A personal loan may seem daunting, especially if it’s your first time getting one. Stories of drowning in debt due to soaring interest rates and missed payments often come to mind. Loans can be complex, especially for first-time borrowers.
Whether from financial institutions or a money loan app, loans might be necessary to keep your finances healthy. Consequently, it can boost your financial standing, create growth opportunities, and support you in your time of need. However, it’s best to ensure the borrowed funds will be used wisely.
This article shares valuable tips when applying for your first-ever personal loan.
- Consider How Much You Need
Before looking for lenders, it helps to be realistic about the amount you want to borrow. You can understand your financial capability by defining how much you need and why you need it. Ideally, you should only borrow the amount that you can afford to pay.
You can check your debt-to-income ratio and calculate how much of your monthly income you can afford for loan payments. To get this ratio, divide your monthly debt payment by your monthly income and multiply by 100.
So, if you have a monthly gross income of USD$2,000 and your monthly loan payment is USD$700, your debt-to-income ratio is 35%. Hence, you’ll spend 35% of your salary on monthly loan payments. It’s best to keep this rate low since lenders don’t often approve loan applications with a high debt-to-income ratio.
- Maintain A Good Credit Score
Your credit score is a critical metric that lenders use to determine your ability to repay the loan. That said, a good credit score equals better personal loan terms. You’ll also have a better chance of getting your loan approved quickly.
Typically, people with credit scores of at least 740 qualify for the lower interest rates possible. They may also get other great offerings and benefits, such as a bigger loan or an extended repayment period. However, if your credit score is below 670, it may help to find ways to improve your credit score before talking to lenders.
Meanwhile, there are several ways to maintain a healthy credit score. Simple acts like opening a credit card account and paying your bills on time can help improve your credit standing. Also, consider getting credit for rent and utility payments to help boost your score. Always check your credit report and dispute any errors that could affect your score negatively.
- Understand Interests
Interest is one of the most significant factors in any personal loan, influencing how much you’ll pay monthly. Thus, it’s best if you understand interest computation. Generally, different lenders offer different rates at various conditions. Essentially, the lower interest you can get, the more flexible your monthly payment will be.
In a few cases, some personal loans may look cheaper on paper. However, you may have to pay a higher interest rate at the end of the term due to how it’s calculated. Additionally, you may need to learn more about the two types of interest in personal loans: fixed and variable interest loans.
A fixed-interest loan means the personal loan has a constant interest rate for the entire term. On the other hand, a variable interest loan fluctuates over time based on a provided interest rate benchmark or index set by the lender.
- Compare Offers
When looking for a personal loan, shopping around and comparing offerings is essential to find the best deal. To make things easier, you can visit aggregator sites to compare products from various lenders offering a personal loan. Remember that the advertised rates on these sites may only apply to a specific loan amount.
To compare offers more accurately, it helps to ask the lender directly for the amount you need to borrow. Also, checking the lending criteria and eligibility when applying is necessary. Some loans may not be available to people with poor credit histories. In addition, check the total cost and rates for the amount you intend to borrow from different loan providers.
- Choose Your Lender Wisely
Aside from comparing offerings, you should also check the lender’s credibility. You can apply for personal loans from traditional banks, but digital or online lenders are also increasingly popular. They offer quicker loan processing, approval, and disbursements. However, be careful on choosing your lender.
A reputable lender should be licensed and regulated. You can visit third-party review websites to look for positive reviews about the experiences of actual customers with the lender. Also, it’s best to check if the lender follows industry-standard information security and data practices.
As you can see, getting a personal loan doesn’t have to be stressful and complicated. Remembering the above tips, you can apply for a personal loan from the right lender. They’ll provide you with correct information and much-needed funds in no time.