Getting the best terms on your next personal loan isn’t all about shopping around between lenders (though that isn’t a bad idea). It’s about taking the time to polish up your spending, saving, and credit. If you take a few months to focus on these areas, you’ll find that the loans you are able to receive will cost you a whole lot less. It’s all because banks and other lenders want to give money only to those who will pay them back with no missed or late payments. If your personal finances look iffy, you may get an expensive loan, or be denied the loan entirely. Here’s how it all works.
If you have bad credit and you need a loan now, don’t despair. Even though you might not have much time to improve the things mentioned above, competition in the lending industry may give you more options than you thought possible. This guide to the Best Personal Loans for Bad Credit (Updated for 2017) can help you save a ton of money.
For everyone else who can spend a couple of extra months polishing their finances, it’s best to start with the things you can investigate just by looking at your bank and credit accounts. It’s important to focus on your credit cards, because that’s usually where the most damage is done. Every credit card has a credit limit. This is the amount of money that the credit company would allow you to spend all at once. Credit limits exist because you could theoretically max out all your credit cards and flee the country. They also exist because some people can’t control their credit limits.
You should only carry as a balance up to 30% of your credit limit. Any more, and warnings start to go off to the Credit Reporting Agencies (the independent companies that keep track of your credit history). When you use more than about 30% of your credit limit on any one card, it looks like you are financially vulnerable. You seem to be spending money you don’t have, perhaps making ends meet with borrowed money. This makes it seem like you probably can’t handle any more debt, because you already have too much. You’ll either be denied a loan or given one that costs a lot of money.
Next you need to look at your credit score and credit history. If you find negative marks on your credit history, you can either dispute or resolve them. Dispute only smaller debts and unpaid items, which you could afford to repay if the disputed item attracts the attention of a debt collector. You can alternately decide to pay for unpaid negative items, after which they will be removed and your credit can rise again.
Additionally, you should save as much money as you can, and pay down medium and low interest debt. The more money and income you have, with as little debt as possible, will result in a much better looking financial situation from the point of view of your potential lenders.