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How to Get a Personal Loan: Rates & Fees

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With the coronavirus pandemic wreaking havoc on the US economy and millions continuing to file for unemployment, many people are finding themselves tight on money. Nobody wants to be in this situation, but if you’re strapped for cash, you might consider applying for a personal loan to cover your expenses.

But what exactly is a personal loan? How does it differ from a mortgage or a credit card? Is now a good time to get a personal loan, and what’s the best way to go about it? CNN Underscored has the answers to all your questions about personal loans to help you decide if getting one is right for you.

A personal loan is a type of debt where, typically, a person receives a fixed amount of cash from a bank, credit union or online lender that must be paid back over a set time period, often two to five years.

There are many reasons you might want to get a personal loan. Usually, you can use the money for any reason, but some of the more common scenarios include paying off debt, consolidating medical bills, starting a business, financing a home renovation or other personal needs.

Personal loans are typically — although not always — unsecured, which means you aren’t pledging any assets in advance to cover the loan if you fail to pay it off (also known as “collateral”). This is one way personal loans are different from mortgages; mortgages are instead secured by using your home or property as the collateral.

Because personal loans are unsecured, they’re generally more expensive than secured loans like a mortgage. But while a secured loan comes with a lower interest rate, if you’re unable to repay it, you can lose the asset you’ve put up as collateral, such as your home if you default on your mortgage.

Personal loans are usually unsecured, but also cost more than a secured loan.

Personal loans are usually unsecured, but also cost more than a secured loan.

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However, even with an unsecured personal loan, if you fail to pay the money back, a lender can still legally pursue you for the amount you owe by sending your loan to a collections agency, reporting your failure to pay to credit bureaus (which hurts your credit score) and even filing a lawsuit in court.

Save money with a personal loan offer at LendingTree, an online loan marketplace.

There’s no one-size-fits-all option when it comes to applying for a personal loan. You can look for personal loans at banks, credit unions or from online lenders. There are also online marketplaces such as LendingTree that can make it easy to quickly see offers from a whole network of lenders all at once.

With an online marketplace, you only have to enter your details once to be considered by many lenders. Some of the information you’ll need to provide includes how much money you need, the purpose of the loan, how fast you need the cash and other key details.

Once you’ve entered your information, it’s sent to dozens of lenders for consideration, and you’ll quickly get a list of personal loan offers that may be right for you. From there, you can decide which offers are best for your situation, and work directly with those specific lenders.

Click here to compare multiple personal loan offers at LendingTree.

Interest rates on a personal loan can vary widely depending on several factors.

Interest rates on a personal loan can vary widely depending on several factors.

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Based on data from the Federal Reserve, the average rate for a 24-month personal loan in the second quarter of 2020 was 9.5%. However, personal loan interest rates can vary widely, ranging from anywhere between 6% and 36% depending on the lender, the borrower and the terms of the loan.

Here are the most important factors that determine your interest rate and other costs connected to a personal loan:

Loan Amount: The amount you want to borrow with a personal loan affects your interest rate, as larger personal loans generally come with higher rates. Personal loan amounts can range between $1,000 and $50,000, or even more in some cases.

Length: Interest rates are also usually higher for longer loans, meaning the more time you have to pay off a personal loan, the more you’ll pay for it, both as a result of a higher interest rate and paying interest over a longer period of time.

Credit Score: The higher your credit score, the lower your interest rate on a personal loan. People with good credit scores also have the best chance to qualify for a personal loan, although there are personal loans available for those with lower credit scores as well.

Fees: You’ll want to keep an eye on any fees charged in connection with a personal loan. For instance, some lenders charge an origination fee, which is a fee to start a personal loan. An origination fee can range between 1% and 8%, but some lenders don’t charge origination fees at all, so you’ll want to shop around.

Prepayment Penalty: If your personal loan has a prepayment penalty, you may have to pay an additional fee if you decide at some point to pay off the loan early. A typical prepayment penalty might be several months of interest or a percentage of the remaining loan amount. Again, some lenders don’t charge prepayment penalties on personal loans, so you’ll want to pay close attention to the terms of your loan.

Check your interest rates on personal loans at LendingTree.

When considering a personal loan, it’s important to know how much you’ll end up paying for it each month. A personal loan payment calculator will help you figure out how much you’ll owe, both monthly and during the overall life of the loan. This is a great tool to use before you apply, so you can visualize what your cost will be from a budgeting standpoint.

Enter the total amount you’re borrowing with a personal loan, the interest rate and the length of your loan, and the calculator will immediately break down your monthly and total payments.

