Many businesses look to secure a loan for an additional financial hand. One type of loan that’s available to you is a personal loan. However, before you apply, it’s important to understand more about this type of financial assistance and how it works. Here is what you need to know before applying for a loan.
How Personal Loans Work
You should always know how personal loans work before applying for one. Remember, just as with any other loan, you should only take one out as a last resort when you have exhausted all other options for getting extra cash. Personal loans are a type of credit that allows you to make a big purchase, such as on a car or even a home. They have lower interest rates than credit cards and can be used to consolidate credit card debt when you have multiple debts but difficulty paying them back.
Your Credit Score and Credit History
You should always check your credit score and history before applying for a personal loan. If you have a good score and credit history, it can help show lenders that you are a responsible borrower who will pay your debt in time and in full. Check your free credit report and examine it for errors. If you spot anything amiss, you should immediately report it to the credit bureau to have it fixed. Discrepancies can cost you in terms of interest on the loan. In general, the better your credit, the lower your interest rate on a personal loan.
If you don’t have a good credit score, there are some lenders that specialize in providing installment loans for poor credit. The requirements will vary by lender, so be sure to do your research and familiarize yourself with the terms of the loan. Note this type of loan is recommended for unexpected emergencies only, and as a last resort if you don’t have the savings to cover your expenses.
Determine Your Budget
It’s important to thoroughly examine your finances, especially the income you earn on a monthly basis, so you can create a budget for your spending. Once you have identified how much money you take in each month, you can figure out a budget that accounts for the amount of money you are able to pay toward a personal loan per month. This is absolutely essential so that you don’t miss any payments.
You will also need proof of your income from your employer as proof for lenders. Your pay stubs, W-2 forms or even a letter from your employer should suffice. If you’re self-employed, you should gather tax returns for the past two years and invoices if necessary. Lenders want to be sure of how much money you earn before they extend a loan.
Avoid Opening New Credit Accounts
While you are in the process of getting a personal loan, you should avoid opening new credit accounts. When you open a new account, a hard inquiry is made on your credit report. This can cause your credit to take a dive, which can adversely affect your chances of securing a loan when lenders take a look at your score. Put any potential new accounts on hold for the time being and comparison shop for lenders in a short amount of time instead. This will minimize the impact of hard inquiries made on your credit report.
Your Employer’s Contact Information
Most lenders will request your employer’s contact information when considering whether to give you a loan. Some may even ask for a past employer’s information. They can serve as references and can prove your income and dates of employment.
Once you know all of these things, you can feel more secure about applying for a personal loan or any type of loan, in general.