Personal loan
How to applyand get the best rate with bad credit

Personal loan – How to apply and get the best rates with bad credit

Personal loans help you to fulfill your short-term and long-term financial goals. You can use these loans for anything you want. This is probably why it is so popular in the US. Read along to know A to Z about personal loans.

What is a personal loan?

A personal loan is a line of credit. It is the money borrowed from a bank, financial institutions, credit union, personal loan companies, and lenders that you have to pay off at a particular interest and within a specific time. A personal loan APR usually varies between 6% and 36%. The loan term ranges from 2 years to 7 years depending on the agreement you have signed.

The best part of a personal loan is that you can use the money for any purpose. For instance, consolidating your multiple debts, paying for your wedding plans, renovating your home, covering emergency expenses, etc.

Types of personal loans

Personal loans can be secured or unsecured.

1. Unsecured personal loan: This is the most popular type of personal loan. You won’t have to pledge any collateral against the loan. You will get money at a fixed rate. You have to pay off the loan in installments over a fixed repayment period.

2. Secured personal loan: A secured personal loan is backed by collateral. Hence, it is cheap. However, if you fail to complete the repayment plan, then you may use the collateral.

3. Specialized loans: Sometimes, you can obtain a loan from service-oriented companies for buying their products or services. The loan doesn’t offer the best rate, but it can help you buy the product.

4. Credit-builder loan: This type of loan helps you to build a positive payment history and boost credit. You won’t get money in hand in this type of loan. The lender will deposit money into a savings account, which is under his control. You have to make payments on the loan every month. The lender will inform the credit reporting agencies about your payments, and that will help to build a credit history. At the end of the loan, the lender will return your entire payment amount after deducting the loan fees.

How to apply for a personal loan

Take the below-mentioned steps if you want to apply for a personal loan.

1. Analyze your credit report: Pull your credit report and analyze all the sections. Check if there are too many errors in the credit report. Dispute them with credit bureaus and get them removed from your credit report as soon as possible.

2. Shop around for the right loan: Before you submit your personal loan application, check how much interest you have to pay for it. Most banks and financial institutions have online applications where you can check out your loan eligibility and also the interest rate you are eligible for.

3. Calculate your cost and apply: Next, it’s time to calculate the actual cost of the loan. Before signing any personal loan agreement, try to understand the terms and conditions of your loan. If the APR of the loan is higher than the personal loan interest rate, then you will pay more in a financial year than what is advertised. Moreover, you have to pay an origination fee as well. That fee will be deducted from your loan straight away. So, make sure you read the fine print of the agreement minutely. Use a personal loan calculator to know how much you have to pay in total for the loan. Can you afford it? Is it within your budget?

Finally, check if you can get a personal loan online. Also, find out what kind of services you can get from the lender? Is there any online chat system? Can you get loan or payment related services online? Can you automate your payments to avoid defaulting on your loans even by mistake? If the answers to these questions are a ‘yes’, then you can submit your personal loan application.

How can you qualify for the best personal loan rates?

If you want to qualify for the best personal loan interest rates, then here are some tips you can follow.

  1. Maintain a good credit score as it helps lenders to understand if you are a responsible borrower.
  2. Keep an ideal DTI ratio, which is 36%. It will help you get a low rate personal loan.
  3. Consider a secured personal loan as it carries a low-interest rate.
  4. Opt for automatic debit payments as lenders may give you a small discount on personal loan rates due to this.
  5. If your credit score is between 580 and 680, then lenders may charge high-interest rates on your loan. You can ask someone with good credit to cosign on your loan. It will help to lower your score.
  6. Check out the loan offers from multiple lenders. That will help you to understand who is offering the personal loan best rate.

Should you take out a personal loan to consolidate debt?

Is taking out a personal loan to pay down credit card debt a good idea? It depends on the loan interest rate and terms. Some banks charge as low as 5.74% interest rate on personal loans, which is lower than credit cards. So, you can potentially save a lot of money by consolidating debts with a personal loan. Get more information from here.