For example, let’s say you’re considering taking out a $10,000 personal loan to pay off your medical debt. One lender offers you an interest rate of 9.5%, which you must pay back within five years, but another lender offers an 8% rate with a three-year repayment period.

You can enter both offers into the personal loan calculator one at a time to see how much each one will cost. The calculator shows that in this case, while a 9.5% interest rate results in a monthly payment of $210, your total repayment would be $12,601. On the other hand, the 8% rate will increase your monthly payment to $313, but you’ll only pay a total of $11,281 over the life of the loan, which is a significant savings.

Use a personal loan calculator to see your monthly payment, as well as how much you

Use a personal loan calculator to see your monthly payment, as well as how much you’ll pay over the life of the loan.

PHOTO:
LendingTree

A personal loan calculator also provides a full amortization table, which breaks down the amount you’re paying for your personal loan in principal versus interest on a monthly basis.

Ultimately, a personal loan payment calculator will do a great deal of the hard work for you in figuring out which loan works best for your specific situation.

If there’s one piece of advice to keep in mind when applying for a personal loan — or any loan for that matter — it’s to strive for excellent credit. This typically means having a credit score of 720 or higher.

With a high score, you’ll be offered some of the lowest interest rates, as well as the most favorable terms. But even if you only have good rather than excellent credit — meaning generally a credit score between 680 and 719 — you’ll still likely be able to get a competitive interest rate on a personal loan.

If you’re right on the edge of having a good credit score, one way to improve your score is to lower your debt-to-income ratio, which is the amount of debt you currently have versus the amount of money you earn. A lower ratio is better, so if you start paying off your debt, there’s a good chance you can increase your score enough to move into the “good” credit range.

Of course, regardless of your score, you’ll still want to do your research on lenders to find a loan with a low interest rate and fair terms. But with a good credit score and a reliable source of income, you should have little problem being approved.

Get personal loan offers with good to excellent credit at LendingTree.

For many, moving up into a good or excellent credit bucket can be very difficult. But don’t let that discourage you. While having a fair credit score — meaning between 640 and 679 — isn’t the ideal place to be, there are still some lenders that will offer you a personal loan.

Even if you only have fair credit, you can still get a personal loan from some lenders.

Even if you only have fair credit, you can still get a personal loan from some lenders.

PHOTO:
iStock

However, you’ll likely find yourself being offered higher interest rates than if you had good or excellent credit. You may also be subject to fees or less desirable personal loan terms, though these can vary depending on your income and monthly cash flow.

You’ll also probably have fewer personal loan options to choose from with a fair credit score, but this is where an online marketplace can come in handy — since your information can be considered by many different lenders all at once, giving you the best opportunity to find a match.

If you’ve made some poor financial decisions in the past or haven’t yet had time to build up your credit history, your credit score likely reflects this. A credit score under 640 definitely won’t give you the best options when it comes to securing a personal loan, but you might not be completely out of luck.

An online marketplace will submit your information to its lender network even if you have bad credit, and some lenders will still offer you a personal loan. Unfortunately, you’ll almost certainly have to pay a relatively high interest rate if you have a bad credit score. You might even be asked to provide collateral to make the personal loan a secured loan, which could include an asset like your car. That means you’d be subject to losing your collateral if you aren’t able to pay back your loan in the end.

People with bad credit who are considering a personal loan in the future can take advantage of the time right now to start improving your credit score. Some steps you can take include paying your credit card bills on time going forward, making more than the minimum payments on your cards, correcting any errors on your credit report and even negotiating with an existing creditor to accept a partial payment.

These steps aren’t easy, and can take some time and persistence. But in the end, they can make a huge difference in improving your financial future and the likelihood that you can get a personal loan with favorable terms.

See if you qualify for a personal loan at LendingTree even if you have bad credit.

A personal loan could be an option to consider if you need cash right now.

A personal loan could be an option to consider if you need cash right now.

PHOTO:
iStock

Applying for a personal loan truly depends on your situation. If you’re planning to use a personal loan on a non-essential expense — such as a lavish vacation or a big birthday bash — we highly recommend against it. In the end, personal loans are expensive financing options, and you’ll ultimately be paying a lot of extra money for an unnecessary reason.

But if you want to consolidate your existing debt and can get a lower interest rate on a personal loan versus what you’re currently paying on your credit card, then it’s worth considering. You should also look at other options such as a balance transfer credit card or refinancing your mortgage if you’re a homeowner, both of which could offer lower interest rates or better terms than a personal loan.

