Personal loans can help in an emergency, but read this before you apply
Understand the process of getting a personal loan now to protect your finances later. (iStock)
Whether it’s because of a job loss or the uncertainty of the future, making ends meet has become more difficult for many Americans who have been affected by COVID-19. You may have emptied your savings account in an emergency and you may be considering subscribing to a personal loan to cover an unforeseen expense, such as a medical bill, a home or car repair, or a funeral, especially since interest rates are at their lowest.
However, getting approved for a loan can cause problems. It is increasingly important to understand the process as well as what lenders are looking for before completing your request.
1. How can I benefit from a personal loan?
When qualify applicants for a loan, lenders look at various factors, such as your credit or your FICO score. This number helps them determine your creditworthiness by assessing your financial past. Lenders prefer borrowers who have good or excellent scores (700 or more) and offer them the best conditions.
Your credit history will also have an impact on the success of your qualification, and this is reflected in part in your credit score. Lenders want to see that you have a good history of paying your debts on time and that you hold accounts for a long time. They also check the number of new accounts you have opened.
Lenders will also qualify you by reviewing your debt-to-income ratio (DTI), which compares your total debt repayments (including credit cards, mortgages, auto, personal, and student loans) to your gross monthly income. If your DTI is less than 40%, you are more likely to qualify.
And a lender will look at your monthly income, which indicates how you will be able to repay the loan. If you’ve recently been laid off or on leave, you may have trouble qualifying for a loan because the bank or credit union won’t be able to set a clear repayment path for you.
The amount you can borrow will depend on your credit history, but common offers are between $ 1,000 and $ 50,000 and up to $ 100,000 for people with excellent credit. While it can be tempting to ask for more in an emergency, you shouldn’t borrow more than you need.
It helps to visit Credible and use the personal loan calculator to find the best personal loan rates and how the payment will impact your monthly budget. The monthly bill will reflect how much you borrow, and if you borrow more than you need, it can be difficult to make the payment.
Before you get into debt by applying for a personal loan, consider all your options. Is it possible to eliminate some expenses to save money? You should also look for income generating opportunities that could cover the emergency by selling items or taking another job. If these options are not available, other forms of financing may be preferable to a personal loan to meet your immediate needs.
If your credit is good, you may want to consider a credit card with 0% APR, especially if you need cash to make a purchase. Zero rate cards can be an effective way to get funds as long as you can make the monthly payment. Visit an online marketplace like Credible to see multiple zero percent credit card options at once.
But be careful. If you don’t pay off the balance by the end of the promotional period (often 12-18 months), you will have to pay interest that accrues from the start date of the charges.
Before you incur any type of debt to pay for emergency expenses, you need to weigh the pros and cons. Personal loans often don’t require collateral, which means you don’t have to put your assets at risk. With the current low interest rates, you can visit an online market like Credible to find affordable personal loan options tailored to your budget.
However, if your credit is not good, you may be charged high interest, making a personal loan an expensive option. And in today’s uncertain economy, a job loss could make it difficult to pay off, even if you qualify for a low interest rate.
Personal loans are one option for getting the cash you need in an emergency, and as long as you think about how to use them and pay them off on time, they could be the solution for you.