The maximum loan amount you are eligible to borrow depends on both your creditworthiness (i.e., credit score and income) as well as how much of a multiple of net monthly income they can afford to pay back monthly. Lenders generally use an “affordability calculator” formula which multiplies this figure against your monthly net income to determine what your maximum loanable amount may be.
Personal loans are generally unsecured, meaning there’s no collateral required; making them more accessible for people with lower credit scores.
What is a personal loan?
Personal loans are short-term money borrowed from a lender that’s paid back over an agreed-upon term. They can be obtained at banks, credit unions, online lenders and some big box stores, though generally speaking these unsecured loans don’t require collateral such as your home or car and instead assess applicants based on factors like financial history and credit score when making their decision.
Personal loans are an ideal way of financing large purchases or paying off high-interest debt such as credit card balances. But before applying for one, it is essential to remember the impact it will have on both your credit score and fees associated with it. A higher credit score with lower debt-to-income ratio will increase your chances of approval at lower rates; adding co-borrowers may further help.
How does a personal loan work?
Personal loans can be found through banks, credit unions and online lenders and typically have fixed monthly repayment installments with an agreed-upon fixed interest rate and fixed term. Personal loans provide greater flexibility than consumer loans for debt consolidation purposes such as home renovations or major life events such as marriage.
Lenders typically look at an applicant’s credit history and income when making decisions regarding eligibility for personal loans. Lenders might require them to submit financial data such as bank statements, pay stubs or tax returns as evidence of this information. They might also review an applicant’s credit report to ensure there are no negative items which might prevent them from repaying the loan in time.
Borrowers often incur fees such as origination and prepayment penalties when early paying off their personal loan early, so it is essential that borrowers compare loan terms and costs before selecting their lender. Making on-time payments will have a beneficial effect on your credit history and score.
What can I use a personal loan for?
Personal loans can help cover large expenses or consolidate debt more effectively than credit cards or payday or pawnshop loans. Before considering one, be sure to carefully examine its fine print and assess alternative financing solutions before making your decision.
Home improvement or travel loans may be tailored for certain needs, while personal loans are designed for any financial purpose. You could take out one to cover medical bills not covered by insurance such as orthodontics or egg freezing procedures.
Personal loans should only be used for one-off purchases or refinancing federal student loans (otherwise you risk losing important protections), and are best used for short-term expenses you cannot cover with savings alone – such as paying one-time essential expenses that you cannot cover through savings alone.
How do I get a personal loan?
Personal loans can be obtained in various ways. There are offers from online lenders and banks alike; even credit unions may provide personal loan offers. Many allow pre-qualifying with them without affecting your credit score and provide loan amounts and monthly payment schedules to choose from.
Repayment terms typically range from one to seven years. By choosing a longer repayment term, your monthly payment could decrease but over the life of the loan more interest will accrue. Some lenders charge an initial origination fee that must also be covered in addition.
Know that personal loans are considered unsecured debt; your lender won’t be able to recoup its money if you default. Therefore, it is crucial that you create a budget and pay on time each month. Adding co-borrowers or collateral may help qualify you and result in lower rates or a larger loan amount; NerdWallet recommends using their personal loan calculator for optimal borrowing decisions.