Things to Look Out for When Applying for Your First Personal Loan
The personal loan industry is booming because usually, a personal loan represents the fastest way of accessing cash in an emergency without the borrower having to jump through hoops trying to comply with the terms and conditions of the lender. Personal loans are unsecured, which means you do not have to offer any collateral to secure them, and you can use the money for any purpose you wish without informing the lender.
A personal loan is thus often an ideal way for people to get hold of cash in an emergency like unexpected medical expenses, a car breakdown, or even to catch up on an overdue loan to avoid penalties and adverse impact on the credit score. Even if the advertisements of various personal loan companies promise loans within minutes, there are a few important things, you should know before applying for one.
Your Credit Score
Almost all lenders use the applicant’s credit score to decide on the loan approval, the maximum amount, and the interest rate chargeable. The lenders that do not refer to the credit score invariably charge a much higher rate to compensate for the additional risk. Before applying for a personal loan, you should check your credit score to ensure it is current and accurate. If you have a poor score, consider improving it before applying for a loan.
Establish the Amount You Need
It can be tempting to borrow more than you need, but you must remember you must pay it back along with interest on time. The best thing to do is to estimate how much you need and use a loan app to apply for the minimum amount and the shortest tenor. You should use one of the handy online loan calculators to find out the monthly repayment amount and the interest expense. Fix the repayment amount establishing how much you can afford but try to keep the repayment period as short as possible to avoid unnecessary interest expenses. According to Forbes, you should cap your monthly repayment at 10% of your income to prevent your lifestyle from being negatively impacted.
Shop Around for the Cheapest Loan
Regardless of what the high-decibel advertising of personal loan companies says, you should know that personal loans carry some of the highest interest rates after credit cards. The reason is there is no collateral to secure the loan, and often the applicants have a record of poor financial management. When scouting for the cheapest personal loan, you should focus on the fees and penalties besides the rate. The best way is to calculate the APR and use it as a yardstick for comparison. Even a small difference in the APR on a long-term personal loan can save you a lot of money.
It is easy to be swayed by the promises of personal loan companies, but you need to be on the alert to prevent getting ripped off by unscrupulous companies. Beware of companies asking you to pay upfront fees without disbursing any money, and be sure to read all the fine print before signing up for the loan to prevent nasty surprises. It is best to go with companies with a solid market reputation to be safe.
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