Once in a while, situations arise in which you might need a substantial chunk of extra money, but don’t have substantial collateral – house, car, property of some kind – available to back up your request.
In such cases, the solution might be a personal loan.
Personal loans don’t require collateral. You’re trading on your good name, asking the lender to make a bet on your ability and willingness to repay your debt.
Banks, credit unions, online lenders and maybe even relatives or friends, are the best places to find personal loans.
Getting one approved will be largely about your credit score, credit history and your earning potential. But even if your credit report is pristine and your employment is solid and lucrative, you can expect to pay an interest rate a bit higher than you would for a house or a vehicle.
If any of the above is shaky — your credit report needs work, or your work history is dodgy — you might still land a personal loan, but it might not be for as much as you’d like, or the interest rate on the loan will be higher, or both.
Here is how to get across that personal loan across the finish line.
What’s the process?
Success in navigating the choppy waters of personal loans requires patience, homework and organization.
Begin by getting an up-to-date free credit report. The inquiry will not ding your rating. Scrutinize it, and challenge any errors. If there’s time and your credit isn’t what it needs to be, work on repairing it. Pay down debt. A bad debt-to-income ratio can be a deal-killer, as can maxed-out credit cards. Bolster your history of timely payments.
While you’re doing that, you should also gather supporting documents: identification, proof of address (current utility bills usually do the trick), proof of employment (pay stubs or direct-deposit printouts), your most recent W2, and financial statements (bank accounts, investment documents).
Now, some homework: There are lots of lenders in the personal loan field. Banks, credit unions, payday loans, peer-to-peer … even friends and family. Some of these, plainly, are more problematic than others.
Do your research, online, on the phone, and in person to determine who you are comfortable working with and who’s offering you the best deal.
Factors in Qualifying
Again, because most personal loans are unsecured — that is, there’s nothing tangible to seize if the deal goes south — lenders make extra sure they’re likely to be repaid. There are assorted factors they consider, and you should know them up front.
The big kahuna is your credit, or FICO score. The higher the better. Underwriters hearts soar when they see applicants with scores 750 and above, and they can sleep well approving scores of 690 and up.
Anything below 690 and it will be difficult to get attractive loan terms. Funding levels go down, interest rates go up.
Also scrutinized is credit report, which simply is the applicants’ record of incurring and repaying debt. You need to know what’s in your report. If there are errors, dispute them. If there are bad patches, be prepared to explain how they occurred, and how you overcame them.
Other factors include the applicants’ debt-to-income ratio. If the ratio is too high, bring it down by paying down balances. Can you trade in an expensive car for one with a lower payment? Do you have non-job-related income? Dividends or interest income? Child support or alimony? Be prepared to declare it.
Will you bring a cosigner — that is, someone credit-worthy who pledges, with a signature, to step in if you falter? A rock-solid cosigner goes a long way toward soothing nervous underwriters.
Lenders also will consider what type of job you have, your income, and perhaps your career history. Moving from job to job, or even employer to employer, within a career, as long as it can be demonstrated you’re on your way up, does not set off alarm bells. Job-hopping without apparent focus or ladder-climbing is less reassuring.
What you plan to do with the money is likely to come under consideration. When I was much younger and a relatively unworthy credit risk, I secured a bank loan to buy a computer by showing the lending officer not only my day-job pay stubs, but also my recent freelance work as well as contracts for work I had pending — which was the reason I wanted the computer in the first place.
Some lenders will review your education — your major, your university, your grade-point average — to get a better read. Some will review your job title. Does it fit with your educational background? If it doesn’t, be prepared to explain the disconnect.
Finally, some lenders will investigate your social-media presence. Oh, don’t look so shocked. Stories of careless financial exploits aren’t funny to potential lenders.
Here’s where being (or getting) organized comes in. Applicants need to show lenders they are who they say they are, live where they say they live, and make the kind of money they say they make.
Government-issued identification is the place to start: a photo ID of some sort, for instance a drivers’ license, university identification, or passport.
Proving where you live can take a number of forms, but some of the most common examples are lease agreements, professional licenses, or several months’ copies of utility bills or bank statements.
Proof of income is usually straightforward: Recent pay stubs or verification of direct deposits from an employer. A W2 form, and/or, for independent contractors, a 1099. The most recent income tax return. Older applicants might be asked to produce a Social Security statement and/or a pension distribution statement.
Here, again, is where you need to consider whether you’ll be declaring nontraditional income — for instance, alimony, child support, or returns on investments — and be prepared to document it.
When to Take Out a Personal Loan
There are plenty of good reasons to consider a personal loan: home improvements, consolidating debt, a wedding, starting a business, moving across country, financing an adoption, a dream vacation.
In each of these cases and more, if you are a homeowner with substantial equity in your house, you first might consider a home-equity line of credit, or HELOC. Because such loans are backed by your home, the interest rates are likely to be lower, and the loan-approval process simpler, than with a personal loan.
