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Known for their flexibility, personal loans can be borrowed for a number of reasons – managing bulky credit card debt, paying for costly roof replacements, etc.
Unlike credit cards or home equity lines of credit, you borrow a fixed amount and owe repay with fixed monthly payments fixed interest rate… This rate can vary widely from 5% to 36%, depending on your creditworthiness.
In general, the better your credit score and credit history, the lower your rate. But in 2020, banks increased their lending requirements even more, making it even more difficult for people with bad credit or limited credit history to get loans.
Why is it harder to get a personal loan?
Lenders use your income, employment status, credit history, and credit score to determine the likelihood that you will pay back the loan or will not be able to fulfill it. This risk is reflected in your interest rate. If you are out of debt and always pay your bills on time, then you have access to better rates. Conversely, if you have no credit history or had debt problems, your rate is likely to be higher, or you cannot qualify for the loan at all.
Anuj Nayar, financial health specialist at LendingClub, offers to compare rates when considering the trade-off between an individual loan and a credit card. “Any [personal loan interest] a rate that is lower than the rate you pay on your credit card is better than what you are doing right now, ”he says. (Borrowers also need to consider other upfront costs of personal loans such as clearance fees.) The average interest rate on a credit card is now around 16%, and it usually ranges from 14 to 26%.
Even if you were recently laid off, have significant credit card debt, have filed for bankruptcy in the past, or your credit rating is below 600, there are options that can make you a more attractive candidate for a lender, namely secured loans and signers.
However, keep in mind that many lenders have tightened lending requirements in light of the pandemic and its negative impact on the economy. LendingClub, for example, has refocused efforts on existing customers and raised standards for income and employment verification. The pool of potential personal loan applicants has increased along with the contraction of the economy, which has led to a difficult climate for potential borrowers.
Secured loans require collateral, often a large asset, in order to approve the loan. The collateral can be your house, bank accounts, investment accounts, or your car, depending on the requirements of the lender. This will require additional documents and more risk on your part, because in the event of default on the loan, the lender may take possession of this collateral.
The trade-off is that the lender will feel more comfortable renewing the offer and may give a better rate than if the loan was unsecured. Most loans are unsecured, requiring faster approval, but generally higher interest rates and stricter lending requirements.
These types of loans can take longer to process as it requires the lender to confirm that you own the collateralized assets. In the case of a home or real estate, an updated valuation may be required to determine the fair value of the collateral.
If you do not own large assets, or at least those that you would like to put up as collateral, then the option with the involvement of a co-author. A facilitating borrower is a secondary borrower with a good credit history that may allow you to qualify for a personal loan that you will be responsible for repaying. Cosigners can increase your chances of loan approval and the likelihood of getting a lower rate because more information is provided to a lender who may be reluctant to give money to someone with no credit history or bad credit history.
Cosiners are not eligible to receive money from the loan and do not see the payment history. However, they will be hooked on the loan if the borrower is unable or will not make payments. This is one of the reasons why it is important to find out the loan repayment plan before applying for a loan. If you are not sure if you can repay the loan, then you and your partner will receive a credit score.
Alternatives to Individual Loans
What if you can’t get a personal loan or the interest rate offered to you is too high to be worth it? Apart from personal loans, there are other options on the market such as peer-to-peer loans, small business loans, and payday advances. Here are two common alternatives to personal loans: credit cards with promo rates and HELOC. We believe that these two options are the most affordable for the average borrower, although these options, like personal loans, are indeed suitable for candidates with good credit ratings.
Credit cards at promotional rates
Many credit cards offer an initial 0% annual rate on purchases and balance transfers for 12-15 months. Provided that you make at least the minimum payments on time, you will not be charged interest for the entire period of time, after which the interest rate will return to the usual annual purchase or balance transfer price, which will probably range from 14 to 26% depending on from on your creditworthiness. You may also have to pay a percentage of any balance you transfer, probably 3 to 5%.
If the math works in your favor, these credit cards are useful for transferring debt from high interest rate cards and saving interest.
Credit limits are usually reasonable as well. “If you’re looking for something to help you over the next six months, the lines of credit on these cards can be around $ 10,000 to start,” says Farnush Torabi, financial journalist and host of the program “So money»Podcast. “If you can pay [the balance] shut down on time, it’s a great alternative. “
However, it is important to keep in mind any limits on these promotional rates, as some cards will charge you retroactive interest if you have not paid the balance by the end of the introductory period. As with all other situations, we recommend reading the fine print before opening a credit card.
If you own a home, you can add value to it with a Home Equity Line of Credit (or HELOC). Torabi compares HELOC to “high credit card limit” in the sense that it is a revolving line of credit where you can borrow as much or less as you need, and it is not a loan. However, like loans, HELOCs can be used to finance large expenses or consolidate other forms of debt.
Interest rates – usually variable – are usually lower than credit cards, between 3% and 20%. However, Torabi recommends that you be wary of the HELOC, as the collateral is your home. There is also the fact that large banks such as Bank of America and Wells Fargo have tightened lending standards for HELOC in the face of the COVID-19 pandemic.
“Right now, banks are not that generous with HELOC because they know that if you go bankrupt or fail to make payments, you will most likely fail to meet your HELOC and underlying mortgage obligations. Therefore, they have very high standards regarding who can borrow for their houses, ”says Torabi.
Ultimately, you will have to weigh the risk yourself and see if the low interest rates and flexible credit line will allow you to make payments on time.
How to improve your credit
Do you see yourself applying for a loan in the future? Whether you may need to apply for a loan in the future or use alternative loans, it is always worth remembering the basics of credit health. Here are some ways improve your credit rating and become the best candidate for lenders.
Payment on time
One of the main factors in your credit history is your billing history. Do you pay your credit card on time and in full? Do you make at least the minimum monthly payments? In the opinion of the lender, incidental payments mean a risky borrower.
If you are having difficulty paying bills or loans, we recommend contacting your creditors and asking for some sort of accommodation – deferred payment, a lower interest rate, some way to ease your claims. Many major banks, credit unions, credit card companies, and loan providers have responded to COVID-19 with financial assistance programs to help you if you are experiencing difficulties. A formal agreement from your lender also help your credit history because the status of your payment will be considered current even if the payment was declined within a month.
Keep your credit cards open
A credit score takes into account how long you own a credit card, so think twice before closing credit cards. Even if you do upgrade to a better quality credit card, consider leaving the old one open and making payments from time to time to establish your accountability. A scattered credit card history can get in your way and lower your credit score.
Request a higher credit limit
Large credit rating companies (FICO, VantageScore) rely heavily on “use of credit” or the amount of available credit used as a factor in your credit score. The lower the ratio, the better – which means that a $ 500 balance shows up better on a $ 10,000 credit card than on a $ 5,000 balance (50% utilization rate). Experts usually recommend using less than 30% of the available credit at any time.
Review your credit reports
Due to the COVID-19 pandemic, you can now receive weekly credit reports for free until April 2021 at three major credit bureaus (Equifax, Experian and TransUnion) at AnnualCreditReport.com… On your credit report, you will see the payment history for each loan or credit card taken, as well as rent and bill payments if you agreed with the lender. Review the report for any inaccuracies or inaccuracies. You have the right to dispute any errors and receive them. remote…