Personal loans can help you get over a financial hurdle, make a large purchase or pay off debt. There are many reasons why someone might need a personal loan, and sometimes, that large sum of money is what you need to get yourself out of a tough spot and move forward in life. But applying for personal loans can do a lot of damage to your credit. Before you submit any applications, make sure you cover these aspects first.
Check Your Credit Report
The largest factor impacting loan approval is your personal credit score. Most lenders and banking institutions evaluate your credit based on its FICO score. FICO scores range from very poor (300-579) to exceptional (800-850). First, you should check your current credit report to make sure it contains no errors. Errors can lower your overall score and flag you to potential lenders. You need to write a letter to your credit card company to dispute any errors you find on your report. You are entitled to one free credit report every 12 months from the three biggest credit-reporting agencies: Experian, Equifax, and TransUnion.
Know Your Net Worth
Your personal net worth is the monetary difference between what you own and how much debt you owe, collectively. Assets that contribute to your net worth include your house, vehicles, cash, and other valuable items. To calculate your net worth, you should add up the estimated cost of everything you own that’s of value, then subtract the total amount of debts you owe. Your net worth can influence the loan amounts and interest rates you’re offered.
Consolidate When You Can
If you are considering taking out a personal loan to pay off debt, you should first look into consolidating. Credit card debt can be especially devastating to people’s financial security. Between interest rates and additional fees, getting out of credit debt can become impossible without the right approach. Consolidation combines all of your outstanding debts into one large sum, so you are able to make payments more quickly and pay off balances while avoiding thousands of dollars in interest. Of course, personal loans will have their own interest rates, especially those that are offered to people with significantly low credit scores.
Make sure that you discuss the pros and cons of getting a personal loan with a representative at your bank or consult one of our trusted financial advisers.
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