Almost all of us will be – or have been — at a point in our lives where we need to borrow money and consider a personal loan. Whereas a loan for a car or new house has a known value and collateral if you fail to keep up, a personal loan is dependent on your personal financial history. Here’s what you can do to ensure you’ll be a good credit risk.
Do your homework
According to Theodore Daniels, Founder and President of Society for Financial Education and Professional Development, Inc., before beginning the loan process, obtain a copy of your credit report at www.creditreport.com. Check it carefully for errors, including possible identity theft; if you find any errors, you have 30 days to resolve them. Mistakes can lower your credit score, which can affect the loan’s interest rate. The ideal credit score is 750 or above.
Other steps you should take before the application process begins, Daniels advises, include, if necessary, taking steps to improve your credit score, such as paying off existing debt; if you are over 50, limiting your debt accumulation; and shopping around for the best rates.
Ask the right question
When you do sit down with the lender, Daniels suggests that the one question you need to ask is this: What are the terms and conditions of the loan? Before signing your name, you should know what terms may not be acceptable or appropriate for you. For example, if you plan to pay the loan off early, make sure there is no penalty for doing so. “Don’t accept the loans if you can’t accept their terms and conditions,” said Daniels.
Look at the big picture
Applying for a personal loan is a good time to look at your overall financial situation. One of the biggest obstacles is not having clear goals or established values. Know what is important to you, now and for the future, said Daniels, and then structure your finances around meeting those goals or values.
He also recommends accumulating wealth in different ways to meet those goals. This includes making contributions to 401Ks and Roth IRAs, and generating non-retirement savings and different income sources.
It’s about building a good financial mindset, Daniels added. “If you practice something, like saving money, you’ll stay with it. It’s all about commitment.”