Introduction to Personal Loans
A personal loan allows individuals to borrow funds from a financial institution rather than charging expenses to a credit card. There are two types of personal loans: secured and unsecured. Secured loans mean that there is personal property tied to the loan, which can be repossessed in case the borrower defaults on the loan. An unsecured loan, on the other hand, has no tangible property associated with it.
Advantages of an personal loan
One of the advantages of taking out a personal loan is that it typically comes with a lower interest rate than a credit card. The average interest rate for a personal loan is around 12.36% while the average interest rate for a credit card is between 27% and 29%. Another plus is that the approval process is relatively quick, sometimes as fast as 24 hours depending on the lender. There also are no restrictions on what you can use the funds for.
When taking out a traditional personal loan, it’s best to prepare your application information in advance so that you can speed up the approval process. While each lender has its own set of specific requirements, most operate using the same basic guidelines. Here are a few pieces of information and documentation you can expect when applying for a personal loan.
- Personal information such as name, contact information and social security number
- Income information such as salary, pay stubs, bank statements, and/or W2s
- Collateral, if required
Importance of your credit score
Another important variable in the personal loan application process is your credit score. This number is important because it not only factors into whether your application is approved or denied, it also affects your interest rate. The higher your score, the lower your interest rate, which in turn results in lower monthly payments. Your credit score is calculated by credit bureaus who receive financial information from creditors.
The most important criteria affecting your credit score are:
- Payment history – shows how reliable your are with your monthly payments
- Amount of debt – demonstrates how much you owe compared to how much you earn
- How long you’ve had credit – the longer your credit history, the better
- New credit – lots of recent credit applications can make you look like you’re in financial distress
- Types of credit – some types of credit appear better than others; a home mortgage, for example is viewed as a positive investment
By understanding the personal loan application process, you can better set yourself up for success. But remember, even if you are denied after submitting your first application, there are plenty of alternative options to explore to receive the financing you need.