Due to the rise of online lending, personal loans have become really popular over the last few years. TransUnion has been making yearly surveys and found out that the number of people taking out personal loans has increased by 18% since 2013.
More and more people are relying on personal loans to help them solve temporary financial issues. Especially millennials tend to use them as a way to finance their big purchases or consolidate debts.
So, if you’ve made a decision to take out a personal loan but don’t have enough information about the application process, here is the ultimate guide meant to help you get a loan.
Traditional Banks vs. Online Lenders
The common mistake is assuming that traditional banks are similar to online lenders. It was popular and widespread in the past to borrow money from a bank. Nowadays, millennials are luckier and have more choices when it comes to applying for a personal loan as this whole industry has changed a lot.
Here are some of the main differences you must keep in mind before you decide where to apply.
Every option has its advantages and disadvantages. Applying for a loan from a regular bank allows you to communicate with your loan officer in case you happen to have some problems or questions.
On the other hand, online lenders usually offer fewer overhead costs and tend to have lower rates for those borrowers who are credit-worthy.
Moreover, when it comes to underwriting, traditional banks and online lenders also have a different approach. For instance, SoFi and Upstart both serve to millennials.
When making lending decisions they consider not only your salary and credit score but also your long-term financial perspective.
With traditional banks, the final decision of whether you will be approved for a loan will less likely depend on the personal merits of the borrower.
Important! Learn about best and worst American banks.
Doing the Math Is Important
You can’t be paying the loan back for ages as the lenders give you a fixed amount of time to repay it.
The terms differ from one lender to another, but typically the loan terms last from one to several years. You have to make sure you will be able to do monthly loan payments as it’s significant for your credit score.
Think twice if you can afford to take out a personal loan, especially if you are a student trying to balance your student loan payments or in case you are not earning enough at the moment.
You’ll need to make regular payments on time and in full if you want to have a good credit score.
You should keep in mind that the interest rates for $ 1000 loan bad credit will be much higher than taking out a loan for 1000 dollars when your credit score is good.
For example, you need to take a 1000 dollar loan in order to consolidate your debt. When you start looking for various lending options, you will notice the difference. One bank may offer you a 2-year term with a 12% rate and another bank may offer you a 4-year loan at a 10% interest rate.
You may think that the lower interest rate is a better deal but if you take out the loan from the second bank, you will end up paying much more in interest. So, you don’t need to hurry with your decision.
Use a personal loan calculator to figure out the real cost of the potential loan before you make your choice.
You Should Pay Attention to Your Credit Score
Of course, online lenders are usually more flexible when it comes to making lending decisions, but you still need to check if your credit score is okay before you apply. In other words, your credit score really matters.
You should understand what kind of deal you may expect to get as some lenders charge interest rates up to 35%.
In order to make sure and check that your accounts are properly reported, you can view your credit report from various credit reporting companies – Experian, Equifax, and TransUnion. The errors may happen, so you need to dispute it if you see a mistake.
Otherwise, your credit score may be pulled down and, as a result, you may be offered a higher interest rate.
For those who are in their 20s and don’t have a credit history yet, the process of getting a loan with the best rates is a bit different.
All you need to do is to pay your student loan as well as other bills every month in full and never miss payments. This will guarantee the establishment of your credit score and boost your chances on getting the best rates for loans in future.