In the world of credit and loans, personal loans are severely misunderstood. This is because, unlike more popular options like auto loans and mortgage loans, personal loans are not tied to any specific product. Yet unlike credit lines, personal loans are not “revolving,” meaning that your credit does not replenish after you have paid off the loan.
This makes them a foreign concept to many Americans who are not sure how they work.
Given their flexibility, personal loans are able to help in a variety of circumstances — consolidating debts, home improvements, paying for a wedding or helping to finance a dream holiday. Sometimes, though, taking out a personal loan comes at a high cost — especially if your credit is not where it could be.
Fortunately, there are ways to access better rates on your personal loans so that you can take advantage of their versatility without worrying about whether or not you will be able to make payments in the future. Read on to learn a few tips for getting better rates on your personal loans.
1. Sort Out Your Credit
If you’ve heard it once, you’ve heard it a thousand times: Your credit history is king when it comes to determining what rate you can get not just on personal loans, but also on car loans, mortgage loans and other types of financing.
One of the top reasons that will result in sky-high interest rates is having bad credit. Now, if your credit score is low and your income is not high enough to keep lenders at ease, you may not get approved for a personal loan at all. However, the more likely scenario for many borrowers is that they get approved for a loan but at a much higher interest rate than they would otherwise get if their credit score were higher.
The national average interest rate for personal loans currently stands at a little over 9.4%, so anything lower than this should be considered good. However if your credit is low, this figure can increase dramatically.
That does not mean that you cannot find a good personal loan for bad credit at a reasonable interest rate. But the likelier scenario is that your interest rate for a personal loan could be as high as 20% or more if you do not take certain steps to get your credit score in check.
If you are going to apply for a personal loan for poor credit, be sure to follow these tips:
- Check your credit score online for free to get a sense of what to expect.
- Order a free credit report and dispute any incorrect information, as this could be hurting your credit.
- Pay off your credit cards and other loans on time.
- Try to make more than the monthly payment on your credit accounts. If possible, pay off your entire balance each month.
- Use your credit cards regularly to keep them from closing automatically.
Making use of the credit strategies above will increase the likelihood of your credit improving, helping you get better overall terms on your personal loans.
2. Compare Several Loans
With so much choice available when it comes to loans, it can be difficult to pick out the best personal loan companies. However, there are many online tools that can help you choose the right one for you.
With a wealth of comparison websites, all it takes is to input your details and requirements to be presented with an ample set of options. More often than not, these options will clearly show you all the information you need to compare personal loan rates.
Additionally, when you compare personal loans and get prequalified, you may even be able to see your chances of being approved. This is particularly beneficial if you wish to avoid damaging your credit score by applying for multiple loans and being continually rejected, since loan applications require companies to run a “hard” check on your credit history.
You will also be given a clear idea of what the monthly repayments will look like so you can find a loan that not only meets your needs but that you can also comfortably repay.
One of the best places to start when looking to take out a personal loan could be your bank. Personal loan banks offer a variety of loan options to suit different circumstances.
For example, if you require a co-signer, TD bank could offer you up to $50,000 with a rate as low as 6.99%. Of course, this rate could increase if your credit score is particularly low. Wells Fargo offers very competitive interest rates and gives you the opportunity to repay over a much longer term than some other banks — up to 84 months.
3. Weigh the Pros and Cons of a Secured Loan
A secured personal loan is a loan that is backed by your financial assets such as your car or home so that, in the event that the loan cannot be repaid, the lender has collateral that they can take as payment.
For some people, especially those who have struggled to keep up with repayments in the past, collateral loans should be avoided. The last thing you want is to put your house as collateral for a loan that you know you will have trouble paying and then have that collateral taken away.
However, since secured loans tend to have a lower interest rate than unsecured debt (such as credit card debt), then if you are confident that you will not default, this might be a better option to avoid being stung by high interest.
What’s more, a secured loan does not require you to have an excellent credit rating, and there are many secured loans for bad credit available. That being said, it is important to weigh the pros and cons before agreeing to a bad credit collateral loan since there is a high risk involved in not meeting the repayments.
Aside from bad credit not being an issue, secured loans are repayable over a longer period, meaning that the monthly payments may be lower. However, it is worth considering that even though the interest rate may be lower initially, many secured loans come with variable rates that could increase.
The most important thing to consider when applying for a secured personal loan is whether you need the loan or not. If it is for something that is not essential or that you may be able to save for, this may be a better option.