You might find yourself in a situation where a personal loan seems like the only option for getting the cash you need. Whether it’s for home repairs, debt consolidation, or moving across the country for a new job, a personal loan can be a great solution. However, with every loan you get, there’s a price attached to it.
When you’re considering getting a personal loan, it’s important to have a thorough understanding of how it works and how it can impact your financial future. Here are the four most important questions you should ask yourself before applying for a personal loan.
1. Can I realistically get approved for a personal loan?
The first thing you should check is your credit score. There are quite a few free credit monitoring tools out there that will give you a good sense of where you stand. Many lenders actually have a minimum credit score requirement to get a loan.
If your score isn’t in top-notch shape (below 600), it might be worth it to hold off a few months to increase your score as much as possible. Waiting it out could potentially be the key difference in whether you’re able to get a loan or not, and most importantly, you may qualify for a better interest rate.
The two largest factors that determine your score are payment history and overall credit utilization. If you’re making your payments on time, try coming closer to paying off the balance. If your score took a hit because of collection accounts, try to pay off those accounts as fast as possible. You’d be surprised at how much of a jump your credit score can have when you pay off old bills.
2. Should I use a matchmaking tool or go direct to a lender?
There are a lot of companies that will be able to instantly pre-approve you with different lenders from one single application. These companies will take your information and run your application through various lenders. The lenders will then respond with live, pre-approved offers.
The benefit to using personal loan comparison engines is that you won’t have to apply to five different lenders at once. You’ll instantly know which lender you’re approved for and which lenders denied you. Again, if you’re using a loan comparison engine, make sure it won’t impact your credit score. Some of the top personal loan comparison sites include ReadyForZero, LendingTree, and CreditKarma.
3. Is the lender pulling a soft or hard inquiry?
Super important. The difference between a soft or hard inquiry is that soft inquiries can only be visible to you. Other lenders won’t see it and it won’t affect your credit score. Now, on the other hand, a hard inquiry will be visible to everyone, and it will affect your credit score.
Keep in mind that lenders pull a soft inquiry to pre-approve you. Upon finalizing your personal loan agreement, some lenders will pull a hard inquiry.
When you’re applying for a loan, try to make sure the lender is pulling a soft inquiry so your credit score won’t be affected if you don’t get approved.
4. How much should I take out?
When you apply for a personal loan, the lender will let you know the maximum amount you’re approved for. It’s important to only take out the amount that you really need. It’s tempting to take out more to have that extra cushion, but don’t forget: You’ll be paying the interest on that amount over the life of the loan.
Take a close look at the terms, including interest rate, length of the loan, and any other fees that are associated with it. See if the monthly payment realistically fits within your budget. Ask yourself how it’ll fit into your monthly budget and see if you’ll be able to pay it back within a reasonable time frame. As long as you stay informed and do your research, you won’t find yourself in a tricky situation when you’re applying for, and paying back, that personal loan.
Rob Ebrahimi is a member of the DailyWorth Connect program. Read more about the program here.