Things You Need to Know Before You Take a Personal Loan
By Credit can come in various forms including personal loans, credit cards, home equity loans, and more. Each type of credit, however, serves a particular purpose. A personal loan is likely the most versatile type of loan since lenders usually do not impose any restrictions on how borrowers must use the loan amount. Also, since it has a competitive rate of interest, the overall cost of the loan is likely to be more affordable as well.
Common Personal Loan Terms
Before you apply for a personal loan, it’s a good idea to familiarize yourself with a few commonly used terms.
- Principal: This is what you borrow from the lender.
- Interest: When you get a personal loan, the lender charges you a certain fee, called the interest, for giving you their money, which you pay back over a period of time.
- APR: APR refers to the annual percentage rate. When you apply for a personal loan, the lender charges a few additional fees to process your loan. So, these fees along with the interest rate are called the APR.
- Loan term: The term refers to the number of months or years that you have to repay the borrowed principal to the lender.
- Unsecured loan: Personal loans are referred to as unsecured loans since you don’t have to put up collateral to get the loan (in most cases).
How to Apply for a Personal Loan
If you would like to get a personal loan, you’ll need to go through the lender’s application process. Before you start this process, however, it’s a good idea to check your credit score, so you have an understanding of the interest rate you can expect to be charged. Once you do this, you can apply to the lender by submitting your application form and supporting documents.
Lenders usually check your credit score and debt-to-income ratio, based on which they approve or deny your loan application.
How to Lower the Impact of Credit Inquiries
The best way to apply for a personal loan is by shopping around and comparing your options. Once you find a few loans with reasonable terms, you can apply for pre-approval. To minimize the effect of inquiries that lenders will conduct to know how creditworthy you are, it’s recommended that you apply for pre-approval for different loans within two weeks. When you do this, credit bureaus will count these multiple inquiries as a single event.