What you need to know before applying for a personal loan for financial aid. (iStock)
The pandemic has created financial hardship for many. If you are with them, you are probably waiting for the government’s decision on a second incentive package. Until then, there are bills to pay. A personal loan from a bank or credit union could persuade you by providing quick cash, but use caution before signing on to the underline.
During the coronavirus, some lenders change qualification requirements. And your income may not be stable, which could jeopardize repayment. A loan may or may not be the right choice for your situation, and it helps to consider these five questions.
1. Will I be eligible for a personal loan?
During the pandemic, some lenders raised the credit rating requirements on unsecured loans. Depending on your financial history, it may be harder to qualify if you do not have good or excellent credit.
Before applying, check your credit by getting a free FICO scorer report. You are entitled to one free report from the three major reporting agencies each year. With this information, shop around and compare lenders and rates with a site like Credible to make sure you get the best loan offer with terms that fit your situation.
Typically, online lenders are more linear than traditional banks. In addition, credit unions will often work with lenders with average scores if you have an existing account. If you are interested in seeing what kind of rates you qualify for today, just enter some information into Credible’s free online tool and you’ll see results within minutes.
Lenders will also look at your debt to income ratio. Add your monthly debt payments, such as a mortgage, car payment, or student loan, and divide that number by your monthly income. The general rule is that lenders should not have more than 43 percent of their home equity payments devoted to debt.
If your credit score or debt-to-income ratio makes it difficult to qualify, you may want to consider getting a cosigner on your loan. If you have a family member or friend who would be willing to trust you, then this can get you approved and result in a better interest rate.
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2. Is a personal loan a good idea?
This is one of the most important questions about loan, and the answer depends on how you use it. If you are aiming to consolidate other debts, a personal loan could help you reduce your monthly payments and eliminate high interest rate loans to pay back faster. A low-interest personal loan should improve your financial health, not add unnecessary stress.
If you intend to use a personal loan for debt consolidation, it is important to shop for the best rates and terms – just let Credible do the work for you. Compare rates and terms between multiple lenders at once.
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If you plan to use the funds for monthly accounts like your mortgage or utilities, for example, a personal loan will make those payments more expensive because they add interest to the balance. And if you have default on the loan, you can score your credit score. Discover other options instead. For example, many lenders and service providers work with their clients during this difficult time by postponing payments without paying over late payments to the credit bureaus.
3. Which personal loan is right for me?
Before you apply, look at the interest rate to determine how much it will cost. The annual percentage rate of charge (APR) includes interest, as well as fees paid by lenders as a percentage. According to the Federal Reserve, the average personal loan of 24 months has an APR of 9.5 percent.
Also determine how long you will have to pay the money. Your interest rate will be based on the length of the loan, with shorter terms normally offering lower interest rates. Most loans offer terms ranging from six months to seven years. Your first payment will arrive about 30 days after you sign the paperwork, so make sure you have enough money in your budget.
You can try Credible to use their personal loan calculator and find the best personal loan rates.
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4. How many loans can you take out at one time?
Underwriting practices of some lenders, lenders may not have more than one personal loan. Your debt to income ratio can also affect your ability to get a second loan. If the payment on the second loan puts you above the 43 percent or less target, you have a hard time qualifying, and making the payments can be tricky. When you apply for a second loan, the creditor will draw a harsh inquiry about your credit report that may lower your credit score. If one loan is not enough, it may be time to consider alternative methods of obtaining the funds.
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5. What are my other options?
Reducing expenses and saving money is probably the best way to get ahead financially, but other forms of financing can address your immediate needs. If your credit is good, consider getting a credit card that offers 0% APR. This can be an effective way to secure money for the short term, as long as you can make the monthly payment. Visit an online brand like Credible to view multiple 0% credit card options at once.
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But be careful. If you do not pay the balance before the end of the promotional period – often 12 to 18 months – you will have to pay interest that occurs from the start date of the charge.
These loans can help you get back on your feet in a crisis, as long as you think about using them and repaying them on time. Choose the option that is right for you in the present and future. The best plan is to make it stronger in the end.
