A personal loan provides quick and easy access to the money you need to take care of a range of financial issues, such as covering an emergency, consolidating debt, paying for a holiday and so on. However, the process of selecting the right personal loan and making the application for the loan can be confusing and complex; so it is vital that you understand all there is before you begin to search for financing.
Read on to find out how personal loans work, how to qualify for a loan, and how to select a lender:
How personal loans work
Personal loans are relatively straightforward and simple – once you apply and are approved, the bank gives you the funds for a fixed period and a fixed interest rate. Meaning, you will be paying fixed monthly installments throughout the life of the loan.
Keep in mind that the interest rates may vary depending on your credit score – if your credit score is good, then you may get a more favorable interest rate.
Types of personal loans
There are two types of personal loans; secured and unsecured loans. Secured loans are those that need security (like property or car) as a guarantee. Your lender will repossess the asset if you are unable to pay the loan. Unsecured loans, on the other hand, require no security. But since it poses a higher risk level to lenders, they tend to give lower loan amounts with higher rates than secured loans.
How to qualify for a personal loan
To be eligible for a personal loan, you will need:
Good or excellent credit: Some lenders will approve your loan, even with a low credit score. However, having an excellent rating will help you qualify for loans with the best terms and interest rates.
Low debt-to-income ratio: A debt-to-income ratio is calculated by dividing your cumulative monthly recurring debt by your monthly income. Asteria Lending notes that clients with a debt-to-income ratio below 36% may qualify for best rates and terms on personal loans.
Proof of ability to repay: It’s easy for your loan to be approved if lenders know that you can pay back. Evidence of employment and pay slips are some incredible proofs.
Co-signer: If you have a poor credit score, then a co-signer with a good score can help you qualify for the loan.
Picking the best personal loan lender
The market has no shortage of lenders. However, you should note that these lending institutions aren’t created equal, so you’ll need to shop around to find one that matches your needs and preferences.
Here are some tips for picking the right lender for you:
Shop around – you can do this online, and compare different lenders head to head based on their terms, rates and customer support levels. You may also ask for referrals from friends and family
Read terms and conditions – ensure that you understand the fine print word-for-word – including the loan terms, conditions, rates and installments.
Check the cost – find a lender with the lowest fees – however; make sure there are no hidden charges
Read reviews – go through reviews to see what other people are saying about the lender. This will give you a clear picture of what to expect.