before you even submit your loan application.
After reviewing your credit score, take some time to evaluate your current income and expenses. While you won’t have any collateral at risk with an personal loan, late payments will still impact your credit score, so it’s important that any new debt payments fit within your budget.
What’s more, most lenders consider a borrower’s debt-to-income ratio (DTI) when reviewing their loan application. This metric represents the percentage of a borrower’s income she must commit to outstanding debt payments each month. Ideally, you should have a DTI of 36% or less to qualify for a new personal loan, but this requirement varies by lender.
Once your finances are in order, start shopping for lenders that offer the most competitive APRs and flexible repayment terms. Luckily, many lenders offer prospective borrowers a quick and easy online prequalification process. This lets future borrowers see what kind of APRs and loan terms they’re likely to qualify for without submitting their application.
If you’ve found a promising lender and are ready to take the plunge, research its application process. Though not necessary, collecting any necessary documentation like tax returns or W-2s before you apply can speed up the application, approval and funding process.
Finally, complete a loan application and submit it online or in-person. Many lenders now offer a completely online application process as well as quick approval times and same- or next-day funding. That said, the exact application process varies by lender, and you may need to discuss your loan with someone over the phone or in-person.