When not to use a personal loan
While a personal loan is a useful tool to finance larger or unexpected expenses, there are some situations where it may not be the best option. Before applying, consider your financial situation and the reason for taking out the loan. “Individuals for whom a personal loan would not make sense would include anyone with fair or below credit who may be subject to a very high interest rate,” says Lauren Anastasio, CFP at SoFi. The lower your credit score, the higher your interest rate could be. If you have poor credit, shop around for bad-credit loans, which cater to borrowers with a less-than-perfect score.
A personal loan also may not make sense if the loan is used for a purchase that would qualify for a better loan type, says Anastasio. “This would be applicable to real estate, automobiles and education. Mortgages, car loans and student loans are all designed specifically to fund a particular expense and each come with features and benefits that personal loans do not offer.” Consider the reason why you’re applying for a personal loan and if you’d be better off with a loan designed specifically for that purpose.
Lastly, if you’re on a tight monthly budget, a personal loan may not make sense for you, says Anastasio. “Some may find that the payment on a personal loan would be higher than their various minimum payment requirements combined.” This can potentially leave you with more accumulating debt and a cash flow crunch.
How to get a personal loan
If you want a personal loan, you should compare multiple lenders to find the lowest interest rate. Start with your current bank and then apply with online lenders, local credit unions and other banks. Most lenders will allow you to get prequalified, letting you see your potential interest rates and terms before you apply, all without a hard inquiry on your credit report. Along with interest rates, you should also compare loan terms and fees.
Once you find a lender you like, you’ll submit a complete application with your loan details, personal information and income verification documents. This will result in a hard inquiry on your credit report. For most lenders, this part of the process is quick; as long as you submit all relevant documents, you may be able to get your funds in a matter of days.