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If you need to borrow money, it may be tempting to reach for your credit card.
But taking out a personal loan is usually a much better option.
For starters, the interest rates are usually lower. And unlike credit cards, the interest rate remains fixed for the term of the loan.
Credit cards can raise their rates if you are late or at any time for future purchases
Even better is the fact that personal loans have a fixed term, usually less than 5 years. With credit cards, you can pay the minimum due for 30 years or more.
Before you sign up for a personal loan, check out the following best practices.
5 Must-Know Tips for Taking Out a Personal Loan
Personal loans are a great way to consolidate debt, pay for a car, or cover medical expenses. A personal loan can be for any easy you deem necessary.
Here’s what you need to know when taking out a personal loan.
Check Your Credit Score
Know your credit score before you begin.
A good credit score increases your chances of qualifying and fetches you the most favorable interest rates.
Here are some credit score guidelines:
- 800 and above: Exceptional credit
- 740-799: Very good credit
- 670-739: Good credit
- 580-669: Fair or average credit
- 300-579: Poor credit
You can access your FICO credit score and a copy of your credit report at FreeCreditScore.com.
Protect Your Credit By Pre-Qualifying for a Loan
Before you take out a personal loan, it’s a good idea to pre-qualify first.
Pre-qualifying allows you to preview loan offers you’re likely to see.
Pre-qualifying also allows you to assess your chances of approval without hurting your credit. This is because most online lenders perform a soft credit check, which doesn’t hurt your credit score.
Shop and Compare
Compare your pre-qualifying offers to determine the best personal loan for you. At this point, you’re looking at these 3 terms:
- Monthly payments
- Interest rates
Shop around at local credit unions, who usually offer lower rates, especially for those with bad credit.
Local community banks are also a good place to find a low-interest personal loan.
On the other end of the spectrum, big financial institutions like Bank of America, Chase, and Citibank usually don’t offer unsecured personal loans.
Pro Tip: Expand your search with personal loan services like The Credit Review who search the marketplace to find the best offer for you.
Read the Fine Print
As you examine your offers for a cash advance, it’s important to read the contract to avoid any surprises down the line.
Some key items to look for:
- No bundled insurance: Some lenders package life insurance into personal loans. While it doesn’t happen often, it’s something to look out for.
- Prepayment penalties: Make sure you’re not paying extra if you pay off the loan early.
- Origination fee: Most lenders include an origination fee so there’s almost no way around them. They often build in the interest they would lose if you pay off the loan early (in itself a pre-payment penalty). Just make sure you are comfortable with the amount of the origination fee.
Approval for Your Personal Loan
Once you’ve decided on the best loan offer, you will need to provide some documents to the lender in your formal application. These are:
Identification: drivers license, passport, government ID or Social Security card
Address Verification: copy of utility bills or lease
Proof of Income: W2, paycheck stubs, bank statements or tax records
Your lender will then run a hard credit check.
Once approved, your money will be paid out according to the lender’s terms.
It may transfer to your bank account, typically within 5 business days.
In the case of a consolidation loan, lenders may pay your debtors directly.
The Bottom Line
Taking out a personal loan is a great way to reduce your debt or pay for an unexpected expense.
Personal loans are better than credit cards for these purposes because they offer you a fixed rate, with a fixed payment, for a fixed term.
Research lenders and borrow only what you need and read the fine print.
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