If you need relief from your high interest loans or credit card debt, you may be considering a personal loan. Offered by many banks and credit unions, personal loans allow you to consolidate or refinance your debt into a lower interest rate loan with one fixed monthly payment.
While they have some drawbacks – personal loans often have higher interest rates than auto loans or typical mortgages – they are a viable option for consumers facing high interest debt.
1. Decide on a type of loan
There are two main types of personal loans: secured and unsecured.
Secured loans require you to provide collateral, such as your house or car, which can be owned by the lender if you don’t pay. These loans have more flexible credit requirements, and you can have lower interest rates and greater borrowing power. However, you are putting your own property on the line.
Unsecured loans do not require any collateral, but depend on your creditworthiness and repayment capacity. You’ll need better credit to get approved, and you could end up with a higher interest rate than a secured loan.
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2. Know how much you need to borrow
Before you apply for a personal loan, know how much you need to borrow. Account for existing debts that you want to consolidate or refinance. You may not need this information immediately, but it will help you determine your needs and avoid asking for an artificially high amount.
3. Know your credit
Before applying for a personal loan, you should know your credit status. This means that you need to check both your credit report and your credit score.
Once a year, you can check your credit report for free with all three credit bureaus at AnnualCreditReport.com. Carefully review your report for negative or inaccurate information that could affect your chances of approval. If you find any errors, you should dispute them and have them removed from your credit report.
It is also a good idea to check your credit score before applying. You can get two of your Free credit scores, updated monthly, on Credit.com. Before applying, you should do everything possible to improve your credit score.
If you are in dire need of debt relief, you may not have time to wait for your credit to improve. Even so, it will be helpful to know the state of your credit as it stands.
4. Find the right lender
Not all financial institutions are created equal. Shop around for several lenders, including banks and credit unions. You may need to choose your lender based on the bank most likely to approve your loan application, but you shouldn’t jump to the first offer. Review the fine print, interest rates, and terms of any loans you are considering.
5. Create a checklist
Once you are ready to move forward with your application, create a checklist of all the documentation you will need. You may need to work with your creditors, employer, and others to put it all together, so give yourself plenty of time. Incomplete applications can lead to immediate rejection, so it’s important to make sure your ducks are lined up.
Remember that debt consolidation only makes sense in certain scenarios. Depending on the interest rates you can get and the length of the loan, you could end up paying more for a long-term personal loan, even with lower monthly payments. Make sure you understand the total cost of a personal loan versus the total cost of your current debt. For more information, see our article on decide if a personal debt consolidation loan is right for you.
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Brian Acton is a freelance writer and contributor to Credit.com. Several years ago, while working to pay off debts and buy a house, Brian became interested in personal finance and credit. He has since covered these topics. Brian holds a BA in History from Salisbury University and an MBA from UMUC. He lives in Maryland with his wife and two dogs. More from Brian Acton