Whether you’re about to start a new business venture or have an unexpectedly large one-time expense that might put a serious dent in your income, loans can help you through such times. While advisable to apply for personal loans when in a financial crunch, it is a decision that needs careful thinking, especially if this is your first time.
Personal loans are great for almost anything, especially if they are unsecured. This means you can get a loan approved without securing it against any particular asset you own.
But what is a personal loan? How to avoid getting scammed or being confused throughout the process? When should you consider applying for a loan, to begin with?
6 Tips To Get Your First Personal Loan
Here are some tips for first-time borrowers to help you secure your loan.
Assess why you need the loan
While personal loans can be great, especially if they are unsecured, you need to understand that these agreements last long periods. Assessing why you’re getting the loan in the first place while knowing the implications can help you make an informed decision.
Are you waiting for a big sale? Is there a luxury item you must purchase? Assess if you can hold off on these things. Sometimes, buying such luxury items is the farthest from an investment; this way, you’re not only losing money but paying extra on interest.
However, this does not mean taking a personal loan for high-risk investments/business ventures in hopes of making profits isn’t something to mull over. These business ventures are subject to change in the market and the risks involved with it.
Are you taking out a new loan to pay off other debts and liabilities? This is called debt consolidation. While trying to get unsecured loans for debt consolidation might help you structure your repayments and reduce interest payments, it is important that you assess where to stop. Continuing to pay your loans by taking out other loans can be risky. The key is to be wary of any high-risk activity you’re looking to invest in before going through with a loan request.
Ask as per your needs
This might seem like a no-brainer, but assessing how much money you need to borrow allows you to look at what you can realistically return. You want to avoid ending up with a personal loan that you cannot return and get restricted from taking other loans in the future.
Suppose you want to get a loan for your financial needs, but it’d be great to have some extra cash for spending. Not only does this reduce your chances of getting a loan, as your lender will see the difference in the amount needed and required, but it might become harder to pay off. Plus, have you taken the various charges banks may levy on you for a personal loan? For example, prepayment charges, late payment or processing fees, etc. Stick to what you need, and return it as soon as possible.
Improve your credit history
Having a good credit history has become an important way for lenders to trust you and allow easy acceptance of loans. As a first-time borrower, you must know that maintaining a healthy credit score can mean something as simple as paying your credit card bills on time. You can achieve this by setting up a rule not to exceed your credit limit by more than 25%.
The better your credit score, the easier lenders can accept your loan request and process it ASAP.
Compare interest rates
While applying for a personal loan, check out a few banks to see their interest rates. Compare those to see the most affordable, as interest rates impact the premium.
You will find a range of interest rates from the lowest at 11% to some rates as high as 20%. Your goal should be to find a low-interest rate with low monthly payments instead of a longer repayment plan. A longer repayment plan might seem more convenient, but it can raise many interest rates. You want to avoid paying more than 30-40% on debt from your income.
Seek financial advice
You’ll likely go through a steep learning curve as a first-time borrower. Of course, getting confused on the way is completely normal. However, you can always reach out to your friends and family who have had previous borrowing experiences or are financially literate.
You can also contact the banks or institutions you want to borrow from to seek advice and understand the procedure for borrowing.
Seeking advice can also help you understand whether it is financially viable for you to apply for a loan.
Improve your chances of getting better loans
Improving your credit score is just one way to get better loan conditions. There are multiple ways you can argue your way into approvals for loans that are customized to your needs. Remember to pay all your bills on time. More than 35% of your credit history is dependent on how good you are with your deadlines. If it is difficult to remember, set up reminders at the start of the month.
You don’t need to close your unused credit card accounts, especially if there are no annual fees. When assessing your loan application, your credit score will reflect the average time you’ve used credit. Holding an account will likely benefit you in the long run.
Hold onto opening new credit cards, as lenders will see this as a risk. If you open too many accounts in a short amount of time and don’t control your spending, this will make you seem like a riskier client to take on.
Takeaway
Nowadays, applying for personal loans has become simpler, with applications available to you online. Many banks also offer their financial services online without having you make frequent visits. You can easily find information on their website if you have questions about the loan application process.
While all of this has been made simple, keep in mind that you should only apply for loans if you need to and are confident you’ll be able to pay back without compromising on necessities. Having a strong credit score will ensure that you have a higher chance of securing the loan. Moreover, do your research to ensure that these loans have low-interest rates, shorter tenure, and are offered by a reliable bank.