Don’t Ever Accept Your First Loan Offer, and Some Other Tips

Personal loans can be a cost-effective alternative to credit cards, allowing you to finance major expenditures while saving money on interest.
According to the online lending marketplace Lending Tree, personal loans are becoming increasingly popular, with around 20.2 million borrowers in the United States.

Whether you’re taking out a personal loan to consolidate debt, finance a home upgrade, support your next big trip, or pay for a cross-country move, it’s vital that you have a clear repayment plan.
Select has compiled a list of 10 things to ask yourself to ensure you’re properly prepared for a new personal loan.

Personal Loan Dos

Do: Check your credit reports

The interest rate you get on a personal loan is heavily influenced by your credit score and credit history. Credit is used by banks as a risk indicator. If you have previously made timely payments, you are more likely to repay your debt. As a result, the better your credit, the lower your interest rate will be. In general, rates will be between 4% and 36%.

The three major credit agencies (Equifax, Experian, and TransUnion) are issuing free weekly reports at AnnualCreditReport.com until April 2021 due to the COVID-19 pandemic. We recommend pulling your credit reports as part of your due diligence to ensure they’re in good shape. Check for correctness and dispute any information that isn’t correct. An inaccuracy (such as missed payments or a credit card falsely tied to your name) can have a major impact on your credit score.

Do: Compare the APR

The difference between a low and a high interest rate might be significant. Assume you have a $10,000 loan with a 5-year repayment period. The difference in overall cost between a 10% APR and a 25% APR during that five years would be $4,862.56. We usually advise you to shop around before committing to a lender because each one evaluates your application data differently.

Do: Consider the risks if you have bad credit

If your credit score is less than 670 (which is considered “excellent” by FICO standards), getting a good interest rate on a personal loan may be more difficult. Furthermore, those who have filed for bankruptcy or do not have a credit history will have difficulty obtaining a loan.
People who find themselves in this situation may want to explore getting a cosigner to help them get accepted. A cosigner is a second borrower who can help you get a loan by putting their (supposedly decent) credit history on the line. It gives the bank peace of mind that the loan will not be defaulted on because there is a backup person in charge.

Adding a cosigner to a loan application can help smooth the process and perhaps get you a better rate than if you applied alone. However, if you default on a payment, your credit score and that of your cosigner would suffer.

If your credit isn’t good enough, you may need to pursue a secured loan. Because most personal loans are unsecured, putting up collateral (a house, car, bank or investment account) offers the bank leverage in a circumstance where you might not be the most appealing candidate. Secured loans have lower interest rates, but you take on a lot more risk if you can’t repay the payments down the road. If you default on a secured loan, the bank may be able to seize your collateral, which means you might lose your home, car, or whatever else you put up as collateral.

Do: Look closely at the fees

Examine your loan offer with a fine-toothed comb before accepting it. You should read the contract carefully to ensure that you understand everything; otherwise, you may be compelled to pay unexpected expenses in the future. The following are the most critical factors of the personal loan to consider:
APR: What is the current rate of interest? Is it a constant or a variable? Is the interest rate lower than your credit card’s? If not, taking out a loan might not be a good idea.
Period of repayment: How long will you be paying monthly payments, and when will you have to pay off the loan?

Can you afford the payments on a monthly basis? Are these inside your price range?
Secured versus unsecured: Will you have to put up collateral for the loan, such as your bank account? Is there no need for collateral?
Do you have to pay an upfront charge for the loan, and if so, how much does it cost? Is the lender being open and honest? Keep in mind that even though this cost isn’t required, many lenders nevertheless charge it. It simply shows up in your interest rate.
Prepayment penalty: Will you be charged if you pay off your loan early?

Do: Get pre-qualified by multiple lenders

Pre-qualification is a process in which you self-report your financial information and preferred loan terms in order to get an estimate of what type of personal loan you might be eligible for. This stage differs from getting a pre-approval or applying for the loan because it does not need the lender to check and verify your paperwork, and it does not result in a hard credit inquiry, which could lower your credit score by a few points. Pre-qualification does not imply that you will be approved; it simply indicates whether you are likely to be approved and what your loan terms will be.

Pre-qualifying for a loan is a simple, often instantaneous process that allows you to discover what loan amount, interest rate, and terms you might be eligible for. You can be pre-qualified for a loan from as many lenders as you like. We recommend collecting quotes from at least three lenders so you can see what options you have based on your credit history.

Personal Loan Don’ts

Don’t: Accept the first loan offered to you

Before agreeing to a loan, shop around. Personal loans are now available from a variety of sources, not simply the traditional banks. Credit unions, community banks, online banks, and online lenders, among others, may be able to offer you a better rate than your typical megabank.
Depending on the requirements, characteristics like income and credit are weighted differently by each lender. As a result, you may find that one bank doesn’t care if you were laid off from a job, while another doesn’t because you have “great” credit. It all depends on circumstances outside your control, so be sure to consider all of your possibilities.

Don’t: Take out the maximum loan possible

We don’t advise taking out a large loan simply because you can. If you lose your work abruptly, for example, a loan payment that appeared acceptable at the time of approval may turn out to be a mistake down the road. Farnoosh Torabi, a finance writer and host of the “So Money” podcast, advises against taking out a loan that consumes more than 5 to 10% of one’s monthly income. Overborrowing is just as risky as paying for something you can’t afford outright.

Don’t: Skimp on payments

Pay your personal loan with automated withdrawals or monthly reminders. Payment history accounts for 35% of a FICO credit score, with credit utilization, length of credit history, credit mix, and new credit accounting for the remaining 35%. Missing or paying late payments will damage your credit score, making it difficult to get approved for loans, credit cards, or even apartment leases in the future. Put that recurring note on the calendar right now to set yourself up for success. You’ll thank yourself in the future.

What other choices do I have?

Balance transfer cards are another choice if you’re wanting to pay off debt.
A balance transfer card with a promotional 0% APR for a limited period allows you to pay no interest for up to 21 months, easily saving you hundreds.
You may even be able to transfer the balances of many credit cards to the new card, depending on your position (as long as the total does not exceed your credit limit).
The Citi Simplicity® Card, the U.S. Bank Visa® Platinum Card, and the Wells Fargo ReflectSM Card are three of the greatest no-interest credit cards for balance transfers.

Balance transfer cards, on the other hand, have a few drawbacks, such as low balance transfer limits (which are often lower than your real card limit) and high balance transfer fees (usually 3%), unless you can acquire a no-fee option like the Wings Visa Platinum Card.
0% APR credit cards are great for financing major purchases that you wish to pay off over time, in addition to balance transfers. Our best picks for no-interest balance transfer credit cards are as follows: