There are all kinds of reasons to take out personal loans. Some people use them to repair cars or pay medical bills, while others simply need to come up with some extra funds to put toward essential purchases or short vacations. No matter why someone wants to apply for a new loan, they should know a few things before jumping.

How to Qualify

Every lender has different eligibility requirements for borrowers. While banks are very stringent about who they will approve, applying for a new loan through a specialized online lender may be more likely to yield success. A few factors will impact eligibility no matter where borrowers try to find a loan, though. They can include credit scores, current employment status, and history of missed repayments.

How Much to Borrow

Some people assume that the best thing to do when they need to borrow money is to take out as large of a loan as they can get to have some extra padding. They need to consider that they will have to pay back extra interest due to borrowing money they don't strictly need. The better approach is for potential borrowers to figure out exactly how much they will need before applying for loans and borrow only that amount to minimize interest and monthly payments.

What Fees Are Involved

Every lender charges fees. What's important is making sure that they are clear from the beginning. Borrowers can generally expect to pay not just interest but also late fees and repayment penalties. They should ensure the range of fees the lender applies is completely clear before signing on the dotted line.

What Documents Will Be Needed

When applying for a personal loan, borrowers should expect to be asked for certain forms of documentation. They usually include:
  • Official identification
  • Address and personal details like marital status
  • Proof of income
  • Information about outstanding loans, especially when consolidating debt
Lenders need these and other documents to form a clear picture of the borrower so that they can better understand what level of risk they are taking on. Some lenders also require hard inquiries, which can impact credit reports for up to a year.

How Long It Will Take to Pay Off the Loan

Most people focus on how much it will cost to take out a loan and pay little attention to the loan term. That's a mistake because while no one wants to pay exorbitant interest or unreasonably high bills, it's just as important to know how long those monthly repayments will be required. Only some have an equal amount of financial security. Taking out a loan with an excessively long repayment period can be just as problematic as taking out a loan with lots of fees or high high-interest rates.

Regarding monthly bills, the general rule is that borrowers should be spending no more than 35-43% of their income on debt. When taking out a new loan, remember that this rule applies to all debt, including mortgages, student loans, car loans, and other personal loan payments.

Find the Right Lender

Once borrowers decide to take out a loan, they shouldn't just jump in. Take the time to find the right lender to ensure there aren't any hidden fees, the interest rate is reasonable, and the monthly payments are affordable.