How To Apply For A Personal Loan: A First-Time Borrower’s Guide

We all need the extra cash. Bills pile up. Unforeseen expenses like car repair payments, medical procedures, and home improvement plans can make a huge dent in your finances. Oftentimes, you really don’t know how you can pay for all of it. The internet calls it #Adulting, a millennial way of saying that you’re now facing “real world” problems. So, what do you do? Unless your parents, relatives or rich godmother are willing to help you out every time you find yourself backed into a wall, you’ll have to incur debt. It’s an #Adulting reality as inescapable as thinning hair and expanding waistlines. The trick is, to incur debt without finding yourself in a hole deeper than from where you started.

One solution is to apply for a personal loan. With a personal loan, you can have enough money to fulfill your obligations all at once while also having the flexibility to pay it off in monthly installments with interest. However, it’s not that easy to get approved for a personal loan application. Banks and other legitimate financial institutions that offer them run a rigid screening process before approving borrowers. Below is an introduction to the steps your application will go through, along with a few tips and questions you have to ask yourself as you move along.

Factors that could help you get approved

Basically, you just need to ascertain that you’re capable of paying whatever you’re borrowing. A fixed and stable income is one way to do so. It establishes that you have the means to settle whatever debt you’re about to take on. A person who has a permanent job has a higher chance of getting his or her loan approved compared to applicants who work freelance or on a contractual basis.

Banks and financial institutions also need to look into a borrower’s financial record or credit history. Your credit history will give insight to the bank on your existing loans and your overall capacity to pay off those loans. Simply put, they compare your total monthly credit repayments to your monthly income to establish your debt-to-income ratio to see if you’ll be able to pay off an additional loan with them.

Reasons why is having a credit card important

Having an existing credit card is crucial to the process as it establishes your credit history. Since your credit company already has an idea of how much you earn monthly, information you have to share when applying, they can determine your debt-to-income ratio. Consistently spending beyond your reported means is a red flag and you’ll most probably be tagged as an erratic account.

Your credit report will also show your payment history. Being able to pay your credit card bills promptly will likely even out your supposed over-spending, thus improving the odds of your loan application getting approved. A credit history riddled with delinquent credit card bills reduces the banks confidence in you and will severely affect your chances of obtaining a loan.

Frequently asked questions

1. What are the requirements when applying for a personal loan?

The usual requirement from a bank is that an applicant should be an existing credit cardholder for at least one year. He or she should also need to be earning at least Php21, 000 monthly to qualify. These requirements still vary depending on the provider so it is best to do your initial research online or inquire directly to your bank of choice.

2. What is the interest rate?

This also varies for every bank and financial institution. Currently, Citi Personal Loan is offering an interest rate of 15.16% per annum (or 1.26% per month). The corresponding monetary value of the interest rate will be discussed with you and also indicated in the Disclosure Statement once you have been approved for the loan.

Before deciding on your final loan amount check first the interest rates currently being offered and match them with your preferred payment scheme. Opting for the minimum tenure scheme, which usually lasts for only six months, will result in significantly lower interest fees but higher monthly payments. Expanding your loan term, meanwhile, will have you taking on more interest but smaller monthly payments.

3. Can Overseas Filipino Workers (OFW) apply for a personal loan?

Of course, provided that the OFW has an existing credit card for at least one year and is earning at least Php21,000 monthly, or depending on the bank’s requirements. It also helps that the OFW is in the Philippines at the time of application; else he or she will need to verify certain information or provide additional authorization documents.

Do a final check

Provided that you tick all the boxes, you should ask yourself anew whether you’re really ready to take on a personal loan. Remember that it should be for something that you really need but can’t afford yet. Don’t just borrow money for the sake of having extra cash around. If that cash isn’t used, it costs you more every day not just from the interest fees but also from its reducing value due to inflation.

As mentioned, different banks offer different interest rates; allot time to shop for the lowest interest rate, or at least the one you can really afford. You should also check out how much they value customer convenience. How clogged is their customer service hotline? Do they offer internet or mobile banking? Is their website always up and running?

Finally, don’t over-borrow. You should always look at whether you can afford a loan and take only what you can afford. Remember, smaller monthly payments may seem great on affordability but you could easily end up paying way more than what you’re actually borrowing. So always look the cost of it over the entire loan period.

A loan shouldn’t require you to make drastic changes to your life. Sure, you can be more conservative with your spending habits, eat at home more than eat out, for instance, but it shouldn’t affect your basic needs. You should be able to pay it off with your income and not by taking fewer showers to save up on water or living in complete darkness to bring down your electricity bill. Otherwise, it probably means you can’t afford it and you should hold off your plans lest you want to find yourself in a financial mess.