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How to qualify for an unsecured personal loan

Personal Loan Letters

You can find most personal lenders offer from $2,000, up to as much as $40,000. An unsecured personal can really help you cover your immediate expenses without breaking the bank. With a good credit score intact, you’ll be more likely to get a loan offer with a lower interest rate.

You are somewhat restricted if you have a poor credit history or lack of. Although there are some lenders that are willing to consider more than just your credit score. Below are some things to consider whilst on the quest to find a personal loan.

Credit is important

The interest rates are usually higher than that of secured loans, or loans backed by an asset such as your home should you own one. Because these rates depend on your creditworthiness, having a respectable credit score can also make it easier to find a lower APR (Annual Percentage Rate).

Pretty much all retail banks offer unsecured loans, also referred to as instalment loans. You pay the lender back over a fixed period of months making either fortnightly or monthly repayments until the balance is settled. Peer-to-peer lenders like Society One or Harmoney, which offer investor-issued loans to consumers with good credit, sometimes offer even lower rates than retail banks to borrowers with excellent credit. Always bear that in mind when shopping around.

Borrowers with an average credit rating have plenty of options, although rates tend to be a little higher. Some lenders will consider additional factors such as your job history/security and also earnings potential when making their underwriting decisions.

What you need to apply for a personal loan

During the application process, here are the documents you’ll be required to supply:

  • Identification – passport, driver’s licence
  • Verification of address – utility bills, recent mail or rent/mortgage statement
  • Proof of income – pay slips, last 90 days’ bank statements or tax returns

You may also be asked to provide the following:

  • Medicare number
  • Monthly debt obligations (rent, pre-existing loan or credit card debt)
  • Gross income
  • Employer’s name, work address and phone number
  • Email and phone number
  • Previous addresses
  • Date of Birth

After providing this information, or beforehand, you will need to specify the amount of money you want to borrow and the duration of the loan (typically two to five years). Bare in mind the longer it takes you to pay the loan off, the more you’ll have to pay back in interest. You should only borrow what you need, there is no point in paying the lender more interest than you absolutely have to, always try to keep your costs low.

How to find the lowest rates?

See if you qualify for a 0% credit card. If you have a good credit rating, you can probably get a credit card that has 0% interest on purchases for up to 12 months or longer, and that may be less expensive than taking out a personal loan.

Consider a secured loan instead. Should you own a house, consider using it as collateral in order to get lower rates. A home equity line of credit can often be cheaper than an unsecured personal loan. Keep in mind that using your home as collateral means that if you default, you could lose your home.

Pay as much of your credit card balance off as you can before you apply. The outstanding balance on your credit card – even if you pay it off at the end of the month and never pay interest – counts against you when a lender runs a credit check.

Make sure you shop around. Online lenders offer very competitive rates, especially for borrowers with excellent credit.

What to look out for with personal loans

If you ignore the fine print and don’t review your loan agreement fully, you might find out the hard way that you agreed to less-than-ideal terms. Look out for any little pitfalls that might send you tumbling.

Prepayment charges. Most online lenders do not charge a fee for paying off the loan before a certain date, called prepayment charges or exit fees. Always keep a lookout for the fine print “no prepayment penalty” on your terms when you apply.

Accidental overdrafts. Many lenders ask for automatic payments from your current account. Ensure you have enough money in your account to make your repayments or you may be in danger of overdrawing your account and paying an overdraft fee. To avoid this little accident, consider setting up a low balance alert with your bank.

Final advice. Taking out a personal loan can be useful to relieve you from debt and cover unexpected costs, but tread with caution and assess your options before making a choice. Find the lowest rates, borrow only what you need and always pay your debts on time to avoid unnecessary charges.