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Understand the process and factors that affect interest rates before applying for a personal loan. (iStock)
A personal loan is a flexible financing tool that you can use to buy a car, consolidate debt, do home repairs, or pay for your education. And if your credit score is good, you could be eligible for up to $ 100,000.
If you are considering getting a personal loan, the first thing you should do is visit an online marketplace like Credible to compare loan options from several lenders at once, which saves you time. The rates can range from 3.49% to 35.99%, and you may wonder why there is such a gap. Lenders look at several criteria to determine the rate to offer you.
1. Credit rating
Your credit score is a number assigned by reporting agencies such as Equifax, Experian, and TransUnion, and it helps a lender assess risk. Your score will be based on your outstanding balances, your repayment record, your credit composition and the length of your account. Credit scores vary between 300 and 850, with a higher score being better.
Another thing that affects your credit score is how often lenders remove your credit history. To prequalify you, lenders will conduct an indirect investigation, which will not impact your credit score. However, when you apply for credit, a lender does a thorough investigation. Serious claims stay on your report for two years and make up about 10% of your credit score. The fewer difficult questions you have, the better. If you are just checking rates, be sure to use a site like Credible which uses inquiries to provide prequalified rates from multiple lenders without affecting your credit score.
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2. Debt-to-income ratio
Another determining factor is the amount of your debt compared to your gross income, which is your debt-to-income ratio. Debt includes loans, mortgages, leases, and credit cards, but not monthly expenses, such as utilities or groceries.
If your gross income is $ 5,000 per month and your debt totals $ 2,100, your debt-to-income ratio is 42%. According to Consumer Financial Protection Bureau, mortgage lenders look for debt-to-income ratios of 43% or less. For personal loans, a lender’s standards may vary. The lower your ratio, the better your rates will be.
CALCULATE YOUR DEBT / INCOME RATIO AND KNOW WHERE YOU ARE
3. Work history and income
Lenders will also want to know how you plan to repay the loan, and they usually look at your employment history. Many lenders look at the past 24 months of employment history, while some may go back further. They are looking for a solid professional experience. For example, someone who has held the same job for two years will appear to be less at risk than someone new to the workforce.
Your income can also have an impact on your rate. Some lenders set low or no minimum income requirements, but borrowers with higher incomes are usually offered lower interest rates. The repayment of your loan will have an impact on your monthly budget. Credible’s online calculator can help you figure out the monthly payment to make sure you can afford it.
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4. Duration and amount of the loan
The length of the loan will also have an impact on your interest rate. Personal loans can range from one to seven years. Longer term loans generally have higher rates than a shorter loan.
The amount of money you want to borrow can also affect the interest rate. Lenders take a higher risk by granting a higher loan amount, and therefore they may charge a higher rate of interest. You can easily find out the impact of the loan amount on the rate by visiting Credible, where you can view the rates for loan amounts ranging from $ 1,000 to $ 100,000.
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5. Guarantee
Most personal loans are unsecured. However, if you have bad credit or a short employment history, you may be able to lower your rate by offering some form of collateral. If the purpose of the loan is to buy a car, for example, you can use the car to secure the loan. If you have other valuables, like a CD, lenders can use this collateral to lower your interest rate. If a borrower does not pay, lenders will take collateral to cover their costs, thus limiting their risk.
By knowing what a lender is considering before approving a personal loan, you take steps to improve your situation before you apply for the lowest interest rate.
You can also improve your chances of getting approved quickly. A personalized loan offer can help you reach your financial goals and stay on track for the future as long as you use it responsibly.
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