There are many uses of a personal loan. You can use funds to make improvements around your home, such as a new kitchen or an updated bathroom. Also, a personal loan can be useful if you’re looking to consolidate your debt and acquire a better rate.
But although a personal loan can be convenient and useful, not everyone will qualify for financing. Banks and credit unions issue personal loans, and while they are in the business of lending money, they are extremely particular of who they approve.
Financial institutions take a gamble on each and every loan they make. For this matter, they have to be choosy – it’s the only way to lower the risk of losing money.
Here are three ways to know whether you’re a good candidate for a personal loan.
How’s your credit score?
It doesn’t matter how badly you need a personal loan, a bank or credit union will not approve your loan request if you don’t have acceptable credit. Credit score minimums for a personal loan vary by financial institution. However, most banks prefer applicants with scores 680 or higher. These individuals typically have a history of on-time payments, and they’ve demonstrated creditworthiness over the years.
To determine whether you are a good candidate for a personal loan, pull your credit report and your credit score before applying for a loan. This provides clues as to whether you’re likely to get approved. Plus, if your credit report reveals issues, you can make the necessary improvements to bolster your chances of getting approved for the loan.
Is there room in your budget for another bill?
A bank or credit union may review your credit report and determine that you’re a good candidate for a personal loan. This can be good news. But before you proceed with the loan process, seriously consider whether you can afford another monthly payment.
You may be happy to get your hands on the cash, especially if you need funds for improvements around your house, or if you’re looking to take a vacation. But this isn’t free money. You have to repay a personal loan, and if you’re not careful, you can get in over your head.
Take a look at your current budget. What is your take home pay and monthly expenditures? Do you have disposable income? Based on your answers to these two questions, you can hopefully determine whether a personal loan is the right move for your finances.
Do you have collateral?
There are two types of personal loans: an unsecured personal loan and a secured personal loan. If you have a high credit score and enough income, a bank or credit union may approve your application for an unsecured personal loan. Just know that these types of loans have a higher interest rate, which increases your monthly payment.
A secured personal loan requires collateral, however, this loan might be the better choice if you’re looking to keep monthly payments as low as possible. Of course, if you default on a secured personal loan, the bank or credit union can claim your collateral. They will sell your personal item and use the proceeds to pay off your balance.