2020 was an unpredictable and difficult year to say the least. What started as a promising outlook turned into a nightmare for millions of Americans as Covid spread across our nation. If there is any solace in a tough 2020, it’s that 2021 is shaping up to be a rebound year for Americans and the economy. The credit markets which were constrained in 2020 have begun to open up which is good news for anyone looking for a credit card or personal loan.
As a reminder, a personal loan is an unsecured loan that you can obtain in varying amounts and interest rates. The interest rate is fixed and the monthly payment is the same each month over the duration of the loan. Personal loans have reached the mainstream in the US, and there is no shortage of lenders available to lend you money. You can search for a loan by completing a loan application and agreeing to let lenders complete a soft-inquiry of your credit. You can get pre-approved for a personal loan in minutes, and then decide if the terms such as APR, term, and monthly payment are right for you.
How have personal loans changed since Covid-19 hit the US and how will that affect your loan options?
It’s no secret that the Coronavirus has put a strain on millions of Americans’ personal finances. Online lenders have had to adjust their lending practices to absorb and adjust to these new times. Lenders who had previously used complex algorithms to assess personal risk and assign you a certain rating, have had to throw their old models out of the window. There is no precedent for these trying times, and trying to ascertain who will be able to pay their loan back has never been more complicated.
Lenders have adjusted their credit models and adjusted their income verification which has made it more difficult for a member to obtain a loan.
The 3 focus areas to obtain a personal loan in 2021 are:
- Loan Requirements
- Credit health
- Employment health
Personal loan requirements: What you need, and why you need it.
What are your plans for the loan? You may wish to consolidate your high interest debt into one monthly payment. Perhaps you need to make a car repair, or home repair. Personal loans can be used for all different purposes, making them an ideal solution for anyone who needs access to as little as $500 all the way up to $100,000. The loan purpose will probably dictate how much money you are interested in borrowing. Once you have an idea of your loan purpose and loan amount, it’s time to review your budget to see what monthly payment you can afford. Personal loans allow you to borrow for up to 7 years in some cases. The longer the term you choose, the lower your monthly payment will be. This comes at a cost, a financial cost, since longer terms mean more payments which means you’ll pay more interest than shorter terms. The bottom line, only search for an amount you can afford, and try to find a monthly payment that works for you with the shortest possible loan term.
Credit health: An honest assessment of your credit rating
Do you know your credit score? Chances are you have a pretty good idea. Now, let’s see which credit grade that falls into.
Excellent 740+
Good 700-739
Fair 640-600
Poor <600
The reality is, your credit health and employment health are more important now than ever. Lenders have tightened their credit models to reduce their risk of making loans that don’t pay back. The lending platforms are only able to make loans if members pay back the loans that are extended to them. The money that comes to fund these loans comes from savvy investors who pull their money off the table at the sign of trouble.
If you have excellent or good credit, you should be able to find a loan at an attractive APR and favorable loan terms. If you have Fair credit, it’s going to be more challenging to find a loan with a favorable term. The lending platforms that provide the loans are actually lending money from large, savvy investors who pull back their money when times get tough. It will be important to make sure you are paying your bills on time, making more than the minimum payments on your credit cards, and keeping your debt levels as low as possible. If you have poor credit, you’ll probably only qualify for a loan with an APR above 36%. Yes, some lenders can charge triple digit APR rates. These loans can help you when you’re in a pinch, but you shouldn’t rely on them for debt consolidation or making a large purchase.
Employment health: Review and asses your repayment ability
Last but not least, your income and employment are going to play a big role in your chances to obtain a loan. Lenders want to make sure you can make the monthly payment that you are signing up for. With 1 in 5 Americans out of a job, having a stable income is going to help your chances tremendously. This is where lenders have made the most changes to their credit and underwriting models. They are checking almost every applicant’s bank account or paystubs to see if you are receiving regular payments that will give them comfort to know that you have stable income. Due to the pandemic, the verification teams are working remotely which is going to add time to the loan processing time. Don’t be surprised if it takes a week or more to verify your loan documents before you receive your loan proceeds.
If you have lost your job during the Covid pandemic, stay positive and keep your head up. Spend some time looking for new employment so that you can have that regular income stream that lenders want to see.
When you’re ready to search for the personal loan that’s right for you, click here.
