It can be hard to know just how to groom your personal finances so as to get the best possible personal loan terms. The difference between one loan and another can be enormous. Even though two different banks might grant your loan request for $X, the differences in the terms they’re offering could be night and day. If one bank offers you a loan with interest rates that are even a couple of points higher than the other one, you could pay thousands of dollars more over the lifetime of the loan than you would with a lower interest rate. Some people think that all you have to do is shop around for loan offers from multiple lenders, then just pick the cheapest one. But without spending time grooming your personal finances, you won’t be able to get the savings you’re hoping for.
It all starts with your credit score. Your credit score is the single most important personal data point that a potential lender will consider. In those three digits, there is contained a lot of information about you live your financial life. If you have a low credit score, chances are you mess up in credit and payment situations somewhat often. Maybe you just missed one electricity bill when you moved out of your last rental. Maybe you lost your job and had to live off of credit cards for three months (and have yet to pay off that debt). Whatever happened to throw your financial ship off course, it will likely be reflected in your credit score.
This Upstart Personal Loan Review (Updated for 2017) will give you a sense of the difference in loan terms that will be offered to people with varying levels of creditworthiness. If you find yourself on the low end of the spectrum, there are a few other personal data points that will require your attention if you wish to turn things around.
The first is your debt-to-income ratio. This is important to lenders, because it shows how much money you have to cover your debts each month. If your debt to income ratio is too high, it shows that you have more debt than you can handle, and that only a huge lifestyle change would allow you to pay it off. Someone in this situation will have a low credit score, which will be a signal to lenders not to risk lending their money to you.
The next most important personal finance data point is how much of your available credit you use. Each credit account has a credit limit – the maximum amount of money you’re allowed to take out without paying any back. If you use more than about 30% of any one account’s credit limit, you will be bringing your credit score down.
Once you understand those factors, it’s pretty easy to change things. But you need to get used to using your money in a new way, and be determined until you get the desired result. After that, you can apply for loans, and you’ll be pleased that the interest rates save you a lot of money.