If you need access to a large sum of money at a relatively competitive rate, a personal loan is your best bet. Given that most lenders don’t impose any restrictions on how the loan amount can be used, there’s a lot you can do with the money. While personal loans are certainly a powerful financial tool, it’s also a serious responsibility. So, we’ve listed a few things that you should know about personal loans before you consider borrowing one.
- Loan Terms: Before you start shopping around for personal loans, you should know the common loan terms that are used by lenders. So, make sure you understand what terms like principal, interest, APR, monthly payment, and unsecured loan mean. Doing this will help you compare the right aspects of different loans.
- Credit Report and Credit Score: Your credit score has an impact on the interest rate that is offered to you. Before approving your loan, lenders will check your credit so they know how creditworthy and reliable you are. So, make sure to check your own score before you apply for a loan. If your score is toward the lower end, you may have to pay a higher interest rate. Keep in mind that checking your own report will not affect your score.
- Shopping Around: Personal loans are offered by a number of financial institutions, like commercial banks, online banks, and credit unions. So, don’t limit yourself to the quote that your bank gives you. Make sure to compare the loans offered by different lenders. Typically, online lenders and credit unions will offer you better rates.
- Impact of Inquiries: When you apply for a loan to a lender, the lender does a hard inquiry into your score, which is noted on your report. Hard inquiries can lower your score slightly. So, if you are applying to multiple lenders, ensure that you do so within a short time frame, so the inquiries don’t hurt your credit score too much. Generally, multiple hard inquiries made for the same credit product will be counted as a single event, provided they occur within a short span of time.
Personal loans have their own set of pros and cons. So, it’s important that you manage your personal loan wisely and make your payments on time. This will ensure that your credit score is not negatively impacted.