Don’t Ever Accept Your First Loan Offer, and 5 Other Tips
Personal loans can be used to fund a home improvement project, pay for a wedding or funeral, or – most commonly – consolidate credit card debt. The loan product became popular after the 2008 financial crisis and is now one of the fastest growing for banks.
Most personal loans are unsecured, meaning they don’t require you to put up collateral, such as a house or bank account, as leverage for the bank. With personal loans, you take out a fixed amount of money and repay it over a fixed time period at a fixed interest rate. Though this seems simple, there are many intricacies to taking out a loan that aren’t immediately obvious, like checking what kind of fees are charged on top of a loan or making sure there are no errors in your credit reports.
Do: Check your credit reports
Your credit score and credit history are major determinants in the interest rate you receive on a personal loan. Banks use credit as a barometer for risk. If you have made payments in a timely fashion before, then you are more likely to repay your loan. Therefore, the better your credit, the lower your rate. Generally, rates will range between 4 and 36%.
Due to the COVID-19 pandemic, the three major credit bureaus (Equifax, Experian, and TransUnion) are offering free weekly reports at through . As due diligence, we recommend pulling your credit reports to make sure they’re in tip-top shape. An error (say, missed payments or a credit card fraudulently attached to your name) can wreak havoc on your credit score, so check for accuracy and dispute any information that isn’t correct.
Do: Compare the APR
The difference between a low interest rate and a higher interest can be major. Let’s say you have a $10,000 loan with a 5-year term. Over those five years, the difference in overall cost between a 10% APR and 25% APR would be $4,. We always recommend shopping around before committing to a lender, as each one weighs your application information differently.
Do: Consider the risks if you have bad credit
If you have a credit score less than 670 (“good” by FICO standards), you may find it harder to get a decent interest rate on a personal loan. Additionally, those who have filed for bankruptcy or have not established a credit history will experience difficulties getting a loan.
People who find themselves in that boat may need to consider a cosigner to improve their odds of getting approved. A cosigner is a secondary borrower who can boost your loan application by offering their (presumably good) credit history. It provides reassurance to the bank that the loan won’t be defaulted upon, because there is a backup person who would be responsible.
Adding a cosigner can grease the wheels on an offer and even merit you a better rate than if you’d applied alone. But the risk is if you miss a payment, then you and your cosigner would experience a credit score decrease.
You may also need to consider a secured loan if your credit isn’t good enough. Most personal loans are unsecured, so putting up collateral (in the form of a house, car, or bank or investment account) gives the bank leverage in a situation where you may not be an attractive candidate. The interest rates on secured loans are often lower, though, of course, you take on significantly more risk if you cannot afford the payments at some point down the line. Defaulting on a secured loan could allow the bank to seize your collateral, meaning you could ultimately lose your house, car, or whatever else you put up for collateral.