If you’re reading this, you’ve probably found yourself at a point in your life where you need a small personal loan. Maybe there’s a vacation that you’d like to take or you need to renovate your house. Maybe you’re looking to consolidate your debts under a single monthly payment. Whatever the case, you may be ready to look for small personal loans under $5,000 but have no idea where to start.
You’re not alone. Every day, thousands of people just like you jump on Google and sort through finance sites, or call their banker, looking to find the perfect loan. What they often find waiting for them is a barrage of terms that they don’t understand and a process that can seem very confusing. It’s a struggle for many people that can often leave them at a loss as to how to proceed.
With this guide, we’ll introduce you to the world of small personal loans, discuss how the lending process works, and give you some advice to help start your search on the right foot.
How do Loans Work?
As you’d expect, whether working through a lender or just borrowing from a friend, a loan is an amount of money that you are given and expected to pay back. While you’ve no doubt received a loan in the past, probably from your parents or friends to buy clothes, groceries, and the like, a loan through a formal lending agent works a little differently.
To start, once you contact a lender, they’ll begin by assessing your viability as a borrower. This is where the lender will look at you and determine whether or not they want to work with you.
How Will I be Assessed?
First and foremost, the majority of lenders will begin by assessing your credit score. Your credit score is a numeric value assigned to you, ranging between 300 and 800, that evaluates your “risk” as a borrower. The higher your score, the less risky you’ll appear to a lender. This also means that they’ll be willing to offer you better terms.
Before you start shopping for a loan, it’s crucial that you understand the five factors of your credit score, and try to raise it as high as you can beforehand. Bear in mind – when a lender checks your credit score, it will cause it to drop. Be sure that you’re serious about working with the lender before you commit to them checking your score.
In addition to your credit, lenders will also weigh how much money you make against how much you’re already obligated to spend. This is known as your DTI or debt-to-income ratio. Typically, lenders want to see a DTI of no more than 43% before they agree to work with you.
The financial obligations that are calculated in DTI include things like a rent or mortgage payment, a car payment, or another loan that you’re repaying. Costs like utility payments, credit card balances, and grocery bills don’t qualify.
Simply put – the better your credit, and the lower your DTI, the more favorable your loan terms will be.
During this stage of the loan process, you’ll submit your application, along with any supporting documents the lender requires to validate your identity, income, and other financial aspects.
How Are Lending Terms Compiled?
Once you’ve been assessed and filled out your application, the lender will assess your risk against what you’re requesting in your loan. In the mortgage industry, this is referred to as the underwriting process. If you’re approved, the lender will present the offer that they’re willing to make for you. Gauging both your credit score and DTI, your terms will be better or worse depending on how risky you appear to be. The terms that lenders will present you include:
- The Principle – the amount that you’re seeking to borrow.
- The Interest Rate – the percentage that is added to your total loan repayment. This varies widely and depends largely on your credit score. For example: if you take out a loan for $4,000, at an interest rate of 10%, you’ll be obligated to repay a total amount of $4,400.
- The Life Cycle – this is how long you’ll have to repay your loan. This will also determine how much your minimum monthly payments will be. Using the example of $4,400 from the last bullet point, if that loan were spread out over two years (24 months), your monthly payment would be $183.33.
- The Loan Limit – this is the maximum amount that a lender is willing to extend to you. It’s critical to know this when you don’t know the final amount that you’ll need, or if you’re trying to get a larger amount like $30,000 or more.
What Happens After I Agree to the Terms?
After you’ve signed all of the documents and agreed to the loan, your loan will be processed, and you’ll receive your money. Depending on the lender, it can take as little as one business day to as long as a month or longer to receive your funds. If you need your $5,000 now, then this is something that you need to establish before you agree to the loan.
The interest on your loan will already be calculated before you sign the paperwork, as well as when your first payment is due, so you won’t have to guess. Once the first payment date comes, whether you’ve received the money or not, you’re expected to start paying.
How Can I Find the Best Lender?
While the process to receive a loan is nearly the same between all lenders, the terms you’ll receive are anything but. Some lenders will charge a high-interest rate for fast service, while others will set low limits and work slowly. While you can take the time to shop among many lenders yourself, this can take days of research, and many lenders won’t even offer you final terms until you’re well into the process. This can make it difficult to determine who really is the best lender.
At Loans Now, you don’t need to spend all of that time searching because we’ve done it for you. Our mission to is to help you find personal loans that are perfect for you. Drawing from a great network of credible lenders, we provide you with different lending options from the start, so you don’t have to spend hours contacting different lenders and fighting to get their terms. By giving us your name, your location, your requested amount, and your credit score, we compile the options and terms up front and help you choose the best one.
Don’t let the fact that you’re new to the world of loans hold you back. Contact Loans Now and let us find you a great loan today!