A 12-month loan is a type of personal loan that must be repaid within 12 months. While personal loans can extend anywhere from 12 to 72 months or more, most lenders will allow borrowers to select the length of the repayment within standard options. Choosing a shorter term can lead to less overall interest. You can find specialized 12-month loans, like student refinancing loans or car loans. Read on to understand how to qualify for 12-month loans and tips to find other types of 12-month loans.
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Understanding a 12-month loan
A 12-month loan, as the name implies, has a term of 12 months. This is most common in unsecured personal loans. Interest rates on 12-month loans vary widely based on individual factors like credit score and debt-to-income ratio, as well as other lender criteria. The current APR for personal loans ranges from 7.99% to 35.99%.
While there’s no universally accepted definition of a short-term loan, we’ve defined it here as a loan with terms of 12 months or less. Shorter-term loan options like cash advances or earned wage access can be a way to get access to cash and repayment in the very short to medium term.
Others, like payday loans, often come with high interest and fees. A 12-month loan, on the other hand, carries an interest rate but allows you to spread out repayment over a year and plan for the expense.
How a 12-month loan works
In most cases, a 12-month loan refers to a fixed-rate installment loan spread out over 12 months. While unsecured personal loans are the most common, auto loans or unsecured student refinancing loans can also be structured as 12-month loans.
The key components of any loan are:
- Loan principal: This is the amount you’ll receive as a lump sum when the loan is approved.
- Interest: Expressed as annual percentage rate or APR, this is how much you’ll need to repay in addition to the loan principal.
- Total repayment amount: This is the total amount you’ll need to repay. In the case of a 12-month loan, this is simply principal plus interest. For example, if the APR is 12% on a $5,000 loan, the total repayment amount will be $5,600, excluding any other potential fees.
How to qualify for a 12-month loan
You can take steps to increase the chances of getting a 12-month loan with favorable terms. While qualifications will depend on the individual lender, these general guidelines are a good starting point. You can also discuss individual criteria with your lender to understand the possibilities. Of course, this list isn’t exhaustive and lenders may impose additional requirements.
Credit score
Credit scores play a crucial role in determining loan eligibility. Your credit score indicates to lenders the likelihood that you’ll pay back a loan on time and won’t default on the loan. The most common credit scoring model, FICO, scores borrowers from 300 to 850. A “good” credit score is defined as a score of 670 to 739, while a very good credit score is 740 or above.
Each of the three major credit bureaus, Transunion, Experian, and Equifax receives information from lenders and banks, tracking your credit score information. You are entitled to a free credit report from the three credit bureaus. You can access it at annualcreditreport.com. If there is missing or incorrect information on your credit report you can dispute it.
To improve or maintain your good credit score, follow the credit-building basics:
- Pay on time: Pay all credit cards and other debts on time every month. Setting up automatic payments can help prevent late payments.
- Reduce debt: Reducing your total debt can help boost your credit score. Approximately 30% of your credit score reflects outstanding debt and the ratio of total debt to available credit.
- Get credit for past on-time payments: If you want to boost your credit score quickly, you can use a rent reporting or utility reporting company to report on-time rent and utilities payments for up to the past two years.
Income requirements
The importance of stable income and employment history when it comes to qualifying for a loan and paying one back cannot be over-emphasized. Banks won’t want to give you a loan if you don’t know how you’ll make payments. If you’re self-employed or own a business, you can still qualify, but you may need to provide bank statements or tax returns to verify income.
Debt-to-income ratio
Your debt-to-income ratio is the ratio between total monthly debt obligations—including mortgage or rent payments, student loans, auto loans, and other debt—and total monthly income. Lenders use a debt-to-income ratio to assess a borrower’s ability to repay a loan. Maintaining a relatively low debt-to-income ratio is essential in loan qualification.
While many mortgage lenders usually look for a debt-to-income ratio of 30% or less, for personal loans, a debt-to-income ratio of up to 44% is acceptable for some lenders.
Since it’s a ratio, you can improve your debt-to-income ratio by working to reduce total debt or increasing income. To reduce total debt, one possible example, look into paying off credit cards or other high-interest debt first, and then see if you’re eligible to pay off student loans or auto loans in full.
Documents
Potential borrowers can prepare paperwork in advance to reduce delays in loan applications. Here’s a checklist of the documents typically required for the loan application process:
- Proof of identity, such as a government-issued ID
- Proof of income and employment
- Proof of address such as a utility bill, mortgage statement, or bank statement
- A loan application
- Any lender-specific requirements
Employment stability
Lenders require employment stability to confirm your ability to repay a loan. Some self-employed people may have difficulty getting loan approval, but it’s not impossible. You may be asked to submit bank statements, tax returns, or other proof of income.
How to find a 12-month personal loan
Comparing various personalized loan offers to find the best fit can help you save significantly over the lifetime of the loan. Start by comparing standard rates, before discussing your individual situation with lenders.
How to find a 12-month car loan
A 12-month auto loan allows you to spread payments over a year, while still owning the car outright at the end of 12 months. Comparing auto lenders can lead to significant savings. If you’ve already got an auto loan, refinancing can help you save more. You can compare various car loan offers to find the best fit or to compare auto refinancing loans with the best 12-month car loans.
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How to find a 12-month student refinancing loan
Refinancing private student loans can help you save more or pay off the loans faster. Comparing various student refinancing loan offers to find the best fit can help you save. Find the best student refinancing loans here.
PRO TIP! Refinancing your student loans could help you break free of debt and help your financial future.
Securing a 12-month loan
Securing a 12-month loan requires some planning to gather the necessary documentation and meet individual lender criteria. However, with some planning and understanding of lender requirements, you can increase your chances of getting a 12-month loan. Remember that there are many options to explore, and you only need one approval.
Get more ideas for $1,000 loans, ways to get emergency funds fast, find a 12-month loan with bad credit, or consider a credit card with a 0% APR introductory offer as a 12-month interest-free loan.
FAQ
Is there such a thing as a 12-month payday loan?
Normally, payday loans are short-term loans, usually two weeks or less. For that reason, a 12-month loan would not usually be a payday loan.
What is a 12-month loan, and how does it work?
A 12-month loan is a loan you must repay within a year. These are most commonly unsecured personal loans with fixed interest rates but can take other forms like auto loans or student refinancing loans.
What are the typical interest rates and fees associated with 12-month loans?
Interest rates depend on the lender and your qualifications. You can browse options for personal loans with MoneyLion to find the best current loan rates.
