You might find yourself in a situation where a personal loan seems like the only option for getting the cash you need. Whether it’s for home repairs, debt consolidation or moving across the country for a new job, a personal loan can be a great solution. However, with every loan you get, there’s a price attached to it.
If you’re considering getting a personal loan, it’s important to understand how it works and how it can impact your financial future. Here are four important questions to ask yourself before applying for a personal loan.
1. Can I get approved for a personal loan with my credit?
Many personal loan lenders have a minimum credit score requirement to get a loan. So the first thing you should check is your credit report. There are quite a few free credit monitoring tools out there that will give you your credit score.
If your credit score isn’t in top-notch shape (below 600), consider holding off applying for a loan for a few months while you work to increase your score. Even a small bump in your score could make a huge difference in whether you’re able to get a loan or not, and most importantly, qualify you for a lower interest rate.
The two largest factors that affect your credit score are payment history and overall credit utilization. Try to pay down the balance as much as you can and continue to make all of your payments on time. If your score took a hit because of collection accounts, pay off those accounts first. You’d be surprised at how much of a jump your credit score can have when you pay off old bills.
2. Should I compare personal loans online or go directly to a lender?
There are several online personal loan comparison sites that can pre-approve you for a loan with different lenders. The lenders will then contact you with specific pre-approved offers.
The benefit to using a personal loan comparison tool is that you can fill out a single application instead of applying to five different lenders at once. You’ll instantly know which lender you’re approved for and which lenders denied you.
If there is a specific lender you prefer, you can apply for a loan directly with them. Research the benefits the lender offers to get the best personal loan for your needs. Most lenders allow you to apply for a personal loan directly on their website, or you can contact them by phone.
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3. Is the lender pulling a soft or hard inquiry?
If a lender pulls a soft inquiry on your credit, that means it’s only visible to you. Other lenders won’t be able to see it and, more importantly, it won’t affect your credit score. On the other hand, a hard inquiry hits your credit report and is visible to everyone — and it can affect your credit score.
Lenders typically pull a soft inquiry to pre-approve you for any type of loan. Upon finalizing your personal loan agreement, some lenders will then pull a hard inquiry.
When you’re applying for a loan, try to make sure the lender is pulling a soft inquiry so your credit score won’t be affected if you don’t get approved.
4. How much should I borrow with a personal loan?
When you apply for a personal loan, the lender will approve you to borrow a certain amount. You aren’t required to borrow the full amount you are approved for. In fact, it’s important to only take out the amount that you really need. It’s tempting to take out more to have that extra cushion, but don’t forget: You’ll be paying the interest on that amount over the life of the loan.
Take a close look at the personal loan terms, including interest rate, length of the loan, and any other fees that are associated with it. Ask yourself how this loan payment will fit into your monthly budget and whether you’ll be able to pay it back within a reasonable timeframe.
Understanding just how a personal loan works ensures you don’t find yourself in a sticky financial situation down the road.
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