Getting a Small Loan

By: Matthew G Young

When you begin looking for a small loan, the process can be downright overwhelming. There is no need to panic, though. This article shows you all your options for getting a small loan and walks you through the process from applying for the loan to actually being approved. The common terms and jargon associated with the loan industry are also clearly explained.

What factors determine if I will get approved for a small loan?

If you are looking for a small personal loan, you will need to be aware of a number of factors prior to applying. The foremost of these is your credit score. Your credit score is a number that tells lenders of all sorts how likely you are to be able to repay your loan during the agreed upon time frame. Experian, TransUnion, and Equifax are the three main companies that track individual credit scores. Your score will vary slightly with each company, but the purpose is the same: to quantify the amount of risk that creditors assume by lending you money.

Credit scores range from 350 up to 850. The higher your score, the better your chances of being able to repay your loan are and thus the better your chances of actually getting approved for the loan. While there is no exact cutoff of what constitutes a good or a bad score, it is generally agreed upon by lenders that anything above 650 is an automatically acceptable risk. You can obtain your credit score once a year for free through a number of different web sites.

Your credit score is not the sole deciding factor when it comes to obtaining a loan; but it is one of the first things that creditors will check. Another deciding factor is the length of time that you have held your job. Generally speaking, someone who has worked at the same job for twenty years is going to be more likely to repay a loan than someone who has been employed for only a few weeks. Basically, banks are looking for reliability and dependability in your financial life when making their decision. In addition to the length of time at your job, your income from that job will also be scrutinized. This makes sense if you think about it; lenders will be unlikely to give you a loan if you have little or no source of income because your risk of defaulting is much more likely. The higher your income, the lower your interest rate will be as well.

If you are purchasing a car with your small loan, another major factor is the down payment. If you are able to pay a large portion of the principal up front, you will not only be more likely to get the loan, you will probably see smaller monthly repayment figures and a lower interest rate.

What if I have no credit?

If you have never applied for credit before, you might run into some difficulty obtaining a loan, even if it is a small one. In order for your score to be calculated by a credit agency, you must have had some sort of line of credit open for at least six months. This might be something as simple as a credit card with a $500 limit that you opened through your bank. Car loans and mortgages also count toward your credit score. Either way, when applying for a loan, lenders want to see a track record of good credit practices. If you have no credit history, it is impossible for a lender to see how diligent and responsible you have been with repaying your loans.

If you have no credit, there is no quick fix to establishing a credit history. Building a good history takes at least six months of stability on your part. While there is no immediate solution, there is an easy way to build a credit history. First, make sure that you have a checking account with a debit card attached. If you are responsible with that account, you can then apply for a bank credit card. The bank will be able to internally see how responsible you have been with your account and will be better able to judge your ability to repay credit card debt than an outside lender would be. This does require awareness, however. Do not charge more on your card than you are able to repay. Abusing credit cards is a surefire way to dig yourself into a hole of debt. After six months, if you have been making the minimum payments on time, you will then have a better credit history and will be better able to obtain a loan.

Another option for individuals with no credit is to have a cosigner. When a family member with a good credit history signs your loan with you, your odds of getting the loan you want greatly increase. Basically, this individual is taking half of the responsibility of the loan. The cosigner will also go through a credit check and will have to supply their personal information, but as long as they have a good credit history, you will be getting a better overall loan. Be cautious though; if you miss a payment, your cosigner will be held responsible as well.

What if I have bad credit?

If you have evaluated your credit report and your score falls below 600, you should not abandon all hope of receiving a personal loan. Bad credit is not an automatic disqualifier of receiving a personal loan. There is often a high price to pay for borrowers in this situation; you will have a much higher interest rate for the amount you borrowed. Many experts discourage this type of borrowing because loans with high interest rates have a much higher default rate than average loans.

It is a little known fact that multiple credit checks can actually hurt the borrower. If you are repeatedly applying for a loan, this will adversely affect your score. If you have recently reviewed your credit score on your own, it is worthwhile to discuss your findings with the lender prior to actually having them review your report formally. This will save a few precious points on your credit score and allow you to be more aware of the areas in which you need to improve upon in order to receive the credit that you desire.

Types of small loans

The type of small loan that you take out can be broken down into two main categories: secured or unsecured. A secured loan is a borrowed amount with an object of value used as collateral. A prime example of this would be a car loan. If you do not repay a secured loan, you will lose the collateral object. Following with the car example, if you do not repay your automobile loan, your car will be repossessed. These types of loans, because there is an object of value to the lender being used in exchange for the loan, will have a lower interest rate than unsecured loans. There is no collateral used in these types of loans, so nothing can be taken away from you should you fail to repay your loan. For this reason, unsecured loans will typically have higher interest rates than secured loans.

