Receiving a personal loan in the United States can be complicated, especially for first-time borrowers. There are so many items that need to be evaluated by lenders, and knowing exactly how to fill out, submit, and evaluate your personal information can be intimidating enough. Throughout this blog post, we will go through all of the necessary steps to taking out a personal loan in the USA.
Before we get into all of the information, it is important to remember that personal loans are unsecured loans, meaning that they do not take assets into account when evaluating your eligibility for a personal loan. So, if you need a loan but do not own a house or a car, for example, you will still have no problem getting the money you need.
The first step to taking out a personal loan is checking your credit score. A strong credit score will greatly increase your chances of being approved for a personal loan and even of being approved for a lower interest rate. Credit scores will fall into the following four categories: 720 and higher (excellent credit), 690-719 (good credit), 630-689 (fair or average credit), and 300-629 (bad credit). Knowing which category you fall into is important before applying for a personal loan. While there are options for people with lower credit scores, it may be a better idea for you to do what you can to fix your existing credit score prior to submitting a personal loan application. This way, you may be given the opportunity to have a lower interest rate on your loan, easing much of the financial burden that comes along with taking out a loan to begin with.
Once you’ve viewed your credit score and are happy with the results, you’re ready to get pre-qualified for your personal loan. Be advised that many lenders will perform a soft credit check during this step of the process, but it will not affect your credit score in any way. During pre-qualification, you will be required to provide the following information: your social security number, any other monthly payments (student loans, rent, etc), your annual income, your employer’s name/address/telephone number, your personal address/email/telephone number, any of your previous addresses, your date of birth, your mother’s maiden name, and the name of your college and your major at that college.
Although your credit score may be in a safe range, you could still get denied for a loan during the pre-qualification step. If this happens, it is most likely due to too little income, little to no work history, a high debt-to-income ratio (anything twenty percent or above is warily considered), and/or too many credit card inquiries and applications.
When your pre-qualification approval comes through, it is then important to begin shopping around for the best personal loan for you. Once you’ve received a certain number of online offers, you can sit down and compare the amounts, monthly payments, and interest rates. Banks and credit unions are also good places to seek a loan if you are unsatisfied with the online offers you’ve been given. Keep in mind that loans taken from credit unions often have lower interest rates and more flexible borrowing terms.
The next step is to consider how your offers fare against other credit options. Before you choose the best loan for you, see if you’re able to qualify for a zero percent credit card. These are usually distributed to people with good credit and have zero percent interest on purchases for a minimum of one year. If you’re able to repay the loan in the allotted amount of time, then this type of card may be your cheapest option. It is also a good idea to consider a secured loan instead of an unsecured loan. If your credit is very poor and you cannot go through the necessary steps to help improve it, your best bet is probably to have your collateral evaluated for a potential home equity line of credit. Another thing to consider when taking out a personal loan is whether or not you wish to have a co-signer. This is a good option for people who are unable to take out a loan on their own. Credit scores and incomes are evaluated for both of the borrowers and the loan itself may offer you more favorable terms.
Once you’ve chosen the loan that is best going to meet your needs, it is crucial to read the fine print within your terms. It is important to look out for hidden penalties and surprises that you may not have initially been aware of. These include prepayment penalties, automatic withdrawals, and APR surprises. Let’s break these down. Prepayment penalties are penalties for paying off a loan early. While this is fairly uncommon, it still does happen, so it is important to watch out. Automatic withdrawals may be done straight out of your account. If this is the case, you will want to set up low-balance alerts from your bank to prevent overdrafting. APR surprises are the most important thing to look out for. The total cost of your loan will be clearly explained in your terms, so be sure to read them to avoid later confusion.
In addition to looking out for hidden penalties and fees, it is also important to look for these borrow-friendly factors that you may want to take advantage of. These include payments being reported to credit bureaus, flexible payment options, and direct payment to creditors. When payments are reported to credit bureaus, your credit score will likely go up as long as all or most recorded payments are on time. Flexible payment options may be outlined in your terms, so if your lender is allowing you to choose your own payment due date, provide a late fee, or to skip an entire payment in the event of hardship, it is important to be aware of this so that you are able to take full advantage of the offers being made to you. Lastly, direct payment to creditors may be sent, which is helpful for any borrower using their loan to consolidate debt.
Now that you’re fully aware of the terms in your contract, it’s time for your final approval. Your chosen lender will need to see the following paperwork: ID (passport, driver’s license, state ID card, Social Security card), verification of address (utility bills, copy of lease), and proof of income (W-2 forms, pay stubs, tax returns, bank statements). At this point, a hard credit check will be run by the lender that will likely cause your score to go down a few points for a short period of time. Then, you’ll receive your funds on the lender’s terms.
Remember: as a borrower, you need to try to find the lowest interest rates and to borrow only what you need to ensure that you’re able to pay your debt on schedule. Otherwise, you’ll end up worse than when you started off.
Here at Personal Loans USA, we provide you with all of the information you need to take out your personal loan. We are here to answer any and all of your questions, as well as to guide you step-by-step throughout your borrowing journey. Our comprehensive credit education will ensure that you know where you stand with your credit prior to applying for your loan.
To get started, visit our website and start your borrowing research.