The One Move You Must Make Before Applying for a Personal Loan

It could save you a lot of money.

If you need to borrow money, there are different ways you can go about it. You could opt to charge up a higher balance on your credit cards, but doing so could mean paying a lot of interest. You could also try borrowing against the equity you have in your home, but you may not feel comfortable taking out a loan where the roof over your head serves as collateral.

But one option that could work well for you is a personal loan. The great thing about personal loans is that they allow you to borrow money for any purpose.

Want to buy some furniture? A personal loan could make that happen. You can even take out a personal loan and use your proceeds to start a business if you're trying to get a new venture off the ground and you don't qualify for an actual business loan.

But if you're going to take out a personal loan, there's one important thing you should do first. And it's a move that could save you a lot of money.

Bring your credit score up

Personal loans are unsecured, which means they're not tied to a specific asset. By contrast, if you take out a home equity loan, your home is used as collateral for that loan. As such, if you have a lot of home equity but your credit score isn't the best, you may not struggle to get a home equity loan that's affordable because your lender has reassurance that if you fall behind on your payments, it could, in a worst-case scenario, force the sale of your home to get repaid.

Personal loans don't work that way. If you fall behind on your payments, your lender may be out of luck. As such, personal loan lenders take on a fair amount of risk.

But if you come in as a personal loan applicant with strong credit, that sends the message to a lender that you're not such a risky borrower because you have a solid history of paying bills on time and in full. And a lender is likely to reward you for that with a lower interest rate on the sum you borrow.

On the flipside, though, if your credit score isn't great at the time of your personal loan application, you may find you're either denied the chance to borrow outright, or you get stuck with a higher interest rate on your loan. That's because lenders feel they're taking on more risk when they loan money to borrowers whose credit needs work. And so if you want to spend less to borrow, it pays to raise your credit score before applying for a personal loan.

How to boost your credit score

There are different ways to boost your credit score, some of which might take longer than others. First, pay all incoming bills on time. Next, if possible, pay down some of your credit card debt to lower your credit utilization ratio. (To be fair, if you're in a situation where you need a loan, you may not have money around to pay off credit cards with.)

It also pays to examine your credit report for errors and correct mistakes that could be working against you. If your credit report lists you as having an outstanding loan balance you paid off years ago, for example, getting that detail wiped from your record could help your score improve.

There are plenty of benefits to borrowing money with a personal loan. But if you go that route, do yourself a favor and try to raise your credit score before submitting that application. It could save you a lot of money.