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What To Know Before Getting a Personal Loan
There are several types of loans in the market, but personal loans are the most popular. Unlike loans with specific conditions, personal loans can help you make big purchases or even consolidate your multiple debts. When you're in a difficult financial situation and need quick money, a personal loan might be the perfect solution. However, before you take out a personal loan, there are some things you should consider:
What Is A Personal Loan?
When you apply for a personal loan, you ask a particular lender to let you borrow a specific amount of money, which you repay in a set period. You can obtain a personal loan from banks, credit unions, or online lenders. Loan amounts and interest rates tend to vary depending on the lender you choose.
While auto loans are used to buy a car and mortgages are used to pay off a house, personal loans can be used for many different reasons. You can take out a personal loan to fund a medical emergency, for your education, make a big purchase for your house, or even consolidate multiple debts.
Repaying your credit card debt is different from repaying your personal loan. Personal loans tend to come with a fixed monthly payment over a set period until you have completely paid off your debt.
Personal Loan Requirements You Should Know
Personal loan requirements tend to vary by lender. Websites like CreditNinja online lenders require you to provide essential documentation. However, other lenders might ask for many types of documents.
The following are personal loan requirements you should keep in mind:
Credit Score And History
Your credit score is one of the tools lenders use to assess your ability to repay the loan in the future. Credit scores tend to range from 300 to 850. Furthermore, the scores are based on several factors, such as your payment history, number of existing debts, and length of your credit history.
Most lenders require applicants to have a score of 600 at minimum to qualify for a personal loan. However, other lenders also accept applicants with bad credit or no credit history. There is nothing to worry about if you are one of the latter; you need to find the right lender that can help you out despite your current situation.
If you know how to manage a personal loan well, it will affect your credit score positively. However, late or missed payments will hurt it. That is why, before you make any debt-related decisions, it's vital to check your credit score to know and understand your current credit standing.
Lenders usually impose income requirements on loan applicants. It's to ensure that the borrower has the means to repay the loan. These income requirements are not the same with all lenders. Proof of income may include monthly bank statements, latest tax returns, pay stubs, etc.
Debt-To-Income Ratio (DTI)
Your debt-to-income ratio is composed of your existing monthly debts over your current monthly income. Lenders tend to check your DTI to predict the chances of your ability to make payments for your new and existing debts.
A DTI that is less than 36% is ideal for most lenders. However, there is a big chance that a lender will automatically approve your loan application if you have a DTI of up to 50%.
Most personal loans are unsecured. However, if you are applying for a secured personal loan, the lender will require you to pledge collateral.
A secured personal loan also accepts collateral in the form of investment accounts, cash accounts, real estate, and even collectibles like precious metals or valuable coins. If you default on your secured personal loan, the lender can repossess your collateral to recoup the loan balance.
The origination fee is not part of the qualification process in getting a personal loan. However, many lenders require borrowers to pay origination fees. It's to cover the expenses in processing the application and running some credit checks.
Origination fees tend to range between 1 and 8 percent of your total loan amount. It usually depends on several factors, such as the loan amount and your credit score.
To Sum It Up
A personal loan is a type of debt that can help you get a certain amount of money you must pay in a set period. This type of loan can be used for many different reasons. However, to get a personal loan, you must consider the requirements of applying for one to make sure you have a great chance of getting approved.
David Owens is a seasoned content writer specializing in finance - debt management, entrepreneurship, and business finance.
When not writing, he travels with his cat, Mellie.