August 18, 2023

Tips for applying for a personal loan

If you need a personal loan, finding the right loan and getting approved are just some of the factors you should consider. You also want to protect yourself and avoid common pitfalls along the way.

  • Make sure a personal loan offers you the best deal

Before you consider different personal loan options and start shopping for the best rate, it’s worthwhile to pause and make sure that a personal loan itself is the best fit for your situation.

Check if there are other types of loans that could better serve your needs. For instance, you could take out a home equity loan or home equity line of credit.

Considering that home equity loans are secured by your home, whereas personal loans are generally not secured, your interest rate is likely to be more favorable when you tap into home equity. Keep in mind that by pledging your home to back the loan, you’re accepting considerably more risk in exchange for a potentially lower rate.

  • Be careful with credit card consolidation

Using a personal loan to pay off credit card debt on more than one account and consolidating the payments are one of the most popular uses of personal loans. If you can secure a lower interest rate on your personal loan than you were paying on your credit cards, this strategy has the potential to save you a lot of money in interest.

Use this debt consolidation calculator to calculate how much money a credit card consolidation might save you.

However, if you’re taking out a personal loan to consolidate expensive credit card debt, you should be careful. You can sabotage your money-saving efforts and potentially hurt your credit scores if you rack up fresh credit card debt again once you pay off the old cards.

  • Read the fine print

You should review the complete terms and conditions for any loan, including its fees and repayment period. This can help you avoid hidden costs and other pitfalls.

Be sure to ask the lender for a full disclosure of all the loan terms and read the fine print. There are differences in the terms offered by different lenders.

Make sure the monthly payment and repayment terms work for you. There also could be fees for late payments, applications, returned checks, credit insurance and more.

The lender is looking to generate a steady stream of interest payments from you over the term of the loan. So, be sure to check for any prepayment penalties in the event you want to pay off your loan early.

  • Watch out for origination fees

Before you apply for a new personal loan, you should pay close attention to whether the lender charges origination fees. While some lenders seem to offer lower interest rates, you might find that they also tack on an origination fee that effectively hikes the overall cost of your loan.

It’s possible that you could be better off with a lender that offers a higher rate than others but doesn’t add on any origination fees. A loan comparison calculator can help you compare interest rates, origination fees and other fees to find and compare the true cost of financing between different lenders.

  • Think carefully about automatic withdrawals

Some online lenders offer borrowers incentives to provide access to their bank accounts for automatic withdrawals of their monthly payments. For example, you might qualify for a discount if you sign up for automatic monthly payments.

If you’re comfortable scheduling automatic withdrawals (and have set up your monthly budget to support them), it’s fine to take advantage of this convenient and possibly cheaper payment option. However, if you have an inconsistent pay schedule or other challenges that might make keeping up with automatic withdrawals a problem, you may want to avoid such arrangements.

Some lenders may set up your personal loan terms to require automatic payments. If you prefer to pay online or by check, you’ll need to see if you have the option to opt out. If the lender requires automatic payments as a condition of borrowing, you’ll have to decide whether that’s a deal-breaker for you.

  • What if you encounter difficulties with repayments?

Find out what your options are in case you run into difficulties making your loan payments. Is there any potential to modify the terms of the loan? Will the lender allow you to enter a forbearance period or move a payment to the end of the loan under certain circumstances?

Also, is the lender open only to arbitration if any differences arise? Or can you go through the court system?

Hopefully none of these issues will apply to your situation. Still, it’s best to know the answers to these questions in advance.

  • Fixed rate or variable rate?

Another choice you may be faced with as you shop around for the right type of loan is whether to choose a fixed or variable interest rate. Most personal loans feature fixed rates, but some lenders do offer adjustable-rate options.

Typically, you’ll start off with a lower rate on a variable-rate loan. But, in exchange, you’ll also be taking on interest rate risk.

As interest rates rise, your variable rate may rise as well. This can increase the amount of your monthly payments and impact the overall price of your loan.

With a fixed rate, your payments will remain the same for the term of the loan. This is true regardless of interest rate movements.

  • Should you get a personal loan?

Now that you know how to get a loan and some of the pitfalls to avoid, the next question is whether you should get one. Personal loans can provide an excellent way to consolidate and save money on higher-interest credit card debt. And if you’re borrowing to make some home improvements, you may be able to get some of the money back when you sell the home.

But it may not make sense to borrow money for something you don’t need. As one example, vacations can be fun, but you may end up regretting it if you’re still paying off your trip years later.

If you’re learning how to get a personal loan, take some time to determine whether getting a loan is right for your situation. Also, consider some alternatives, such as 0 percent APR credit cards that can help you save on balance transfers and new purchases alike.

Whatever you do, avoid applying for a personal loan without seriously considering whether it’s necessary and some alternatives.

  • Preparation is key

When the question is how to get a personal loan, the best answer is to be prepared. Do your research and know all your options. Be sure to read the fine print and don’t be afraid to ask a lender to clarify something for you.

Lastly, make sure to set yourself up for success. Get on an automatic payment plan if you can manage it and look for ways to pay off the loan early.

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