How to get a personal loan in 7 steps
A personal loan is a line of credit provided by financial institutions, such as banks or fintechs, that allows you to obtain a sum of money for personal use, typically to cover specific expenses like debt consolidation, emergencies, or major purchases.
This type of loan is repaid in monthly instalments, with interest and fees, over a predetermined period. This form of credit may be offered based on the applicant’s credit history and, in some cases, requires collateral or co-signers.
Instalment loans, with and without security
An instalment loan is a type of loan where the borrower receives a fixed amount of money and agrees to repay it in monthly instalments over a defined period. These instalments include both the principal amount and interest. When secured by an asset, such as a house or car, the loan is referred to as a secured loan, where the asset can be repossessed by the lender in the event of default.
Unsecured loans, known as unsecured loans, do not require collateral but typically have higher interest rates. This type of loan can also be used for debt consolidation, making financial management easier by combining multiple debts into a single monthly payment, often with a lower interest rate.
When personal loans are mentioned, it typically refers to a type of instalment loan where you borrow a certain amount of money upfront and agree to pay it back gradually over a specified period.
Understanding the details of personal loans
Before taking out a personal loan, it’s crucial to evaluate some important points to avoid future issues. Here are some questions you should consider:
- Do I really need this loan? Assess whether the loan is necessary and if there are other ways to resolve the financial situation.
- Can I afford the repayments? Review your budget to ensure that you can manage the monthly repayments without financial strain.
- What will I pay in total? Check the interest rates and any additional charges, as the total amount may be significantly higher than the amount initially borrowed.
- How much can I afford to pay each month? Ensure that the monthly repayments fit within your budget to avoid default.
- What are the interest rates and costs involved? Verify the total cost of the loan, including interest rates, origination fees, and any penalties for late or early repayment.
- What is the loan term? Understand how long it will take to pay off the loan and how this will affect your finances in the long run.
- Is this loan secured or unsecured? Consider the risks of offering an asset as collateral, or the higher rates associated with an unsecured loan.
- Can I consolidate existing debts? Determine if it makes sense to use the loan for debt consolidation and save on interest.
7 steps to your personal loan
Obtaining a personal loan can be straightforward if you follow a few steps, such as checking your credit, pre-qualifying, and comparing offers. Here are 7 steps to guide you through this process:
1. Check your credit
The first step is to review your credit score. This is important because your score directly influences the terms and rates you can secure. Look for any errors on your credit report, and if you find any, correct them immediately. The higher your score, the better your chances of obtaining lower interest rates.
2. Calculate the repayments
Before applying for the loan, run a simulation to understand the total amount you will need to borrow and how much it will cost you each month. Consider the interest rate and repayment term, and see if the monthly repayment fits within your budget without compromising your essential expenses. It’s crucial to ensure you can meet the repayments over time to avoid falling into debt.
3. Research lenders
Compare different lender options, whether traditional banks, credit unions, or online lending platforms. Assess the credit score requirements, the minimum and maximum amounts each lender offers, and the available repayment terms. This will help you find the best loan option for your financial situation tailored to your needs.
4. Obtain pre-qualification
Pre-qualifying is a process that gives you an idea of the rates and conditions you may receive without impacting your credit score. During this stage, you will provide some basic information, such as your income, employment status, and the desired amount and term. By pre-qualifying with different lenders, you can better compare offers before deciding which one to formally apply for.
5. Select a lender and apply
After reviewing the offers and selecting the most suitable one, it will be time to submit the formal application. At this stage, you will need to provide documents such as identification, proof of income, and proof of address. The lender will then conduct a more detailed assessment of your repayment capacity, and this check may temporarily impact your credit score.
6. Read the fine print
Before signing the contract, it’s essential to carefully review all terms. Check the Annual Percentage Rate (APR), which includes the interest rate and all fees associated with the loan, such as origination and service fees. Also, look for any penalties for early repayment in case you wish to pay off the loan before the term ends, and ensure you understand all contractual obligations.
Before applying for a personal loan
Before applying for a personal loan, it’s essential to ensure that your credit score is strong. This will increase your chances of securing better terms and interest rates.
Next, explore lender options that offer loans with features that meet your needs. Be sure to gather all required documents and information to complete your application.
Many lenders allow you to obtain an estimate of the interest rate before formally applying, making it easier to compare offers without impacting your credit score. In some cases, a decision can be made within minutes of submitting the application.
However, with so many options available, both in traditional institutions and online platforms, it is crucial to conduct careful research to find the best offer that aligns with your financial goals and budget.