Outlets for small loans

There are several accredited routes when it comes to taking out a small loan. You will want to compare rates and time frames with several different lenders before making a decision so that you can get the best loan possible. Your credit union is usually the best place to start. Credit unions act as banks and lenders for members of a niche within the community. In other words, not everyone qualifies for membership with a particular credit union. If you belong to one already, this should be your starting point. Because credit unions are more selective regarding who can use their services, they usually can offer more competitive rates than traditional banks. This means a higher rate paid out on your savings account and a lower rate that you will be responsible for in regards to any loans taken out.

If you are not already a member of a credit union, it may be in your best interest to pursue a membership. Ask your boss if your employer works with a sponsored credit union. Positions such as public school teachers and some union jobs will have a credit union that you can join just for being an employee. If your place of employment does not sponsor a credit union there may still be other options. Look in the yellow pages for credit unions in your area. While they may not state membership criteria in the advertisement, you will at least be able to call them and ask. Because of their lower rates, it is definitely in your best interest to exhaust this outlet prior to going to your next option.

Your next source should be a bank. Banks offer many different types of loans, including small personal loans, credit cards (both secured and unsecured), automobile loans, and home equity lines of credit. These loans vary in size and repayment rates, but a general rule of thumb is that the more you borrow, the lower the interest rate is going to be. This is why mortgages typically have lower interest rates than automobile loans. Remember though, secured loans will have lower interest rates than unsecured loans because of the offered collateral.

Another option that many people utilize through their bank is an overdraft. An overdraft is when you withdraw more money than what you have in your account. These types of loans come with an extremely high cost, though. The bank may drastically increase the interest rate paid on any amount that you overdraft along with a flat penalty fee. Overdrafts should only be considered if you absolutely need them.

Cash advances are another option. These are usually accomplished through a credit card. Rather than using the card to pay for something, you can treat your available remaining credit as a checking account and simply withdraw from your card. Not all credit cards will allow this.

A final option is a payday loan. As the name implies, payday loans are meant to get the borrower through until their next pay check from their employer. These loans are extremely short-termed, and as such, have very high interest rates. A typical payday loan is for 14 days. If you were to hold that 14 day loan for an entire year, you might be paying as much as 650 percent interest on the loan. Payday loans should only be arranged with extreme caution.

Additionally, there are a number of online venues that offer small personal online loans. These are not available in every state due to differing lending regulations, but they are a quick and easy way to apply for your loan without leaving the comfort of your home. Varying in amounts from $500 to $1,500, these loans can be used as payday loans or longer-termed, if need be. For these loans, you will need a checking account so that the loan can be deposited electronically. A typical turnaround on receiving your loan is twenty-four hours. Like payday loans, online loans will have a high interest rate and should be treated with caution.

How do I get a small loan?

In order to obtain a small loan, there is an application process that must be followed. The intricacies will vary between different institutions, but the general feel will be the same. You will be required to fill out paperwork stating your personal information, purpose of the loan, and a few references that will vouch for you.

Your personal information will typically include your name, permanent address, Social Security number, and employment history. Some forms will also ask for your financial status; in other words, you would be required to list how much you held in your bank accounts and other investments. This might seem like an invasion of privacy at first, but remember: your lender is in the business of making money. They will want to make sure you are going to be able to repay your loan.

This is also where they will be looking at your credit report. It is not necessarily a bad thing if you have a large amount of outstanding debt. Think of your credit status as a ratio: how much debt do you have in comparison to your remaining spending power? This is precisely what lenders are going to be looking at. Do you have all of your credit cards maxed out? Or do you have a credit limit that you have not come close to reaching? If you have a high debt to spending power ratio, you will be less likely to secure a loan at a good rate.

For example, assume you have two credit cards, each with a $2,000 credit limit. If you have only charged $500 worth of purchases, although this may seem like a large amount, you still have $3,500 of spending power remaining giving you a 1 to 7 debt to spending power ratio. Although you have a large amount charged on your cards, your credit rating will still be good because you have only utilized 12.5 percent of your available cash.

The purpose of the loan should be straightforward. Are you using this loan to buy a car? Or do you anticipate using it to start a small business? Furthermore, lenders may require that you have a written plan if you are going to use the loan for something other than personal use. You should be prepared for this when you begin the loan application process.

Do not be daunted by listing references on your application. The bank will only use this information as a final resort. Your lender just wants to make sure that if they lose contact with you that they will be able to still get a message to you. One particular scenario that may require this is if you move and forget to give your lender your new contact information. The references would be called in this instance in order to get your new contact information.

What if I can't get a small loan?

If you cannot secure a small loan because of a poor credit score, you will need to reestablish your credit rating. This takes quite a bit of time, for example, a bankruptcy can stay on your credit report for seven to ten years, but it will greatly help you over the long run. Adopt a repayment structure that you will stick to. With credit cards, try and pay more than just the minimum payments. If you have more than three cards, consider closing some of them. You will need to make sure that the cards you are closing are fully paid off first due to the fact that it will hurt your credit score if you close a card prior to fully repaying the amount owed. Do not apply for loans repeatedly as this in itself will lower your score. Stay disciplined and you will eventually qualify for a small loan.