It can be difficult to keep up with expenses in today’s fast-paced world. From unexpected car repairs to home improvements, saving up for every event isn’t always possible. That’s where a personal loan could come in handy. You don’t charge anything to a credit card or pull funds from savings. Personal loans come in all types of amounts to fit your needs. You might wonder about the details surrounding interest rates when it comes to these unique loans. Explore the world of lending so that you can benefit from it as events arise in your life.
Calculating Your Credit Score
Every person has differing interest rates quoted to them. They’re largely based on your credit score. This score is actually a combination of three perspectives offered by their respective credit bureaus. These institutions include:
In general, higher credit scores equate to lower rates on any loan type. The credit bureaus use a host of different details about your spending habits that are translated into a quantifiable score.
Paying your bills on time and carrying credit cards with balances creates part of your credit score. Lenders want to know that you’ll responsibly pay back any amount that you borrow. They may then reward you with an interest rate that’s lower.
People who struggle to keep up with their financial responsibilities are seen as risks. High-interest rates for their personal loans are the norm. The lender requires this assurance that the balance will be paid back without issue.
Evaluating Credit Histories
In reality, your credit history is more telling than a three-digit number. Your history spells out every detail of your financial life.
Within your credit history, you’ll find these highlights, such as:
- Credit card providers and contact information
- Payment histories
- Balances and payoff details
When you initially work with a lender, your credit history can be brought up and discussed. No one has a perfect record. There may be perfectly understandable scenarios that impact your history in a negative sense, such as becoming ill and forgoing payments on a credit card for several months.
Another factor highlighted in your credit history is the length of time you’ve held these accounts. People with long-term commitments to certain lenders show a high level of responsibility. A large amount of credit that’s unused is also a perk. This available money equates to spending control, which often translates into low rates for your personal loan needs.
Exploring Income and Employer Statuses
Consumers must understand that loans have certain limitations that are based in part on your income. Lenders look at your debt-to-income ratio. In essence, this ratio is a comparison of your income and current balances. Lenders cannot allow you to borrow too much money because it isn’t feasible for it to be paid back in a reasonable amount of time.
For any personal loans, you also need proof of income. Pay stubs from your employer are valid as proof, so keep these filed at home or in an online account. Depending on the lender, you might need six to 12 months of pay stubs. A copy of the direct deposits to your checking account may be a substitute in some cases. However, lenders typically want the official stubs with the employer’s name printed at the top.
If you’ve had multiple jobs in the past year, explaining your situation will be necessary. There may be extenuating circumstances that called for this type of employment record. It’s not necessarily bad; an honest explanation can clear up any confusion.
Understanding Bankruptcy Influences
Interest rates are also influenced by possible bankruptcies in your background. If you completed a Chapter 7 bankruptcy, it remains on your credit report for 10 years because a large amount of money was essentially forgiven by the courts.
Lenders have a right to know that you defaulted on these debts. Discussing the reasons behind a bankruptcy could help your personal loan rates, however. There are solid and valid reasons why a bankruptcy is necessary, such as:
- Death in the family
- Lost job or career displacement
A partial repayment through Chapter 13 might grant you slightly better interest rates. Personal loans are partly based on your responsibility level and the fact that you tried to pay back some of your debts. Your resulting interest rates may be a bit better in these situations.
Differentiating Between Fixed and Variable Rates
You’ve probably seen categorized rates from banks that report current home, auto and personal loan values. There are typically three categories, which include:
- Fixed rates
- Variable rates
Most consumers are concerned about loans that have a variable rate. These interest rates change with the financial times, which ultimately impacts the monthly amount to be paid.
The majority of personal loans are fixed. You and the lender agree to a particular rate that reflects the current financial landscape. The rate gets “locked” in during discussions. For a period of around 30 days, the loan remains locked so that the lender can finalize the documents.
If you decline the loan during the 30 days, you lose the locked rate. It’s possible for the rates to rise during this time, which raises your payment amounts accordingly. Lock in a rate that is as low as possible. On average, personal loans can range from 5 to 36 percent in interest when all of your credit details are considered. The APR will include not only the interest rate but also certain fees associated with the loan.
Choosing Between Secured and Unsecured Loans
Loans are further divided into two more categories: secured and unsecured. In the loan world, moving large amounts of money depends on risk, and lenders take a gamble on particular borrowers. Secured and unsecured loans are options that reduce the lender’s risk while improving the interest rates for the public.
Secured loans have collateral backing the funds. If the borrower doesn’t pay back the loan during the term length, the collateral becomes the bank’s property. Collateral might include:
- Recreational vehicles
- Real estate
Because the bank has a guaranteed way to collect on the monies, secured loans tend to have lower rates.
