A personal loan can help you cover a variety of expenses, from home improvement projects to debt consolidation. But before you apply, make sure you know what to expect when you receive a personal loan and what kind of impact it could have on your credit. This article will give you all the information on personal loans you need to know.
Generally, you will have to provide documentation verifying your identity and income to be considered for a personal loan. Then, the lender will typically do a hard credit check that may temporarily affect your credit score. The lender will then review your application to determine whether or not you qualify for a personal loan. Lenders consider a number of factors when determining your creditworthiness, including your credit history, your debt-to-income ratio and other financial assets. You might be able to boost your odds of qualifying by taking steps to improve your credit score before applying.
When you’re approved, you will receive a promissory note that defines all of the terms and conditions of the loan. This document will state how long you have to repay the loan, the applicable interest rate and when payments are due. It will also state any fees associated with the loan, such as an origination fee or late payment penalties.
Your lender will send the loan proceeds to you, either directly into your bank account or via a check. From there, you can use the funds as you see fit. The loan proceeds will usually be subject to a fixed-rate interest rate and a fixed monthly payment throughout the term of the loan, though some lenders allow borrowers to choose a variable-rate personal loan.
You might also be able to secure a personal loan by providing collateral such as cash, a car title or money in a savings account. A secured personal loan allows borrowers with less-than-stellar credit to qualify for better loan terms because the lender can seize the asset (such as an auto, boat or bank account) if you fail to make payments. However, you will likely have to pay higher interest rates on a secured personal loan than you would with an unsecured one.
Tip: If your credit score prevents you from qualifying for a personal loan or securing reasonable loan terms, it may be worth considering a cosigner. A cosigner, who has a strong credit profile, can boost your chances of being approved for a personal loan and may be responsible for making the loan payments if you’re unable to do so.
Whether you choose a secured or unsecured personal loan, your payments will be reported to the credit bureaus and will remain on your credit report for seven years. If you have an unsecured personal loan, your repayment record will boost or hurt your credit score depending on how well you manage the repayment schedule. You can get a better understanding of how your personal loan will impact your credit by using WalletHub’s free credit score tracker.