There are many reasons you may need to get a loan. Whether you are trying to get a personal loan to pay off debt or refinance bills or buy things you need, there are certain considerations you need to think about to make sure you get the right loan for your situation. Read on for the top 10 questions to ask before getting a personal loan.
1. What is my credit score? You should consider this factor before applying for a loan, since it will affect your ability to get credit and it will also affect how much it costs you to do so. If your credit score is low, you should consider trying to raise it before applying for a personal loan. You can raise your credit score by paying down debt, removing incorrect information from your credit report, and making on time payments.
2. Is this a secured loan? For some loans, you need to put up collateral. This means you pledge assets to guarantee the loan, and if you default, the bank can seize those assets. Mortgage loans and car loans are secured loans. Secured credit cards in which you put cash into an account and then have a credit limit equal to that amount of cash, are also secured loans. Most personal loans are not secured loans, but you still want to ask to be sure.
3. What is the loan application process? This is an important question because you need to know how long it will take for you to be approved for the loan, what you need to do to get approved, and how long it will take before the bank pays you the money you are borrowing.
4. What do I need to get the loan? For some loans, supplying your credit score and stating your income is enough. Sometimes, however, you will need to bring tax returns or copies of bank statements so that you can prove how much money you make and how many assets you have.
5. What is the application fee? For some loans, you need to pay a fee to apply or a fee to originate the loan. It is important to know this up front both so you can compare different loans from different lenders to find the best deal and so you can be prepared to make the payment when the time comes.
6. What is my interest rate? This is the amount of money you must pay for the privilege of borrowing the money. It is usually stated in terms of your APR or annual percentage rate, although not always. This number tells you how much you are charged just to borrow money and, ultimately, how much you will have to pay back in total. A higher interest rate means the loan will cost more. Mortgage loans and student loans usually have relatively low interest rates- between four and six percent. Credit cards often have interest rates at 10 percent or higher, sometimes as high as 27 percent. Personal loans are generally somewhere in the middle between mortgage loans and credit cards, depending on your credit.
7. What is the repayment period? This is the amount of time you have to repay the loan. If you have a shorter repayment period, your monthly payments will be higher because you have less time to pay off the loan. A longer repayment period means lower monthly payments but a longer period of time in which you pay interest and a higher loan cost overall.
8. Is there a penalty for pre-payment? If you receive extra cash or some wiggle room in your budget, you may want to pay off the loan faster than the stated repayment period. Some lenders charge you a penalty if you do this. It is best to find out up front and try to avoid loans that you cannot prepay if you want to.
9. Are there limitations on my use of the money? For some loans- such as mortgage, car loans and student loans- you can use the money only for certain things (buying a home, buying a car or going to school) For most personal loans, you can use the money however you want. Still, it is best to find out what limitations there are, if any.
10. What happens if I default? You will want to know both what the late payments are and what the potential penalties are for non-payment, just in case the worst happens.