Applying for a personal loan can be a bit intimidating. You need to make sure you’ve got the documents, information, and paperwork straight while you’re applying for one.
These are just some of the easy tips that you could follow when applying for a personal loan.
Don’t borrow any more than you need when applying for a personal loan
One of the biggest mistakes people make when applying for a personal loan is borrowing more than they need. Borrowing more significantly increases your risk of default, and lenders view this risk through a different lens than homebuyers or business owners.
If you have a bad credit score, you might not qualify for a personal loan at all. But if your score is average, lenders will consider you for a loan up to a set maximum amount. The lower your income, the higher the limits tend to be.
Understand the terms of your loan
Personal loans typically come in two forms: secured and unsecured. A secured loan requires collateral, such as a house or car, whereas an unsecured loan does not. Personal loans are often taken out to pay for big expenses, such as home repairs or medical bills. Unlike a credit card, the interest on a personal loan is not subsidized by the credit card company, so the interest rate may be higher than a credit card.
Other terms, such as “fixed rate” or “variable rate,” can be confusing. Fixed-rate loans are fixed for a predetermined time, such as 12 months, whereas variable rate loans can change according to market fluctuations.
If you’ve never taken out small loans online before, you might feel overwhelmed by all of the language — APR, monthly payments, loan terms, credit score, and so on. Before you apply, be sure to understand the terms.
Make sure you can make your payments on time
All lenders want to know that you can repay your loan on time, every time. They don’t want to see late payments, charge-offs or bankruptcies, which are all considered negative marks on your credit report. It is essential that you pay your bills on time and avoid skipping payments.
Have proof of citizenship, proof of residence
Having proof of residency in the UK when applying for a loan can make it easier for lenders to approve your application. However, proof of citizenship isn’t usually needed, as lenders usually use your passport to determine your nationality. What’s more, if you are applying for a small loan, it’s unlikely that a lender will request proof of citizenship.
There are, however, a few cases in which proof of citizenship might be required. For example, if you’re applying for a mortgage, the lender will require your passport. The lender will also ask for your National Insurance number (NIN) or national insurance number and a recent utility bill copy.
Other loans, including car finance, personal loans and credit cards, usually require proof of residency in the UK. If you’re applying for a loan abroad, and the loan isn’t secured on your home, you might also need proof of citizenship. A lender will want to know where you live, as well as where you work.
Plan out what you intend to spend the money on
You should plan what you intend to spend a personal loan on because by knowing what you’re going to do with the money. You can better calculate what you can afford.
For example, if you plan to buy a new bed, then find out how much the bed itself costs and subtract the amount from the loan amount. Now you have a figure to work from, and you’ll know the loan amount you can borrow. Similarly, if you want to buy a car, calculate how much the auto loan will cost and subtract that from the loan amount.
Leave that part blank in the budget if you don’t think you’ll spend the personal loan money immediately. In the budget, also include a line for “emergency expenses”. This doesn’t necessarily have to include car repairs (although that might happen); it can also include things like replacing a leaky roof or paying for your child’s braces. If you stick to the budget, you’ll eventually have enough money to pay these expenses without dipping into your loan.