Before applying for personal finance, it is important to be aware of how they work so you can make an informed decision. Most lending institutes have similar procedures and requirements, hence knowing the prerequisites beforehand can help you be prepared for contingencies.
Financial emergencies are always an unforeseen event that leaves us in a vulnerable situation. In such scenarios, quick and easy loans and personal loans can be a lifesaver. Personal loans are the most preferred financial product today as they are not limited to emergencies. Many people prefer personal loans to help achieve their short-term as well as long-term goals. Depending on your needs, there is a wide variety of personal loans to choose from including secured, unsecured, debt consolidation, and co-signed and joint loans.
Here is a list of points you need to be aware of before applying for personal financing:
Know Your Credit Score
A credit score is a three-digit number used to measure a person’s creditworthiness and repayment likelihood. It is crucial to know your credit score as it determines whether you are eligible for a loan. Your credit score is calculated based on various factors like credit history, payment history, credit utilization, and duration of credit history.
Anything below 600 is considered a poor credit score. Though different institutes have different requirements for credit scores, it is always advised to maintain a decent number to avoid complications during an emergency. But how do you maintain a good credit score? You can do so by simply paying your dues on time, limiting the number of credit cards, and not exceeding 30% of credit utilization.
Income
All lenders require you to submit proof of a steady income to make sure that you have the capability to repay the loan amount with interest. Your income proof documents can include bank statements, tax returns, pay stubs, and employer’s contact information. If you are self-employed, you might be required to submit your recent tax returns or bank statements.
Lenders impose a minimum salary requirement to avoid any risk in the future. If you want to skip the detailed documentation process and need some urgent finances, you can opt for quick and easy loans. We advise you to do your research before opting for such options as they involve their own risk factors.
Compare Lenders
Before making a final call, be sure to compare all available options in the market to ensure that you get the best deal. Not all lenders offer the same amount at the same interest rate. Start by researching them online and learn more about their annual percentage rate (APR), loan term or length, and minimum credit score requirement. Try to compare at least the top 3 lenders and their offerings to find the best match for your needs.
Knowing the Two Types of Personal Loan
There are two types of personal loans: secured and unsecured. The most preferred one is the unsecured personal loan as it does not require any collateral like a house, car, or any other asset, unlike secured personal loans. The former one is simply based on your financial history and credit score.
Your first preference should always be an unsecured personal loan. If you don’t qualify for an unsecured loan you can always opt for the secured one, but it comes with the risk of losing your collateral asset if you fail to pay back the loan.
Debt-to-income Ratio
Debt-to-income ratio or DTI is another crucial factor that proves your credibility to the lender as it gives an immediate snapshot of your financial situation. Ideal DTI should be as low as possible (35% or less) as it implies your financial ability to repay the loan after covering your daily expenses.
If your current DTI ratio is on the higher side, you can try to lower it by reducing your debt payments and/or increasing your income. It is also beneficial to know your DTI ratio so you can plan your monthly budget accordingly without going over the top or going stretching too thin.
Avoid Gimmicky Schemes and Sketchy Lenders
In case of a financial emergency, it is normal to feel vulnerable but keep in mind to not fall for any gimmicky schemes in desperation. There are institutes that claim to offer unrealistically low interest rates and some other sketchy schemes to attract customers. Make a wise decision while spending your hard-earned money.
Benefits of Personal Loan
- One Lump Sum: A personal loan provides you with the loan amount in a lump sum which means you can use the loan amount instantly for large expenses.
- Easy to Manage: Personal loans have single fixed-rate monthly interest which makes them easy to manage and helps avoid late payments.
- No Collateral Requirement: Unsecured personal loans do not require any collateral like a house or car to get approved. It depends on your credit score and DTI ratio.
Downside of Personal Loan
- Higher Interest Rate: When compared to other alternatives, a personal loan carries a higher interest rate, especially if you have a lower credit score.
- Lengthy Procedure: Since a personal loan has strict requirements, the procedure might feel lengthy if you are in urgent need of finances.
- Potential Credit Damage: Loans do help you build your credit score, but if you fail to make your monthly payments for whatever reason it can adversely affect your score.
- Debt Load: If you are already facing a financial crisis, additional debt commitment through a personal loan can worsen the situation if you do not have a proper plan.
Conclusion
While a personal loan has its perks and benefits, go through all the above-mentioned points to make sure you are well-prepared for the commitment. Even if you do not need a personal loan right now, it is important to maintain your credit score and have a steady income in case of some unforeseen event.
