When someone needs money for an upcoming wedding or a home renovation, one of the easiest ways to get the funding they require is through a personal loan. These loans are typically unsecured and can be for as much as $40,000 (depending on the applicant’s state laws).

However, there are also many predatory companies that try to take advantage of those in need. Here’s how to safely shop around for a reputable personal loan.

Perform a Credit Check

Just like a credit card or mortgage, personal loan lenders will use the applicant’s credit rating (also known as their FICO Score) to gauge their ability to pay back the money they borrowed. This number doesn’t have to come as a surprise to the applicant. They can check their FICO Score using a free online service such as Experian.

If an applicant finds that their FICO Score is lower than expected, the next step will be to download copies of their credit reports and look for any errors that might be dragging their rating down. Every consumer has the right to dispute any inconsistencies or issues that they find.

Get Financially Prepared

Another figure that a lender will want to check is the applicant’s debt-to-income (DTI) ratio. This is just a simple comparison of monthly debt payments divided by gross monthly income. If an applicant’s DTI ratio is too high, it indicates that they might struggle to make payments and should therefore be perceived as a risk.

Applicants can calculate their own DTI ratio before applying for a loan. Lenders typically like to see this metric below 35 or 40 percent. If the applicant needs to lower their DTI, they should spend some time strategizing how to eliminate as many of their debts as possible.

Compare Interest Rates

Even though most personal loans will come with a fixed interest rate, not all lenders will offer the same number. This is why it pays to shop around, especially for applicants with high FICO Scores who should be getting the best rates possible.

Some loans may start with a low introductory interest rate that switches to a variable rate after a few months. Applicants will want to be careful of these offers because their payments can drastically increase without warning.

Watch Out for Fees

Interest won’t be the only thing that a borrower has to pay. Most personal loans also come with a one-time origination charge that is somewhere between 1% and 5% of the total value of the loan. For instance, a loan for $10,000 might have a fee somewhere between $100 and $500.

Just like the interest rate, it’s a good idea for applicants to shop around. Compare these fees and how they might impact the overall cost of borrowing these funds.

Consider Secured vs. Unsecured

Sometimes, depending on the amount an applicant wishes to borrow, their credit score, or DTI ratio, they can increase their chances of getting approved if they’re willing to apply for a secured loan instead of an unsecured one. A secured loan means that something of value (called collateral) will be offered in case the applicant defaults on the loan.

While this can be a helpful strategy, borrowers need to be cautious about what they put up for collateral. For instance, if they list their house and default on the loan, then it could put their family out on the streets. Therefore, applicants should review their assets carefully and only list collateral that isn’t absolutely necessary for survival.

The Bottom Line

Shopping around for a great personal loan starts with an applicant checking their credit and making sure their finances are in order. They’ll want to compare rates and watch out for fees. Adding collateral to the loan can be helpful, but applicants should use caution.

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