The only thing you need to do before applying for a personal loan
It could save you a lot of money.
- Personal loans are a flexible borrowing tool that works well for many people.
- If you want to keep your borrowing costs to a minimum, there is one key step worth taking.
If you need to borrow money, there are a number of ways you can go about it. You can choose to charge a higher balance on your credit cards, but that could mean paying a lot of interest. You can also try borrowing against the equity in your home, but you may not feel comfortable taking out a loan where the roof over your head serves as collateral.
But an option that could works well for you is a personal loan. The advantage of personal loans is that they allow you to borrow money for any purpose.
Do you want to buy furniture? A personal loan could make this possible. You can even take out a personal loan and use your proceeds to start a business if you’re trying to start a new business and don’t qualify for an actual business loan.
Discover: These personal loans are the best for debt consolidation
More: Prequalify for a personal loan without affecting your credit score
But if you are going to take out a personal loan, there is one important thing you need to do first. And it’s a move that could save you a lot of money.
Improve your credit score
Personal loans are unsecured, meaning they are not tied to any specific asset. On the other hand, if you take out a home loan, your home is used as collateral for that loan. As such, if you have plenty of home equity but your credit score isn’t the best, you may not have trouble getting an affordable home loan because your lender has assurances that if you fall behind on your payments, it could, in the worst case, force the sale of your house to get your money back.
Personal loans don’t work that way. If you’re behind on your payments, your lender may be out of luck. As such, personal lenders take on a fair amount of risk.
But if you come in as a personal loan seeker with strong credit, it sends the message to a lender that you’re not such a risky borrower because you have a solid track record of paying bills on time and in full. And a lender is likely to reward you for it with a lower interest rate on the amount you borrow.
On the flip side, however, if your credit score isn’t great at the time you apply for a personal loan, you may either be denied the opportunity to borrow directly or end up with a higher interest rate. high on your loan. This is because lenders believe they are taking more risk when lending money to borrowers whose credit needs work. And so, if you want to spend less to borrow, it is better to increase your credit score before applying for a personal loan.
How to increase your credit score
There are different ways to boost your credit score, some of which may take longer than others. First, pay all incoming bills on time. Then, if possible, pay off some of your credit card debt to reduce your credit utilization rate. (To be fair, if you’re in a situation where you need a loan, you might not have the money to pay off your credit cards.)
It is also beneficial to review your credit report for errors and to correct errors that may work against you. If your credit report tells you that you have an outstanding loan balance that you paid off years ago, for example, erasing that detail from your record could help improve your score.
There are many advantages to borrowing money with a personal loan. But if you go that route, do yourself a favor and try to boost your credit score before submitting that application. It could save you a lot of money.
The Ascent’s Best Personal Loans for 2022
Our team of independent experts have pored over the fine print to find the select personal loans that offer competitive rates and low fees. Start by reviewing The Ascent’s best personal loans for 2022.