On the other hand, maybe you’d rather not obligate your house. There’s nothing wrong with that. Personal loans generally offer fixed rates and closed-end payoff dates; just be certain both the payment and the duration are within your comfort zone.
Personal Loan Cautions
OK, you know why you want a loan, and you have assembled the wherewithal to make it happen. But your work is not quite finished.
Remember poor, desperate George Bailey from the Christmas classic “It’s a Wonderful Life?” So desperate was he to get his hands on $8,000 — a vast sum, to be sure, in 1945 — he was willing to pay any bonus, any interest. Of course, greedy, grinding financier Henry Potter turned him down. Potter wanted to see our hero in jail.
You, presumably, are not desperate. You want the best personal loan possible. So you are going to read the fine print to avoid any unnecessary add-ons or unpleasant surprises.
Here’s what to look out for:
- Prepayment penalties or exit fees. You want to be able to pay off your loan early without getting dinged. The Consumer Financial Protection Bureau, in a June 8, 2016 article, makes plain its preference for loans with simple interest — that is, the interest is computed on the current balance — as opposed to precomputed interest, which keeps the interest constant even if you make early payments.
- Automatic withdrawals. If the lender insists on automatically withdrawing monthly payments from your bank account, and you otherwise like the loan’s terms, check with your bank about setting up a low-balance alert so you’re not caught short and incur overdraft fees.
- APR — annual percentage rate — surprises. Be certain everything that’s being rolled into your loan, including origination fees, is fully disclosed and reflected in the APR.
- Be aware that certain fees, if included in your loan, will reduce the amount of the net proceeds. If you need $10,000, make certain you borrow enough so that when fees are taken out, you have $10,000, not $9,700.
- Loan insurance. Some lenders will encourage you to buy insurance against losing your job or dying and leaving your estate on the hook for any unpaid debt. Weigh these options warily.
- Borrowers with troubled credit need to be especially alert to potential scams. In one such scheme, online lenders promise loans, but require an advance fee. Instead of working with the consumer, such “lenders” vanish with your cash, along with a boatload of personal information. Is the lender willing to proceed without a look at your credit report? The Federal Trade Commission warns: There’s your red flag. Check out such lenders with your state’s Department of Banking or Department of Financial Regulation. Since March 2016, the Consumer Financial Protection Bureau also has been fielding complaints about unsavory lenders.
How to Find the Lowest Rate
All things being equal, you want the lowest possible interest rate. Luckily, a variety of avenues exists to accomplish just that.
As with any other consumer product, you want to shop. Online. Over the phone. In person. Make every effort to get apples-to-apples comparisons.
Can you pay off your loan in short order? If not, consider a credit card with a modest introductory rate. Some start as low as zero percent. But such gambits require discipline; rates can surge when the introductory period expires.
Consider offering something as security. Homes, cars, boats, property, savings accounts, investment portfolios and even jewelry would help ease the lender’s angst.
Again, bring in a rock-solid cosigner who will commit to backing you up would be a huge boost.
Where to Get a Personal Loan
The world of consumer lending is ever-changing. In addition to banks and credit unions, the traditional standbys, and friends and family (with all the well-known awkward Thanksgiving table episodes), the internet has opened up such opportunities as digital solicitation (GoFundMe.com, in which the recipient is not expected to pay back any funds), and this intriguing option: peer-to-peer lending.
Peer-to-peer cuts out traditional financial institutions in favor of consortiums of investors looking for better returns than CDs or money market accounts without the risk of stocks. You can go online to sites like Lending Club, Prosper and Upstart to register for a personal loan and see what sort of terms and conditions are offered before deciding whether to accept it.
Cash advances — never (never, never) to be confused with payday lenders — can be achieved through traditional lenders and credit card companies, sometimes at breathtakingly low rates. As mentioned above, be certain about the length of the introductory period, and what happens afterward.
Business loans are unsecured loans for business borrowers who might not qualify for Small Business Administration loans, or are too low to interest typical lenders or investors. Not surprisingly, business borrowers have their very own peer-to-peer site: Funding Circle, which began in the United Kingdom and expanded into Germany, the Netherlands and, in October 2013, the United States.
So: Patience, homework and organization. Blend them successfully and you, too, can ring up a satisfactory personal loan … and maybe get some dutiful angel his wings in the process.
About The Author
Bill “No Pay” Fay has lived a meager financial existence his entire life. He started writing/bragging about it in 2012, helping birth Debt.org into existence as the site’s original “Frugal Man.” Prior to that, he spent more than 30 years covering the high finance world of college and professional sports for major publications, including the Associated Press, New York Times and Sports Illustrated. His interest in sports has waned some, but he is as passionate as ever about not reaching for his wallet. Bill can be reached at [email protected].
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