A personal loan can be the lifeline you need to pay off high-interest debt or help to make things right at a time when you can least afford for things to go wrong. Before you apply, it’s important to get familiar with the key parts of the loan application.
What is a personal loan?
A personal loan is typically an unsecured loan with a fixed rate, with approval based on factors like your credit score, your ability to repay, credit history, and possibly, job stability. This kind of loan does not require collateral.
In other cases, a personal loan may be secured by collateral such as a savings account with a variable rate. Be sure to read the contract details.
Ask yourself why you need the money
It’s common to use a personal loan like an LGFCU Signature Loan to consolidate debt or to cover an unexpected expense. Knowing your purpose upfront can help you decide if this type of personal loan is right for you or if a different line of credit is better suited for your needs.
For example, if you have certain assets like a home with available equity, you may be better off with a home equity line of credit (HELOC) to pay down high-interest debt.
LGFCU also has variable, fixed and term note Shared Secured Loans. With these loans, you borrow money and use your Share Account as collateral. Your savings remains intact, yet you get the money you need.
Understand the state of your finances
A lender may look at your debt-to-income ratio, which tells them if you’re financially able to manage another monthly payment and successfully repay debts. If you’re unsure, try a Loan Payment Calculator to determine what your monthly loan payment might be. Then check your budget to make sure you can afford this additional monthly bill.
Adding another creditor could stretch your personal finances too far and make it difficult to keep up with existing payments. Missed payments could negatively impact your credit score.
Approvals for LGFCU personal loans are not based only on your credit score. The Credit Union may be willing to work with you even if you have less than perfect credit.
What is the personal loan interest rate?
Are you borrowing at a price you can afford? If not, it’s OK to search for a better rate. You may even have to re-examine your loan request: Is it based on a real need such as a financial emergency, or a want (e.g. pay down debt)?
Find out the loan terms
While the interest rate is an important part of any loan, you also need to know and understand the terms offered. A closed-end loan will have a specific start and end time for paying back the funds. Again, this is where you need to consider if you’re able to meet those terms, if another loan type is better for you, or if maybe now is not a good time to take on more debt.
Whatever your reason for applying for a loan, take time to understand all aspects of the application.
The advice provided is for informational purposes only. Contact your financial advisor for additional guidance. This article was originally published in December 2016.