Who should consider personal loans?
Not everyone is a good candidate for a personal loan. Personal loans are not the cheapest form of financing and qualifying can be tough for people with credit problems. However, they may be an excellent choice for certain consumers, such as:
- People who need money fast. Even if you have home equity, you may not be able to tap it fast enough to do what you want. It can take weeks to get your property appraised and your home equity loan or line of credit processed, approved and funded. If you need to move on a fantastic investment right away, a personal loan could be your best option – and you could always use your home equity to pay it off when you aren't under time constraints.
- People whose savings is tied up in retirement accounts. If you aren't old enough to access your savings without penalty, a personal loan could be a much cheaper source of funds. When you withdraw from your IRA or 401(k) too soon, the money is taxed as income to you (which could mean a 10-to-39.6 percent hit right off the top) and you'll also pay a ten percent penalty. If you're in a 25 percent tax bracket, you'd have to withdraw over $15,000 to get $10,000!
- People who don't own homes or have enough home equity. Not everyone with good credit and a healthy income owns a home. Personal loans allow these folks to get money fast.
- People who want a loan with a fixed interest rate. Sure, some credit cards come with fixed interest rates – for a limited time. They don't call those introductory rates "teasers" for nothing. If you want a true fixed-rate loan, you probably want a personal loan.
Qualifying for a Personal Loan
Personal loans are not cash advances, payday loans or title loans. They are loans with terms of two-to-five years and you must complete and application and pass a credit check. Here are typical underwriting requirements for personal loans:
- Minimum credit score: 640-750
- Maximum debt-to-income: Up to 45% depending on income, loan amount and credit rating
- Interest Rate: 8.50% - 18.0% depending on credit rating
Underwriting is more like that of credit cards than mortgages. Your income, debts and credit are examined to see if you qualify for a loan. If you do, your application package is graded and your interest rate is determined by your grade. Borrowers with an "A" grade pay the lowest personal loan interest rates, while borrowers with B, C and lower grades pay more.
It's important to understand this distinction, because one lender's "B" grade might be another lender's "A" grade. When shopping for a personal loan, be prepared to provide your credit scores, income, loan amount and the length of time you wish to borrow the money. Then choose your best offer.