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A personal loan can be used for various purposes which include financing home improvement projects, car repairs, purchasing new appliances or furniture, and paying off existing debts. If you meet the requirements, you can secure the amount you applied for within a few days after submitting your application, making it one of the fastest ways to get the funds you need.
But before you start making plans about what you can do with the additional funds you will get, there are several important things you have to know about applying for a personal loan. These are:
1. You won’t be asked to submit a lot of requirements
Personal loans are usually classified as unsecured debt since they are backed by the borrower’s good word and credit history instead of physical collateral such as a house or car.
Because of this, a personal loan is more feasible for individuals who need cash but do not have sufficient collateral to put up. More importantly, it significantly reduces the loan processing time because less documentation will be required and has to be verified.
2. The APR will depend on your credit score
The annual percentage rate or APR is the annual rate you will be charged for borrowing money. It comes in the form of a percentage that represents the actual yearly cost of funds over the term of a loan.
Your loan provider will calculate this percentage based on your credit score and history. If you currently do not have a good credit score, you can expect the interest rates to be really high.
In case you have an impressive credit score and history, you can expect to be offered a lower interest rate.
3. Payment terms are fixed
Nearly all personal loan products come with a fixed interest rate and a definite repayment term which you have agreed to. These fees will remain the same even if the interest rates fluctuate with the market.
As such, you won’t have to worry about paying a higher amount two or three years after your loan was approved. With a fixed rate, you will be able to work your monthly payments easily into your budget.
4. There are usually other fees involved
Aside from the APR, your personal loan provider may also add an interest rate to the amount you will have to repay. This interest rate is the actual cost to borrow the loan.
In addition, there are other fees that you may have to pay for. These can include:
- Application fee
- Origination fees
- Check processing fee
- Prepayment penalties (paying the full loan amount early)
If you are already shopping for a loan, confirm all these fees first so that you know everything that you will be paying for beforehand.
5. Your personal loan will be part of your credit history
All personal loans will be reported by your lender to the credit bureaus and, as such, will appear on your credit history.
If you always pay the monthly fee on or before the deadline, it will boost your credit score since this will indicate you have a good repayment history. But if you always pay late or default on your loan, this will negatively affect your credit score.
It is also worth adding here that every loan application you make with different lenders will appear on your credit report. If you don’t want your credit score to get any lower, avoid applying for all loan products that you find interesting.
6. You should have a payment plan ready before applying for a loan
Lastly, before deciding on the loan amount and which bank or lending institution to approach, make sure you have a payback plan first.
To come up with a reasonable amount, review your monthly income and budget. There are various online personal loan calculators you can use where all you need to do is type in the amount you want to borrow, interests, and your monthly salary. The tool will then calculate the monthly payment for you.
If the calculated repayment fee will work with your monthly budget, you can apply for the loan amount you want or need.
You will also do well to have an emergency fund in place before you take out a loan. You can draw money from this fund in case you can’t make a monthly payment because of an unexpected illness or loss of income.
Before you apply for a personal loan, take the time to shop around and compare multiple quotes to find the best product.
Use various online resources as well such as a credit check tool and loan eligibility calculator to ensure you won’t encounter any problems during and after the loan application process.
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