Many people find personal loans serve as a great solution when they need funds for a variety of purposes. These loans often come with a lower interest rate than a borrower would pay on a credit card, and the borrower knows exactly how much they must pay each month. However, the borrower must know how to qualify for a loan and obtain the lowest rate to get a good deal. They must research different loans and understand the options available to them. Finally, potential borrowers need to know What to consider when applying for a personal loan.
Lenders consider a borrower’s credit score when determining whether to provide a personal loan. This three-digit number gives them information on the risk they will take on by loaning the funds. A poor credit score suggests the borrower may not meet their monthly obligations. However, some lenders do work with lower credit scores, so continue reading to learn more about how to qualify for a loan at an affordable rate.
Individuals with a credit score less than 669 might find they cannot get a personal loan. Borrowers that do qualify will pay a higher interest rate than someone with an exceptional credit score. Consider boosting one’s FICO score before applying for a loan to bring the interest rate and monthly payment down.
According to realtimecampaign.com, lenders also take into account the borrower’s debt-to-income ratio when underwriting a loan. This figure provides information about the borrower’s gross monthly income and the debts paid each month. They divide the debt by the gross income and look for borrowers with a DTI that is 43 percent or less. This is the amount recommended by the Consumer Financial Protection Bureau. A higher DTI may lead to a denial of the application or a loan of a lesser amount.
The annual percentage rate provides the fee charged by the borrower for advancing the funds. To calculate the annual percentage rate, add the loan principal over 12 months along with the fees and interest. Divide this number by 12 to get the monthly payment.
Use this information to determine how much of each monthly payment goes to the balance and how much is used to pay the fees and interest. The lower the APR, the less the person pays over the loan term.
Loan Amount and Term
Individuals need to borrow responsibly. This means borrowing only what is needed. Choose the shortest loan term possible to minimize the interest paid. Most personal loans come with a term between 12 and 60 months.
The Monthly Payment
A borrower must know how much they can afford to pay on a personal loan each month. The monthly payment includes both the principal and interest. It may also include fees, so learn what is included to ensure they get the right loan amount for their needs without damaging their budget.
Most personal loans don’t require collateral, but that is not always the case. Secured loans come with a collateral requirement. The benefit of this type of loan is it often comes with a lower interest rate. The lender can take possession of the collateral if the payments aren’t made as agreed, so they take on less risk. Speak with Tower Loan to learn whether a secured loan is right for one’s needs.
Research different lenders before applying for a loan. The time spent pays off, as borrowers know they will get the best loan for their needs and financial situation. If credit scores are less than ideal, try to bring the score up before applying. They’ll pay less in interest over the life of the loan and get their finances back on track.