A personal loan is a type of unsecured loan that you can take to consolidate your debts, fund home improvement projects, and pay for emergency expenses, among other things. Being an unsecured loan, you are not required to offer any collateral to the lender to qualify for this loan.
If you are considering applying for a personal loan, here are a few things you should know.
- Banks Are Not Your Only Option: If you are looking to apply for a personal loan, keep in mind that traditional banks are not your only option. You can also apply to credit unions and online banks, which will likely charge you lower interest rates.
- Your Credit Score And Debt-To-Income Ratio Matter: When you apply for a personal loan, lenders take your credit score and debt-to-income ratio into consideration. A high credit score indicates you are likely to repay your loan on time. Lenders also check your debt-to-income ratio since having too many debts could affect your repayment ability.
- You Can Lessen The Impact On Your Credit Score: When you apply for a personal loan, the lender performs a hard inquiry into your credit history, which causes your credit score to drop. To lessen the impact of hard inquiries on your credit score, you should apply for multiple loans within a period of a few weeks, since credit scoring models will count these inquiries as a single event. In comparison, if you stretch the application process to a few months, each inquiry will be counted as a separate event.
- Personal Loans Work Best As A Short-Term Solution: The tenure for personal loans usually ranges between 1 year and 7 years. So, personal loans work best if you can repay the borrowed loan amount within a few years.
- The Interest Rate May Be Higher Than What You Expect It To Be: Personal loan interest rates may be lower than that of credit cards. However, if you have a less-than-desirable credit score, you should be prepared to pay a higher rate of interest.
Once you get your loan amount, make sure to repay the loan every month as per the agreed-upon terms to keep it from affecting your credit score.