Let’s say you want to buy some new furniture, a new smart TV and an iPhone. You’ve already decided on a budget to spend and all of these, but you haven’t got all the money. The best solution in this case is a personal loan. Usually you pay the money back in monthly installments over a period of two to five years and you don’t need a collateral.
Personal loans are unsecured loans like those offered at Adherents Loans. This means the loan is supported only by your creditworthiness and you won’t need any type of collateral. The main advantage of a personal loan is that it can be used for almost any reason, from an unexpected medical’s bill to a much sought-after vacation, or house renovation. So, it seems like a very good way to borrow money. However, there are some things you should know first.
- The interest for a personal loan can vary
The interest rate for a personal loan is based on the annual percentage rate, aka APR. The APR can vary from one year to the other. It is expressed as a percentage and it will help you make a decision on the lender. In June 2019, the APR was 9.41%. However, your creditworthiness can influence this number.
Your creditworthiness is your “borrower CV”. The creditors will be able to look at your repayment history, credit score and even number of liabilities. They could also see your balances, the credit limits, the credit balance of your current accounts and even if you’ve had due amounts of any kind. So, it helps to build a “good borrower” reputation in time, because banks will know.
- Make sure you really need a personal loan
You need to make sure that a personal loan is right for you. At a first glance, it might look like the less complicated idea. However, for certain types of needs, like say a car, an auto loan might provide for a lower interest rate and an overall better idea. However, these types of loans also come with other strings attached. For example, an auto loan needs to be secured by the very car you want to buy.
Moreover, there are loan solutions, like a 0% introductory APR credit card which can be a better idea if you are sure you can pay off the money before the 0% rate expires. All in all, there are a lot of things to consider before choosing a personal loan, so it is not such an easy choice to make after all.
- Don’t borrow more than you need
Always keep in mind that you’re going to pay interest for the money you borrow. It’s easy to say “I’m going to borrow extra, just in case”. However, you’re going to pay interest for that “extra”, so try to make real calculations before deciding on the amount of money you borrow.
What is more, you also need to make sure that you can pay them back. Overextending yourself financially is a big mistake, but you probably already know that, so let’s move on.
- Check your credit score before applying for a personal loan
You can make what is called a soft inquiry at the main credit reporting agencies and will get back your updated credit report. If the lender makes what’s known as a “hard inquiry”, that could affect your overall creditworthiness. So, it’s better you check your credit score first, then proceed to applying for the personal loan.
Credit score is really important for your loan because the higher the score, the better the interest rate. For example, a person with a 760 or higher credit score, could borrow an average of $20,027, with an interest rate of 9.96%. In contrast to this, a person with a lower credit score of only 640, could borrow about $11,000 with an interest rate of 24.49%.
These numbers are from January 2020 and as you can see, the difference in interest rate is quite huge. So, keep an eye on your credit score and make soft inquiries about it before you want to take a personal loan.
- Always check the details of your personal loan
After getting prequalified for your loan, make sure you read all the details in your preapproval letter. Know the fees and penalties for late or missed payments. See if the interest is fixed or variable and if you can decide between these two. In case the personal loan needs to be secured, see what the collateral might be.
You might also be able to pay your loan off early, but some lenders might have a “penalty” for that. See if that is the case. Once you know all the details, you can apply for a loan. That is the time when you need to have all the required documents in order and submit your application.