How To Apply for a Personal Loan: 5 Simple Steps
By Space Coast Daily // July 4, 2022
Applying for a loan can feel overwhelming. Just looking at the online forms, you can tell that a lender expects you to know some information about your loan before you even apply. This means if you go in blind, you may end up confused and agreeing to a loan that doesn’t suit your needs.
To help avoid that issue, you need to follow these 5 simple steps.
1. Know How Much You Need To Borrow
The first step is figuring out how much you need to borrow. What is your reason for this loan? Are you trying to renovate your home, are you planning for a vacation, do you need a new car?
It can be tempting to borrow as much as you can, knowing you definitely have enough for your project and then some. However, doing this means you’ll end up paying more for the loan than you needed to.
Instead, you should take some time to figure out how much you will need. Be realistic and round the figures up to be on the safe side. For example, if you’ve re-doing your kitchen, and a builder gave you a quote for $3,000 to $5,000 depending on unforeseen complications, then pick the higher number.
This will keep you financially prepared should the larger price be needed.
2. Figure Out How Much You Can Pay Back Monthly
Depending on where you live, the cost of a loan will change. For example, finding good loan companies in Rock Hill SC sometimes means settling for a high interest with a secure company.
To figure out how much you can afford to pay back, you need to figure out your income and expenditure. This is something the lender will ask for too, however, getting ahead of the game means understanding what you can expect from the banks.
Figuring out your income is easy – simply add the money you receive every month. This includes passive income, wages and benefits. Once you’ve added those figures together, put them to one side.
Next, you need to add together your monthly bill. This needs to include standard information such as rent, gas, and water, but you should also include subscriptions and your grocery shopping.
Now minus the monthly bills from your income. This is your free spending money or the money you could use to go to the cinema, shop or eat out.
To know how much you can afford to borrow, you need to figure out how much of the free-spending money you can put towards the loan. For example, if you have $500 left over, perhaps you would be happy putting $250 towards a monthly loan bill? Or if you only have $100, would you be happy using the whole sum to pay off the loan?
Knowing how much you can pay off monthly, can tell you how long it will take to pay the loan back.
With this information, you can find a free loan calculator online. Enter the amount you need to borrow and the monthly payments you can afford to make. It will generate how many months (or terms) it will take to repay a loan.
Be aware though, these loan calculators will not have the exact interest rate for your loan. This will just be an estimated time frame.
3. Check Your Credit Score And Shop Around
There are multiple free credit score apps that you can use. Equifax, Experian, and TransUnion are the most popular.
Log into one of these websites or apps, and input your information. The system will then generate your credit score. The higher the number is, the less likely the lenders will see you as a risk.
Ideally, you want an excellent credit score, but great and good ones should give you manageable interest ratings.
Looking at your credit score, you may notice that a black mark (such as a missed credit card payment) will be removed from your record after a month or so. With this information, you should wait until the mark is removed before applying for the loan. This is because, with the mark removed, you will be offered a better interest rate.
Knowing what your credit score is, you can browse loans (often through the credit score app), to see what a company will likely charge you. Shop around until you find one which offers the lowest interest rate within your expected time scale.
4. Apply For The Loan
Again, it might seem productive to apply for as many loans as possible until someone accepts your application. However, every time you apply for a loan, your credit score goes down (often just for the month). And every time your application gets rejected, your credit score decreases too (often for longer than a month).
If you apply for a loan and get rejected, it will be harder to apply for a loan from a different lender. This is because the second lender will see you’ve been rejected, and assume they found something in your files that makes your loan risky. They don’t need to search themselves, they can use the first lender’s conclusion.
This is why step 3 is important. Once you’ve used the credit score company’s recommended list, you will see the most likely lenders to accept your loan request. You can either go through the credit score company or apply directly.
5. Set Up Your Fixed Monthly Payments
As soon as your loan has been approved and you have access to the money, you should step up a direct debit. This will automatically pay your loan every month with the correct amount, so you don’t have to worry about missing a payment.
If you miss a payment, you will receive a late payment fee and a black mark against your credit score, making this process harder in the future.
Applying for a personal loan is easy as long as you know what to do. It all comes down to this – figuring out how much you need to borrow, how much you can afford to pay monthly, and finding the best interest rate for your credit score.