How does a personal loan affect credit score?

When you apply for a personal loan, lenders will check your credit report. They will check if you have too many debts or late payments in your credit report. This will trigger a hard inquiry on your credit report and lower your credit score by around 5 points. However, the detrimental effect on your credit score will go away over time. Moreover, as you make on-time monthly payments, your credit score will go up.

Again, if you make late payments on the loan, then lenders will report that to credit bureaus. Late payments can lead to a 90 to 110 points drop in your credit score. So, be careful.

A tip: If you want to shop around for a personal loan, then try to do it within 45 days as multiple queries are treated as a single query during that period.

Can you get a personal loan with a bad credit score?

Can you get a personal loan with a 550 credit score or less? Well, personal loans for bad credit are available but at a high-interest rate. Lenders will consider you as a risky borrower and charge a high-interest rate on your loan.

If you want to get a personal loan with bad credit, call your friends and relatives. Ask them if they can give you a personal loan with no credit check. If they agree, then you can obtain a loan without any interest rate. But make sure you repay the loan on time so that you don’t break their trust.

Should you take a shorter repayment term with a personal loan?

It is best to take a shorter repayment term with a personal loan. Try to understand the psychology of the lenders. They are doing business with you. They would obviously want to earn interests every month and also get back the principal amount fast. That is probably why lenders offer the best interest rates on personal loans with short repayment terms.

Now, there are both the upsides and downsides of taking out a personal loan with a 3-5 year repayment plan. Let’s discuss them briefly.

Upsides

  1. Fast cash
  2. No long-term commitment
  3. Can get out of debt quickly
  4. Quick approval
  5. Flexible repayment plan
  6. Mostly unsecured loans

Downsides

  1. Doesn’t provide long-term solutions. It will fulfill your short-term financial needs as the loan amount is not huge.
  2. May not help to build credit as all lenders don’t report to credit bureaus.
  3. May have to pay a penalty if you don’t make payments on time.

Although personal loans carry low-interest rates, monthly payments can be high due to the short repayment period. So, check if you can afford to pay the high monthly payments. If you can’t, then it is better to opt for the long term personal loans. Since the monthly payments are low in case of long-term personal loans, you can get more scope to play with your budget. You can have some free cash to fulfill your other financial goals like building your retirement savings fund.

Moreover, if you receive a financial windfall, you can use it to prepay the loan. However, in that case, read the loan agreement once. Is there any prepayment penalty? Do you have to pay the prepayment penalty for paying off the loan early?

There are both advantages and disadvantages of paying off a personal loan early. When you repay the consumer loan early, you get relief from your financial obligations. You do not have to make further payments. You can save thousands of dollars on interests. You do not have to remember the payment dates. You can use the entire money to strengthen your financial life. However, there is only a disadvantage, and that is the prepayment penalty.

Should you choose a personal loan with a short repayment term or long repayment term?

The ultimate decision is yours. Analyze your affordability and your financial requirements. Do you need a small amount of money or a huge chunk of money? Can you afford to pay off the loan within the short-term? What is the condition of your budget? What are your financial goals? Can you afford the monthly payments? Your repayment decision will depend on the answers to these questions.

Remember, once you choose the repayment term, you cannot change it. So, take the time before making the final decision. Think carefully how much money you need and how much you can pay before shopping around for a loan. Usually, lenders base your loan term on your budget, loan amount, and loan term.

What is the best way to pay down a personal loan?

The best way to pay down a personal loan is to make small payments every two weeks. That will help to shorten the life of your personal loan. Plus, it may help to lower the overall interest paid on the loan. Thus you can save a big chunk of your money.

What are the biggest mistakes you should avoid when taking out a personal loan?

Some mistakes can cost you a lot of money on your personal loans. Here are the biggest mistakes you must avoid when taking out personal loans.

  • Not checking your credit score
  • Not reading the personal loan agreement
  • Not doing your homework
  • Taking out a high-interest loan
  • Not evaluating your borrowing capability
  • Not analyzing your household budget