The numbers paint a clear picture of the grim state of American’s personal finances.
For instance, did you know you know 78 percent of workers are only a paycheck away from financial ruin? Or that 69 percent of Americans don’t have enough cash to settle a $1,000 emergency? We can go on and on, but the picture will only get clearer, and the reality harsher.
It’s, therefore, not surprising that many Americans turn to personal loans to make ends meet and take care of life’s emergencies.
However, if you’re on the hunt for a small loan, the whole process can be overwhelming. There are literally thousands of lenders, all looking to entice you into taking up their credit.
Do you know how to sift through and find a preferred small loan? In this article, we are telling you how to do that.
But first off…
How Much Is a Small Loan?
Financial strengths vary from person to person. For a multi-millionaire, a $500,000 credit line can as well be small. But for the millions of low and middle-income people, a small loan is anything up to $3,000.
As such, the first step to finding a loan is to know whether the sum you need is actually small.
Now let’s head off to the steps you need to take to get the loan.
Know Your Credit Score
Unless you have never taken out a formal loan before, you certainly know a strong credit score significantly improves your chances of getting approved for a loan.
Perhaps you are saying to yourself, “I only need a 500 dollar loan – why do I need to check my credit score?” Well, sorry to disappoint you. Any formal lender will always want to know whether you’re capable of repaying whatever small amount you’re requesting, and the best way to know your creditworthiness is to check your score.
Know where your score stands before applying for a loan. Here is a quick break down of what your score means:
- Above 720 – Excellent credit
- 690-719 – Good credit
- 630-689 – Average credit
- 300-629 – Bad credit.
Excellent credit will get your loan approved, as will good credit. Average credit might also get you approved, but that depends on the relationship you have cultivated with the lender, and expect higher interest rates. Obviously, you stand no chance with bad credit, unless you’re specifically going in for a bad credit personal loan.
Now, what should you do if your score isn’t looking great? Should you ignore it and submit applications anyway? Don’t!
You see, every time you apply for a loan, the lender will make a credit score check. The hit will show on your report. If the lender rejects, you go to another lender, who also makes the check and rejects. Accumulating these hits on your report tells your future lenders that you’re probably under financial pressure because you’re making several credit applications. That’s why lenders who provide loans with no credit check are a good option, as their loans will not hurt your credit score.
The savviest thing to do is take steps to build your credit. It can take some time, but it’s absolutely doable. Pay your bills on time, clear your current credit card balances, ensure there aren’t any errors in your report (if there are any errors, get them corrected).
Know the Lenders of Small Personal Loans
With your credit score in order, it’s time to find out the various organizations that make small personal loans.
This is important because you might think that just about any commercial bank offers small loans. Not all banks do this. In fact, some specialize in small businesses or high-net-worth individuals, so you don’t want to waste your time approaching the wrong lenders.
Here is where you might want to look:
Most credit unions are built with members’ financial welfare. They have a reputation for making small loans at preferred rates.
If you’re already a member of a credit union in your local area, find one and join. You typically need to deposit some money – say $25 – and maintain your membership for a certain amount of time to become eligible for a loan.
Chances are you already hold at least one account with a commercial bank. It could be a checking account or savings account, or both. This is great because it means you have a relationship with the bank.
The only thing you need to know is whether the bank makes small loans. If it does, bingo! You’re a step closer to getting the money you need.
The internet has revolutionized who we do many things, from personal communication to media consumption. And now, we can bank online! With just a few clicks or taps, you can apply for a loan and have the money disbursed to your local account!
Online lenders such as LightStream, LendingPoint, and Avant make loans to internet users.
Is there any difference between bad credit online lenders and traditional banks? To fight off competition from traditional lenders, online lenders often offer attractive features, like flexible repayment. However, they will all consider your credit score before lending you the money.
Employer, Pawnshops and Other Lenders
If your employer offers employees to secure personal loans, by all means, go for it. Your employer has a fairly decent amount of information about you and your finances and can prove to be a reliable lender when you’re in need.
Pawnshops give secured loans and often will also offer payday loans. For pawn loans, you offer collateral like a watch, and you get money that equals a certain percentage of the value of the item/property. Simple and straightforward. If you fail to repay, you risk losing the collateral. Pawnshops should be your last resort for when push comes to shove.
Shop Around for a Small Loan with Preferred Rates
Now that you know where to find small loans, don’t settle on the first lender that catches your eye. It’s financially prudent to shop around and know exactly what the various lenders are offering.
A good strategy is to ask for loan pre-qualification.
When pre-qualifying you for a lender, a lender does a soft credit check (this doesn’t reflect on your report so it won’t hurt your score). Ultimately, you’ll know whether you stand a strong chance of getting approved for credit, as well as the amount of money you qualify for.
During pre-qualification, the lender might ask you to provide a host of documents and personal information, including your name, date of birth, physical address, social security number, current debt obligations, monthly income (provide pay stubs), and employer details.
Want to know the reasons you might fail a pre-qualification?
- Poor work history – You just got employed or are in-between jobs
- Your monthly income is too low
- High debt-to-income ratio – After paying up your current debt obligations, you’re left with too little money
- A high number of credit inquiries on your score.
Study Your Offers
If your pre-qualifications are positive, then you’ll have a couple of offers on your hands. Take time to study the offers.
What are the interest rates? How many co-signers are needed? Are the loans secured? If yes, what are they secured against?
Are there any pre-payment (if you pay off the loan early) penalties? Are the repayment automatically deducted from your account? What is the total cost of the loan (watch out for origination fees)? How flexible is the repayment? What, for instance, happens when you skip a repayment due to financial hardship?
In short, you must read the fine print of each small loan offer you receive. If you’re aren’t familiar with loan agreements, seek help from a close friend or relative. This will prevent you from taking up a loan that will turn out to be one of the worst financial decisions you ever made.
After selecting your preferred offer, the only remaining thing is to get approved! You’ll be asked to submit your identification, verify your address, and prove your income.
Depending on the lender’s policies, you could have your money as soon as the next business day, or it could take a couple of days.
Small Personal Loans Are Essential
Even though taking out a small loan is never an ideal situation, these loans can mean the difference between financial hardship and financial stability.
An emergency can knock you down when you least expect, you could lose your job, your business could fail… the possibilities of running into financial trouble are endless. A small personal loan is all you’ll need to get back on your feet.
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