by Matt Frankel, CFP | Dec. 17, 2018
The personal loan process is rather quick and painless these days. Here’s what you need to know.
If you’re in the market for a personal loan, here’s the best approach to finding and getting approved for the right loan for you.
Personal lending is a relatively new way to borrow money, at least in its current form. Peer-to-peer lenders, up-and-coming FinTech companies, and many traditional financial institutions have all made personal loans to pay off debt and finance personal expenses more available and easier to get than ever before.
As part of the increased competition, most personal lenders allow you to pre-qualify for a loan, and also see what interest rate, loan terms, and maximum loan amount you might be able to qualify for. With that in mind, if you’re in the market for a personal loan, here are the steps you can take to get pre-approved for the best possible loan for you.
Not all personal lenders will meet the needs of all borrowers. For example, if you’re looking to borrow $5,000 and the minimum loan offered by a particular lender is $10,000, it doesn’t really matter what interest rates and fees that lender charges -- it simply doesn’t meet your needs. With that in mind, check out our list of the best personal lenders, and keep these principles in mind:
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The next step is to check the loan terms you can qualify for with all of the lenders on your list. At this point, you might be asking yourself, “Why so many?”
That’s because personal loan offers can vary dramatically between lenders -- even for the exact same borrower. When you apply for a mortgage or auto loan, the interest rates offered by different lenders are generally in the same ballpark. However, that’s typically not the case when it comes to personal loans. Remember that the personal loan industry is still relatively young, and therefore the underwriting methodologies used by various lenders aren’t exactly standardized. In fact, it’s not even uncommon for borrowers with strong credit histories to get interest rate offers where the difference between the highest and lowest is 8 or 9 percentage points.
But wait. Won’t all of these loan applications hurt your credit?
Not necessarily. The vast majority of personal lenders allow you to check your personalized loan offers without impacting your credit score. They perform what is known as a “soft inquiry,” which essentially means a credit check when you’re not actually applying for credit. This is similar in nature to the credit checks performed when credit card companies mail you pre-approved offers, or when you check your own credit. Most lenders clearly state that checking your rate won’t affect your score, so if you see this, go ahead and get pre-qualified. There’s really no reason not to do this for every lender on your list.
After you’ve viewed your personalized loan offers from several lenders, it’s time to figure out which is the best one for you. If any of the offers have extremely high-interest rates compared to the others, go ahead and scratch them off your list.
Other than comparing interest rates, here are some things to consider in this phase of the loan selection process:
Once you’ve compared your offers and have determined the best personal loan for you, it’s time to complete the application process. At this point, you’ll need to fill out a more thorough form of your personal information, and will likely be asked to upload supporting documentation for your loan. Just to be sure you’re prepared, here’s what you should have available:
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This is by no means an exhaustive list, and some lenders may ask for other supporting documents. Sometimes, there are several rounds of document requests you’ll have to deal with before the loan can be finalized -- this is especially true if you’re self-employed. Don’t get frustrated, this is a normal component of the underwriting process.
It’s important to note that at this point, your loan application will most likely result in a hard credit pull. In other words, when you actually apply for one of the loans you pre-qualified for in step two, it could potentially affect your credit score. It’s true that hard credit inquiries are a FICO® credit scoring factor, but it’s unlikely that a single inquiry will drop your score by more than a few points.
To sum it up, applying for a personal loan has become far easier than it has been in the past. Unless you have an unusually complex financial situation, you should be able to thoroughly complete the personal loan comparison and application process in its entirety within a couple of hours (although it may take a few days before you get your money).
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