A personal loan is a quick fix for financial hardships. It helps you consolidate debt, fund a home improvement project, or cover unexpected expenses. This loan requires approval from the bank by submitting a healthy credit score, credit history, etc.
But do you need a down payment for a personal loan? Our expert bankers claim a down payment is nonessential to get a personal loan. A personal loan is totally different from a home or car loan. Also, personal loans are unsecured and need no collateral. Plus, you need the timeline for a personal loan to show up on your credit report.
The Concept of a Personal Loan
Why does a personal loan require no down payment? For a clear understanding, let’s explore the Banker’s guide in layman’s terms.
Defining Personal Loan
A personal loan is often called an unsecured loan or a signature loan. Your credit history and income primarily determine it. What sets personal loans apart is their lack of a requirement for collateral. In other loans like home loans, you must list some assets to back up the loan application. However, a personal loan requires a healthy credit score, credit history, income, etc.
In contrast to home, car, or other loans, personal loans typically have a more straightforward application process. Also, our observation finds higher chances of approval. However, to wisely use a personal loan, it’s very important that you put the money to actual purposes, not for any luxury.
Terms of a Personal Loan
In this case, there are two things you must consider: interest rate and the loan duration. Moreover, can you refinance a personal loan with the same bank?
Interest Rate
Most Americans prefer fixed-rate personal loans. However, there is an option for a variable-rate personal loan. As per top investors, a mid-range income holder or a small businessman needs limited money. A personal loan is an excellent resource for them. Besides, it is always better to get a fixed-rate one for its stability and less burden regarding monthly payments. The following calculation helps you understand even better:
You take a personal loan at an 8% fixed-rate term for 5 years. Now, consider the following:
Total of 60 loan payments = $24,331.67
Total interest = $4,331.67
Loan closing date = Sep. 2028 (considering that you are taking the loan this month)
Now, your monthly payment is
just $405.53. It means for the whole 60 months (5 years), each month, you will pay this amount; there will be no change under any circumstances.
Now, let’s check what if you go for a variable rate for the same $20,000 for 5 years.
Take for the initial 3 months; the interest rate remains the same. So your monthly payment will also be the same. Say after a 4-month review of the interest rate, it gets an increment. Your monthly payment will also increase accordingly. The amount can be approximately $440 until the next interest rate adjustment.
Loan Duration
Our expert observation is that, in general, people receive 3-7 years of loan terms. However, there are exceptions; loan terms can extend up to 14 years. This long duration applies if you borrow a larger amount, say $200,000. Also, you must learn the timeframe of a successful personal loan application.
How to Apply for a Personal Loan
You must submit the documents below to apply for a personal loan.
- A complete application form.
- Report related to credit score.
- Report related to credit history.
- Income statement.
- Identity proof.
- Proof of address.
Do you notice one thing specifically? We have not mentioned any down payment requirement to get a personal loan. Moreover, learn what happens if you fail to repay a personal loan.
Approval Process & Documentation of Personal Loan
Even though a down payment is redundant, a strict evaluation process approves a personal loan.
Credit score: Your credit score should be within 560-690 following the FICO score.
Credit history: Your credit history should be neat and clean. It means you have always paid your monthly installments for any other loan or credit card payment.
Income: Your income status must be standard, like $40,000. However, a lower income benchmark is also okay. However, the bank will rigorously review your financial state. They will ensure after paying all your monthly bills like rent, utility bills, grocery, etc., you will have enough money left to repay the monthly installments of the personal loan.
Debt-to-income ratio: Lenders generally prefer a DTI of 35% to 40% or lower.
Final Words
So, do you need a down payment for a personal loan? We hope now you have a clear understanding. It is now evident that no down payment is mandatory. To get a loan, you just have to select a bank and submit the above-mentioned documents. They will take a couple of days to review your application and grant you a personal loan. Besides, we must mention that the approval entirely depends on your credit score, credit history, and income status.