What to know before taking a personal loan

October 20, 2021 By: Cox Search

Many people find themselves in need of quick cash to either deal with an unforeseen expense, tackling debt, or financing a home improvement project. There are many options available, but not all of them are optimal for people who want to practice fiscal responsibility. One way many people have addressed financial freedom is through personal loans. According to statistics, more than 20 percent of Americans currently have a personal loan.

Many financial institutions offer personal loans to individuals. Keep in mind that a personal loan is much different than a payday loan, which you should avoid since they often have very high interest rates that can push you further into debt. In addition, personal loans can be a good counterpoint to credit cards, which can also add to financial woes and affect your credit score.

Find out more with this personal loan FAQ and make sure to discuss your situation with a trusted lender before a final decision:

What is a good reason for a personal loan?

There is no ironclad reason for wanting a personal loan. Individual reasons may vary, but the benefit of these types of loans is that they don’t require any collateral to acquire money, making it a better option for those without a home or other large assets to put up.

People get personal loans for a variety of uses. Some of them include:

• Debt consolidation: Many people, faced with multiple credit cards and other expenses, turn to debt consolidation as a way to combine a number of debts into one monthly payment, making it easier to pay off outstanding balances and avoid falling into more serious financial straits.
• Home repairs: A personal loan is an ideal way to get an infusion of cash to help kickstart important home upgrades like electrical or plumbing repairs without having to take out a home equity line of credit or loan.
• Funding small business: Often, small business owners can find it difficult for traditional lenders to support their business ideas. Personal loans are a way to provide much-needed capital in your venture.

Do personal loans affect a credit score?

If a financial institution does a credit check as part of your personal loan application, it will cause a slight dip in your credit score. But if you’re wondering whether personal loans affect credit scores in a positive way, the answer is yes. If you are approved for a personal loan, and you pay the installments back on time, your credit score will begin to increase at a steady rate. A personal loan is a solid way to receive the critical funds you need and begin to rebuild your credit score if it is lower than average.

What personal loan documents do I need to gather?

Before you fill out an application, check your credit score and request a copy of your credit report from the three main bureaus. This will help you identify any errors or inaccuracies that may lower your score or lead to a loan application denial.

Once your credit score has been determined, collect the following documents for review:

• Proof of employment
• Your most recent tax return
• Your driver’s license and/or other photo ID
• Social Security numbers for every borrower listed on the application
• Proof of address

Depending on the lender and your reason for applying for a loan, you may also be asked to provide other documentation and information not listed above to help with the personal loan underwriting process. Some of this may be required when you make the initial application, while other information may be requested while your application is being processed.

How long does it take to get a personal loan?

If you’re in a rush, the personal loan process is ideal. Some online lenders can get back with approvals in one day and a few can have a decision in as fast as 30 minutes! Banks and credit unions usually take a little longer to process all the paperwork and make a decision. It could take up to a week in that case. The approval process depends on the amount being loaned, credit history, and whether you have an existing relationship with the lending institution.

How many personal loans can you have at once?

The number of personal loans you can have at one lender varies. Some lenders are open to offering customers multiple loans, while others set limits at one. Your credit and employment history will play a role in this determination. However, adding additional personal loans may increase your debt-to-income ratio and hurt your credit, as every application will require another credit check.