From a family vacation to a home project, there are many instances where you may find yourself in need of some extra funds. A personal loan is one option to consider when facing an unexpected expense. Personal loans can seem intimidating. While they are a serious commitment, they can also be life-changing if handled appropriately. In this article, we will be telling you all that you need to know about applying for, using, and repaying a personal loan.
When Would I Need a Personal Loan?
The question you might ask is when you would need a personal loan in the first place. In reality, there is no right answer to this question. There is a myriad of possible scenarios, but, in any case, getting and repaying a personal loan is a serious commitment. You should know exactly your purpose before even applying for a personal loan.
Here are 3 very specific situations where getting a personal loan would be appropriate:
- Consolidating Debt- If you already have other loans like car payments, mortgages, or student loans, you can take out a personal loan that consolidates all of your debt into one loan. Consolidating your debt has a number of advantages, including not having to organize multiple loan payments and having one interest rate instead of many different ones.
- Improving Your Home- A lot of people find it necessary to do home improvement projects. Personal loans can really help with adding a new room, doing renovations, or even adding a pool to your backyard. It is recommended that you only take out a personal loan on a home improvement that will raise the value of your home -think of it as an investment to raise your home’s value.
- Business Expenses- If you are a small business owner and could not get approved for a small business loan (since the requirements are usually stricter), it may be possible to get the required capital through a personal loan. Personal loans do not often have stipulations on how they can be used, so as long as you meet the requirements of the lender you can use the loans for your business Keep in mind however that personal loans often aren’t for as large amounts as business loans.
How to Get a Personal Loan
Getting a personal loan may be intimidating at first, but with proper planning is perfectly doable. Here we’ll see what to do before applying for the loan, during the application process and even once you receive your funds to make sure you comply with what’s expected:
1. Prepare Accordingly for a Personal Loan
Take these actions before you approach a lender:
- Find out your credit score- Credit scores are one of the premier determinants of whether you will be approved for a personal loan (and how generous the interest rate will be). You need to find out what your credit score is and adjust your expectations accordingly. If your credit score is poor, it will be really hard to get a personal loan. Keep in mind that you can always raise your credit score if you are not happy with it!
- Check your math- You always want to make sure you will be able to repay a loan when you take it out (including interest!). When you are looking at your options for loans keep in mind the interest rates and other added fees (like the closing costs), and use a loan calculator to find out exactly how much your monthly payments are going to be. To get guidance on how much you should pay every month without stressing your finances, you can apply the same rule that is used for a mortgage: no more than 28% of your monthly income should be used for monthly payments on your personal loan.
- Research Lenders– You want to really do your research on the lender that will be right for you. Obviously you want the lender to be reputable, but you also want to look at things like payment schedules (how long they give you to pay off the loan) and interest rates. Some lenders may even give guidance or other benefits which would also be ideal. The main thing is to make sure that your lender is reputable and that the interest rates are calculated fairly (more on that later).
Not sure on what lender to approach? Check the Top 15 Personal Loans in the U.S.
2. Gather your Documents and Information
Once you decide on a lender they will have guidelines on how you apply for the loan. Typically, you will need the following information when applying for a personal loan, but keep in mind this list can be longer depending on the lender of your choice:
- Identity documents- Lenders will need to know you are who you say you are. Most personal loans require you submit one or more of the following documents:
- Driver’s License
- Social Security Number
- State ID
- Military ID
- Certificate of Citizenship
- Government-issued ID
- Proof of Address– Not only do you need to provide your address to lenders, but some may also require you to prove your address is correct by providing one of the following documents:
- Utility bills (water, electricity, cable, etc.)
- Voter ID
- Insurance card for your home or rental
- Income statements– Lenders will want to know you can repay the loan you are asking for, so they will want to know your financial situation. You will likely need to provide some of the following to show your current financial situation:
- Bank statements
- W2 forms
- Tax returns
- Verification of employment
If you have any other loans currently active, you will likely have to list them on your application.
3. Measures to Take Once Your Loan is Approved
If you have a good credit score and have provided proof of a stable income, you will hopefully be approved for the loan. If you are, here are a few things to keep in mind:
- Pay on time- You always want to make your payments on time. Failure to do so will negatively impact your credit score. If you don’t think you will be able to make a payment, contact your lender as soon as possible to work something out.
- Be Aware of Early Payment Penalties- A lot of people get a personal loan with a plan to pay it off as soon as possible to save money on interest in the long term. Keep in mind that some lenders have early payment penalties that will prevent you from doing this, so be sure to do your research on whether this will be in play on your loan.
- Take measures to reduce your interest rate- Another way that lenders will prevent losing money on early payments is using pre-computed interest. This essentially means that you will pay more interest in the early life of the payment schedule and less interest at the end. This will make no difference if you pay the loan along with the payment schedule, but if you pay off the loan early you will pay more than if the interest rate was fixed or simple. Here you can find some good tips on how to lower your interest rate.
Timeline for a Personal Loan
Below is a rough timeline of getting a personal loan, although it can change drastically depending on the lender, as some may be much faster to fund than others.
Camino Financial Personal Loans
While we are most well known for offering small business loans, at Camino Financial we do also offer personal loans. Here are just some of the benefits we can offer you:
- Instant Loan Quote– After filling out our application online, you will get an instant loan quote so that you can figure out if the monthly payments fit your current income.
- Best Available Rates and Terms– We strive to match our clients with the best possible interest rates and terms. After regular payments are made, you may be even eligible for a second with even better terms.
- Minimal Paperwork- Our application is fast, easy and takes place entirely online, so you don’t need to visit a branch or spend hours gathering documents.
- Excellent Customer Service- Our loan specialists are bilingual and will work personally with you to find the financing solution that best fits your goals.
If you need a personal loan and want a lender you can trust, apply with Camino Financial and find out instantly if you prequalify!