The good thing about an unsecured personal loan is you don’t have to borrow against your home, property, vehicle or another asset that has value. Naturally, though, interest rates are usually higher and qualifying is easier with a higher credit score.
Is a Personal Loan the Best Option for You at This Time?
If you’re uncertain about the answer to that question, let me help you figure it out.
Can You Afford Another Monthly Payment at This Time?
Take care to review your income and expenses before you borrow to make sure you can handle a new payment before applying for your next personal loan. You must make sure you can handle the payments without cutting into your needs (e.g. housing, food, appropriate clothing and transportation).
Is a Personal Loan Essential?
Borrowing every month for things that aren’t necessary, such as entertainment, can impact your ability to borrow at reasonable rates in the future. Furthermore, it really isn’t worth increasing your debt. You’d be better off budgeting in extra to place in a savings account.
Will the Loan Cost You More After Interest Rates?
Are you getting the loan to pay off a credit card or other debt that is $1,000 or less? If this is the case, working out a monthly budget to pay more than the minimum due in order to pay off the debt earlier would probably save you more money since the personal loan could have a higher interest rate.
Is the Debt You’re Trying to Pay Off a Student Loan?
Maybe you’re considering refinancing your student loan. Although a personal loan could offer you lower interest rates, your student loan comes with benefits that a personal loan doesn’t, and refinancing would cancel those benefits.
Some of the benefits your student loan may have that you would lose include the ability to deduct interest rates you’ve paid when filing income taxes, the option to get a deferment during a financial hardship, an opportunity to qualify for future loan forgiveness programs and the chance to delay payments if your student loan is still within the grace period.
Is There a Better Money-Saving Option Available?
If you’re trying to pay off medical debt, you’d most likely save money by setting up a payment plan with the hospital or doctor’s office. Another less expensive option to consider if you can’t arrange a payment plan is a medical credit card.
How Good is Your Credit?
There are lenders that will give you a loan even if you have bad credit or no credit. However, the interest rates are much higher, which means you’d be better off trying to improve your credit score first.
If you still think a personal loan is the best option for you at this time, keep reading to ensure you get the best possible deal during your hunt.
Tips for Getting the Best Unsecured Personal Loan Deal Possible
Aim for a Fixed-Rate Personal Loan
This is the most common type of personal loan and it’s the one you want. With a fixed-rate loan, interest rates and monthly payments stay the same. Knowing exactly how much you’ll be paying each month for the life of your loan is easier on your wallet and budget.
Ask About Early Pay Off Fees
Beware that if you have plans to try and pay off the personal loan early, you may have to pay an extra fee, usually referred to as a prepayment penalty. That being said, as you’re shopping around, make sure you check the terms of the loan for mention of this. If the terms don’t specify whether or not there’s a fee for paying the loan off early, ask the lender if there’s a fee, and if there’s not, be sure it’s mentioned in the contract before you sign. Even if there is a fee and you decide to go ahead with the loan, that amount should be in writing as well.
Be Careful Where You Apply for Credit
While there are several lending platforms that will perform a soft pull and check your credit with no impact on your credit score, not every entity does this, and multiple pulls can impact your credit.
Check Your Assets
New lending restrictions are known as Current Expected Credit Loss (CECL). Lenders need to be able to make a prediction of how likely you are to pay your bills in the future. When you go to apply for a personal loan, make sure to list all of your assets, including retirement accounts, your home (if you own it) and your car. Be honest about any problems in your payment history. Qualitative and Environmental (Q&A) factors include things such as your employment history (e.g. how long you have been with your current employer).
Q&A factors, despite what you may have heard, still apply under CECL. If you suffered a health challenge or were downsized at work, share that with your lender. If you’re working again, you may not need the loan for very long and may be able to pay it off quickly.
To ensure you get the best personal loan deal, make a comparison chart with at least four columns: lender, interest rate, additional fees (e.g. origination, late, prepayment, etc.) and term range (number of years until the loan is paid in full). As you prequalify for a personal loan, enter the information in your comparison chart. This way when you’re done prequalifying with the lenders of your choice, you can choose the lender who offered the best deal.
Consider a Credit Card for Small Loan Amounts
Credit cards can make sense as a type of personal loan if you’re smart about using them. For example, if you’re considering a personal loan for debt consolidation and your debt amount is small, your better option may be to apply for a credit card that offers 0% APR for a limited amount of time. This only works if you’re able to pay off the amount within the specified time for the 0% APR, and you must also have enough self-control to NOT use the card for extra purchases beyond the needs of the personal loan.
Red Flags to Watch for When Searching for a Personal Loan
1. Asks for Advance Fees
If a lender requires you to pay any fees before you get the loan, mark them off your list immediately. Never pay any upfront fees! Not only is this a possible scam, but it’s also illegal for U.S. lenders to require advance payment before you get the loan.
2. Guarantees Unsecured Personal Loans
I’m sure you’ve come across companies that guarantee you a personal loan with statements such as “we never say no,” “no credit, no problem” or “instant approval.” Although tempting, you definitely want to steer clear of these lending companies!
3. Not Registered in Your State
By law, lenders must be registered in the states they do business. To verify that the lenders you’re considering are registered, contact your state’s Attorney General office.
4. Requires You to Buy Credit Insurance
It is illegal for a personal loan lender to include credit insurance in your contract without your knowledge. They also can’t require you to buy it or refuse to loan you the money if you tell them you don’t want the insurance.
5. Has Outrageous Interest Rates
While it’s true that an unsecured personal loan does have higher interest rates, they shouldn’t be excessive. According to Bankrate, the average rates range from 3% to 36%.
The most important thing when it comes to searching for a lender is to take your time. Doing your homework on each company and using your comparison chart ensures you get the best personal loan deal that fits within your budget.