You have probably heard the term “personal loan” used on more than one occasion. If you need money to take care of something, you might be wondering if a personal loan is right for you. A personal loan that is used for personal use – not for commercial or business needs. Personal loans are often unsecured, which means you don’t have to provide collateral to get the loan. Money borrowed from a lender, bank, or credit union, personal loans are repaid through fixed monthly payments, which often are spread out over a period of two to five years. Banks and credit unions have set credit scores and standards that must be met to get a loan approval. However, there are some lenders who focus on helping those with bad credit scores or who have a lack of credit to secure the loans that they need.
How Can A Personal Loan Be Used?
There are many ways a personal loan can be used. Personal loans can be used on almost anything, but the interest rates are higher than a car loan or a mortgage loan, both of which are secured. A personal loan typically has lower interest rates than credit cards unless you have a credit score that is high enough to qualify for a low-interest rate because of a balance-transfer promotional credit card offer. Personal loans can have a higher limit than you would get with a credit card as well. A personal loan can be very beneficial if you have higher balances on multiple high-interest credit cards. You can use that loan to consolidate multiple debts into one monthly payment with a much lower interest rate.
How Do Lenders Make Decisions Regarding Personal Loan Applications?
Lenders take several things into consideration when determining if an individual qualifies for a loan. Several factors that come into play include:
• Credit scores
• Credit report history
• Debt-to-income ratio
Credit scores - Those consumers who have higher credit scores will get approved with lower interest rates, but there are lenders who offer personal loans to individuals with lower credit scores, including those with scores of 600 or less. These help those who are considered to have “bad credit” to improve their credit scores by building credit by showing that they can make timely payments on a loan. However, there is much more to credit than the credit score.
Credit history - Most lenders will carefully review your credit report and might ask questions. As an example, if you have a $2,000 bill in collections, they might ask about it. If it is a medical bill because of an accident involving your child, it will be viewed differently than a credit card that you maxed out and never made a payment on. Many lenders work with consumers to help them overcome financial obstacles and reestablish a strong credit history.
Debt-to-income ratio - Your debt-to-income ratio (DTI) measures your ability to repay your debts and manage your monthly payments. Your DTI is determined by dividing the amount of your total monthly recurring debt by your gross monthly income, then showing it as a percentage. For example, if your monthly recurring debt is $2,000 and your pre-tax income is $4,000 per month, then your DTI is 50%, which is high. Different lenders have target DTIs, but often to buy a house you will need a front-end DTI of 28% or less and then when all expenses are added in, the back ratio shouldn’t exceed 36%. This ensures you don’t overspend, and you can afford to pay your bills.
Applying for a Personal Loan
If you have been denied a personal loan from a traditional lender, such as your bank or credit union, you can still be approved. Colonial Loan will work with you and help you determine how to get approved for the funds that you need. A company that offers loans to those who have negative marks on their credit history and bad credit scores, Colonial Loan has helped thousands of people throughout East Tennessee reestablish their credit. Call the Colonial Loan branch near you for more information. You can get a loan with less than perfect credit.