Lately, more people are looking into obtaining a personal loan to weather the storm created by the coronavirus pandemic. According to the Federal Reserve, the number of nonrevolving debt accounts (including personal loans) increased by 4.8% between June and July 2020. But a shaky economy is also making loan approval harder.
Here are some things you should do as you prepare for the personal loan application process. Taking these steps ahead of time could help save money and meet your financial goals.
- Check your credit score
- Know your desired loan amount
- Compare rates and lenders
- Prepare all the paperwork
1. Check your credit score
This number is where your lender will likely start when they review your application, and it’s where you should begin your preparation work, too. You’re entitled to a free credit report from the three credit bureaus each year, and you can order yours through AnnualCreditReport.com.
Having good or excellent credit demonstrates that you are responsible and it helps banks and credit unions assess their risk of lending money to you. Your credit score can be the determining factor between being approved or declined for a personal loan.
A credit score range generally falls into one of these categories:
- Poor (less than 640): A score under 640 will make it difficult to qualify for a personal loan
- Fair (640 to 699): You may qualify for a personal loan, but you’ll likely pay a higher interest rate
- Good (700 to 749): You’ll likely qualify for a personal loan and have a greater variety of lenders and rates from which to choose
- Excellent (750 and above): You’ll qualify for a personal loan and be able to secure the lowest rates offered
Credit scores are calculated with your credit history in mind. Your FICO score, for example, is based on your payment history, amounts owed, length of credit history, credit mix, and new credit.
If your credit score is poor or fair, you may want to take steps to build it before applying for a loan. Make sure you’re paying your bills on time, pay down balances to lower your debt-utilization score, increase your income to help build your debt-to-income ratio, and avoid closing old credit card accounts.
2. Know your desired loan amount
In uncertain times, you may be considering applying for a larger loan just in case of an emergency but requesting a high loan amount can be the reason lenders decline your request.
Before you settle on a loan amount, ask yourself some important questions, including, “How much do I really need?” You can get the answer by reviewing your budget to get an idea of your other financial obligations as well as how a new loan would impact your monthly cash flow.
It can help to use a personal loan calculator to determine the monthly payment on a variety of loan sizes. You can judge how the new bill would impact your budget. A personal loan calculator can also help you estimate how much you’d qualify for, so you can then look for the best personal loan rates.
3. Compare rates and lenders
Once you understand where you stand financially and have determined your loan amount, it’s time to start shopping for lenders.
Some personal loan lenders will pre-qualify you for a loan, using a soft credit check that doesn’t impact your credit score. You can easily determine if you qualify and then move forward on your application with the lender that offers the most favorable personal loan for you.
4. Gather all the paperwork
When it’s time to apply, you’ll need to provide documentation. Gathering these items before you start the application can help the process go more smoothly.
Here’s what you’ll need:
- A government-issued ID (such as a driver’s license, passport, state or military ID)
- Social security number
- Proof of income (a W2 or pay stub)
- Proof of address (a utility bill or lease agreement)
Personal loan rates can vary greatly, starting at about 4.99% and going up to 35.99%. When you get the best terms, you’ll end up saving money by paying less interest over the life of the loan, which can help strengthen your financial situation over the long term.