The most common loan, however, is an unsecured type. Borrowers simply promise to pay back the amount, but they don’t have any collateral to back up that claim. They’re basing their word on credit histories at this point. Lenders take a chance on these borrowers, so higher rates prevail.
Applying Personal Loans to Nontraditional Debts
In the past, people used personal loans to pay for major events such as weddings, family vacations and other milestones that required a large amount of money. Today’s borrowers have a wide variety of needs that could be addressed with a personal loan. Nontraditional debts for borrowers might include fixing up a home or consolidating unsecured debt.
Repairing or updating a home is a common use of today’s personal loans. You might be under the impression that only home-equity loans are designed for these purposes, but this isn’t necessarily the case.
Personal loans can be completed in a matter of weeks because the paperwork effort is minimal. Going through a home-equity process takes several months as appraisals and other formalities must be completed before funding the loan. Many consumers understand that personal loans are solid substitutes when money is needed quickly.
Picking Your Lender
There are certainly lending rules when it comes to borrowing money, but there are small differences between lenders. It’s advantageous to shop around for a lender. Comparing rates gives you a clear view of the borrowing picture because you’ll encounter both high and low rates.
Take a look at the benefits that each lender provides. A few features might include:
- Online account access
- Choosing your monthly due date
- Streamlined paperwork process
Many consumers start with their own banks first. They have a track record with the bank, which helps with interest rates. Your bank has literally every transaction that you make in their records, so proving financial responsibility is simple in these cases.
Use your bank as a stepping stone toward other quotes from separate lenders. You can narrow down your choices as the best deal comes to light.
Preparing the Documents
With your chosen lender, start the document process. At first, it’s your responsibility to provide paperwork that pertains to your finances, such as:
- Tax records
- Pay stubs
- Current loan documentation, including student and auto commitments
Your lender requires hard copies of these documents so that they can paint an accurate picture of your situation. You’ll also need copies of your identification cards. Passports, driver’s licenses and birth certificates are examples of accepted IDs. Every lender must be careful about identity fraud to protect customers.
These documents might be mailed or emailed to the lender if necessary. Electronic pathways are normally secured by the lender’s software. If you don’t feel comfortable with electronic transmissions, most lenders still accept papers mailed as certified packages to their offices.
Receiving the Funds
Compared to other loans, personal types are funded in record time. Verify that your lender has all of the necessary documentation. A quick email or phone call is sufficient. If any documents are missing or incomplete, the funding will be delayed.
On average, loans disperse in about five to seven business days. There’s no need to wait for a check in the mail, either. Most lenders can wire the money so that it ends up in your bank account without any effort on your part.
For a successful deposit, your lender requires several details, such as:
- Routing number
- Account number
- Bank name and account type
Lenders keep this information extremely confidential so that no one will have access to your accounts except for authorized personnel.
Paying Back the Debt
Once the lender funds the loan, it goes immediately into repayment. You pay a combination of interest and principal each month. Depending on when the loan funds during the month, you won’t pay the first payment until the subsequent month.
Loan term lengths vary considerably. Each lender has slightly different rules for their customers. In general, you’ll have between one and seven years to pay back the debt.
Consumers must consider certain details when they pick a term length. It’s normal for a long-term length to have higher interest rates because the lender is without its money for that time period. A consumer who pays back a loan within a year, in contrast, is typically rewarded with a lower rate. The lender receives the money in record time, which is attractive to a financial institution.
Comparing Loans to Credit Cards
With so much preparation involved with personal loans, you might be tempted to just apply for a credit card. Interest rates will always be better with a loan, however. Credit cards are designed to be short-term loans of up to 30 days. Allow a balance to reside on the card for longer than this window, and you’re paying interest rates that are normally higher than 20 percent.
This interest accrues on a daily basis. It can go on for months at a time, too. When you accept a loan, it has a definite starting and ending date. The interest remains at a reasonable number. If you have an event that requires a large sum of money, turn to loans instead of credit cards for your financial solutions.
Going Online for Loan Competition
One of the ways you can find low-interest rates is through online lenders. These businesses are legitimate banks, but they don’t have traditional buildings and staff. You benefit from lower costs overall. The lack of overhead, such as office space rent, means that the lender doesn’t have to support a lot of expenses. As a result, they’re extremely competitive with even larger banks today.
Go online and ask for a quote from several lenders. Every business knows that it’s under scrutiny, so you’ll receive a variety of attractive rates. The funding process is identical to traditional banks, which alleviates any concerns between online or local lenders.
When you’re a responsible borrower, lenders sit up and take notice. Keep up with any payments and complete those terms in little time. Personal loans can enhance your lifestyle and cover expenses without putting you into debt for the long term.
Chris Fuller went to the University of South Florida and has worked in the financial sector for over 20 years. He has extensive experience in all aspects of personal and small business lending, from personal loans, equipment finance to cash flow based solutions for small mom and pop businesses, and large corporations.