5 Things You Need to Do Before Applying for a Personal Loan
If you plan to apply for a personal loan, here's how to make it easier.
Personal loans are handy financial products. If you dream of a home makeover, need to get an old car running, or want to consolidate high-interest credit card debt, personal loans can help. Whatever your reason for a personal loan, do yourself a favor -- take these five steps before you apply.
1. Check your budget
Dreams are fantastic, particularly if they're realistic. Sit down with your monthly budget and figure out if you have room for another payment. Ask yourself this: After I pay all my monthly bills and put money away for the future, do I have enough to afford a loan payment easily?
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"Money for the future" here refers to an emergency fund. Do you have enough put away to cover three to six months' worth of bills? What about retirement? Are you saving for when you won't have a job, but will have a thousand things you want to do and see?
If your income allows you to take care of today's bills while planning for the future, you're on a solid financial footing. It's time to proceed.
2. Stop taking on debt
Lenders fear one thing: Borrowers who don't repay debt. Here are the red flags they look out for:
- A borrower with insufficient income
- A borrower with too many outstanding debts
- A borrower who carelessly assumes new debt
You can easily tick all three of those boxes if you buy a new car or add debt to your charge cards in the months leading up to the loan application. Ideally, you won't be taking out a personal loan due to an emergency. However, you may need to apply for a personal loan at some point. A leaky basement, furnace on its last leg, or new transmission could derail your finances so badly that a personal loan is the best way out.
You may not always have time to prepare for financial challenges. That's why it's so important to keep debt under control at all times, whether you're planning to apply for a loan or not.
3. Check your credit report
An estimated 1 in 5 Americans who check their credit reports discover at least one mistake. And even one mistake could drag your credit score down. The higher your credit score, the better the interest rate and loan terms you are likely to be offered.
If you find a mistake (or mistakes), submit a dispute to the credit bureau. According to the Fair Credit Reporting Act, credit bureaus have 30 days to investigate the item(s) in question. If they are unable to verify the information, they must delete it.
4. Know what you want
Say you plan to refinish your basement. You'd love to do it now, but the job can wait. Knowing what you want in a personal loan before applying is an excellent way to gauge whether now is the right time to take one on. For example, if your ideal loan has an interest rate of 5.99% with a five-year term, look for a loan that comes close. If all you qualify for now is an interest rate of 9.99% and a three-year term, your best bet may be to do one of three things:
- Work to raise your credit score.
- Wait until overall interest rates are more favorable.
- Figure out another way to pay for your project.
5. Organize documents
For some, the worst part of the loan process is gathering the documents you need to apply. Make it easy on yourself by having the following documents ready to go.
- Driver's license or state ID
- Social Security card, passport, or birth certificate
- At least two recent pay stubs
- Tax returns for the past two years
- Recent bank statements
- Mortgage statement, lease agreement, or utility bill (for address verification)
Each lender has a preferred way of doing business, and is likely to request a different set of documents. The faster you can provide the required documentation, the quicker you can learn about the best personal loans available to you.
Here's how taking the time to prepare can benefit you:
- Studying your credit report gives you the opportunity to see what you can improve upon. For example, if your debt-to-income (DTI) is higher than it should be, you know it's time to pay down debt or increase your income.
- Taking the time to improve your credit score means you'll be eligible for lower interest rates and better terms.
- Having a list of existing debts ready makes consolidation easier for you and your lender.
- Organizing your paperwork (such as income statements) can make tax time less stressful.
Personal loans can be tremendously helpful, particularly if you've taken the time to position yourself as a highly qualified borrower.
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