It’s a given fact that the average American household carries credit card, mortgage, automobile, or some other form of revolving debt. In fact, the total revolving debt in the United States is at an all-time high of slightly over $1 trillion dollars. With this much debt spread out among families, the question is how are they handling the payoff?
Many households who carry large balances or multiple credit cards are turning to personal loans to help offset some of the interest. Since out of the $1 trillion in debt over $830 billion of it is in credit cards, there are a lot of people looking for help through the avenue of personal loans.
In many cases, a personal loan is the right way to help you out of mounds of credit card debt and high-interest payments. However, jumping in and taking the first loan, you are offered is probably not a good idea. You need to shop around and get informed about the possible types of loans available to you before you determine a course of action.
Here are 7 considerations you need to think about before you apply for your next personal loan.
- Your credit score plays a huge part in the types of loans you will qualify for.
Most credit card scores range from 280 to 850 and these scores are broken down into ratings. Scores that are considered to be “very good” or “excellent” will give you more access to better personal loans with lower interest rates.
Those borrowers who are struggling with their credit ratings will likely have trouble getting approved for loans that have good terms. However, depending on the current terms that you have, you may find that even the higher interest rates in a personal loan may be a better course of action for you than paying on your multiple credit cards or other debt.
Taking out a personal loan when you have poor or bad credit could result in a loan with a high-interest rate, which equates to higher monthly payments. To determine if this new loan payment is worth taking out, compare the total cost of the loan and the terms, as well as when it will be paid off, to your current credit cards, interest rates and terms, and when those are anticipated to be paid.
- The risks in taking out a personal loan are different than the risks involved with credit card debt.
Unlike a credit card, which you can pay off at your own pace as long as you are making the minimum monthly payments, a personal loan must be paid off according to the terms of the loan. You can pay it off earlier, but if it is not paid off by the set date you could be liable for extra charges.
If the loan is for a large enough amount, or the lender determines it is necessary, you could even end up in a court case should they decide to sue you.
Some personal loans also have prepayment penalties if you do decide to pay it off early, so watch for those extra terms and conditions in the fine print.
- There are different types of personal loans.
Once you have decided that your finances would be served better by taking out a personal loan and you know what your credit score is, you need to understand the different types of personal loans you may be applying to receive.
There are two main differences in the types of loans out there – some are secured loans, and some are unsecured.
Most personal loans are unsecured, but you may find lower interest rates or better terms with secured loans since there is collateral to guarantee to the lender that they will receive some form of payment should you default on your repayments. Collateral is often found in the form of automobile titles, house deeds, or other guaranteed items that can be transferred to the lender.
However, unsecured loans are more common. In these types of loans, collateral is not necessary. Because of this added risk to the lender, the interest rates tend to be higher.
You can shop around for personal loans, though, since there are many types out there. Sites like LoanReviewHQ.com can help you to see what you may qualify for and walk you through the process.
- You are going to need some common documentation regardless of the lender you work with or the loan you decide you want to try to obtain.
Each lender has different requirements, but in general you will have to come up with some proof that you are who you say you are and you can pay back the loan. When you know what you need in advance, it saves time and trouble while you are filling out your application.
Be sure that you can easily access your government-issued ID and social security card as your proof of identity. After that, you will need to submit some proofs of income, like check stubs and an active checking account. You will also need to prove that you have a residence where your bills can be sent.
Once you have all of this together, you can start the process of applying for a personal loan.
- Determine how much you will need before you start talking numbers.
The company that you are applying with is going to get more interest if you take out a higher loan. Most personal unsecured loans range from $100 to $25,000, but if you only need to take out $2,000 to pay off your credit card debts, then that is what you should take out.
Remember that you will pay more interest on higher loans and they will take longer to pay off. Shop smart and don’t get talked into a loan that has higher terms than you can afford.
In the long run, your goal is to get your bills paid off. Taking out larger loans can end up making it difficult for you to meet the monthly payments, causing you to end up deeper in debt and impacting your credit card score negatively.
- You may be able to qualify for a personal loan, even with bad credit.
If you are in a position where a personal loan may be the best way to manage your finances, talk to a lender that works with multiple personal loan providers. If you have the ability and the funds to repay the loan, you can still be approved.
It is worth checking into and applying for because most lenders do not go the normal route of traditional credit checks with a small unsecured personal loan, so their inquires do not affect your credit score.
If you can prove that you have a steady income and are financially secure enough to repay the loan, there is most likely a lender out there that can help you. The terms will vary for each lender, so you want to make sure you work with someone who is looking to get you the best terms for which you can be qualified.
- You can apply online for many personal loans.
Depending on the lender service, many loan providers offer you the option of quick approval or denials online. You can get personal loans, car loans, business loans, and even payday loans without leaving your couch.
Most of these responses come within minutes, but some may take as long as one business day. The fast turnaround means that you will know quickly what your next steps need to be – whether you are on your way to financial stability, or you need to consider other options to get yourself out of debt.
Once you are approved, some places will mail you a check for your loan and others have direct deposit options. Look into the terms prior to your application. If you need money immediately, you may need to keep shopping around if the lender you are looking into does not do direct deposits.
Also keep an eye out for the lender’s loan amount limits. Borrowers who need lower loan amounts, typically under $3,000, don’t need to be as concerned about this. If you are looking for anything higher, you need to verify with the personal loan provider that they give out loans in the amount that you need.
Going in With Knowledge Means You are on the Path to Financial Freedom
Even though there are concerns when you take out a personal loan and you need to carefully consider your repayment terms, it is still an excellent choice for many people caught in the web of credit card and other revolving forms of debt.
When you arm yourself with the knowledge of how personal loans work and what you can expect when you apply for one, you have the ability to shop around and find one that is right for your situation.
You can use your newfound loan expertise to get the lowest rates and best financing terms possible and get out of debt sooner.