In the end, personal loans are another tool in your financial toolbox. Given the current economic climate, having cash right now could be worth the cost of a personal loan. So do your homework by knowing what to look for in a personal loan, and find the best offer for you.

Learn more about personal loans at LendingTree and get offers from multiple lenders.

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Bad Credit

Pros And Cons Of Using A Personal Loan To Pay Off Credit Card Debt – Forbes Advisor

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Editorial Note: Forbes may earn a commission on sales made from partner links on this page, but that doesn’t affect our editors’ opinions or evaluations.

People use personal loans for so many different reasons—from buying an RV to paying off medical bills—but consolidating your credit card debt may be one of the most popular uses. By taking the proceeds of a personal loan to pay off credit card debt, you can eliminate multiple monthly highinterest card payments and consolidate the debt into one monthly personal loan payment—often at a reduced cost.

There are benefits to using a personal loan to pay off a credit card, but it’s not always the best option for everyone. Before you choose a personal loan to pay off your credit card, make sure you know the pros and cons.

4 Benefits to Using a Personal Loan to Pay Off Credit Card Debt

If your goal is to get out of debt faster than you’d be able to by simply making the monthly minimum credit card payments, applying for a personal loan could be helpful. But a personal loan offers other benefits, as well.

1. You May Earn a Lower Interest Rate

You could pay 20% APR or more if you carry a credit card balance, although borrowers with excellent credit could pay roughly 12% to 17%, depending on the type of card they own.

Personal loans, on the other hand, charge an average interest rate of less than 10%. The best personal loans are even cheaper than that if you have a high credit score. That means you could cut your total interest payment in half and even pay off your debt sooner since you’ll be paying less in interest.

2. Consolidation Streamlines Payments

If you make many different credit card payments every month, it could be difficult to keep track of all the due dates and minimum amounts owed. If you miss a payment or don’t pay at least the amount due, you could face late payment fees and your credit score could drop.

By taking out a personal loan to consolidate your credit card payments, you’ll make one monthly payment to your loan rather than many payments. Reducing the number of payments can free up time and space for other responsibilities.

3. You Could Boost Your Credit Score

While taking out a personal loan triggers a hard credit check and temporarily dings your credit score, a personal loan could impact your credit score positively in a number of ways.

Taking out a personal loan increases your credit mix, which makes up 10% of your score. It shows creditors and lenders that you’re responsible with money by carrying many different types of credit and debt.

You’ll also lower your credit utilization by paying down your debt. Your credit utilization is the ratio of how much credit you’re using vs. how much credit is available to you. If you pay off your credit cards, your utilization will go down to 0%. Under 30%—and ideally under 10%—is considered great credit utilization and can help you improve your score.

4. You May Pay Off Debt Sooner

If you’re only making minimum credit card payments every month, it could take you years or even decades to pay off your balances, depending on how much you owe.

With a personal loan, you can pay off your credit card debt right away and set up a payment plan to repay your one personal loan. Terms vary based on how much you borrow and your lender. If you were on track to pay off your credit cards in 10 years, you could take out a personal loan and pay it off in less than five years. Just be sure you don’t restart the cycle by rebuilding credit card debt.

3 Drawbacks to Using a Personal Loan to Pay Off Credit Card Debt

There are some potentially negative consequences to consolidating credit card debt by taking out a personal loan, including the cost. Consider these drawbacks, as well, before making a decision.

1. Taking Out a Personal Loan Could Lead to More Debt

A personal loan means you’re borrowing more money. If you take out a personal loan to pay off your credit cards and start to carry a balance on those credit cards again, you’re racking up more debt than you had before.

A personal loan for credit card consolidation isn’t a debt eliminator; use it only if you’ve gone through other options, like increasing credit card payments every month or opening a balance transfer credit card.

2. You’re Not Guaranteed a Lower Interest Rate

Personal loans tend to offer lower interest rates compared to credit cards, but that might not be the case for everyone. If you don’t have stellar credit, you might not qualify for a personal loan. If you qualify for a personal loan with bad credit, your interest rate may not be any lower—and could be higher—than what you’re paying now.

3. Personal Loans Have Fees, Too

Some lenders charge many different fees, like a late payment fee, origination fee and insufficient funds fee, for example. Be mindful of this as you’re comparing personal loan lenders.

How to Choose the Best Personal Loan

There are many different personal loan lenders that charge different interest rates and fees and offer various repayment terms. There’s no one set of standards that personal loans follow, which means you could see a wide range of offers based on what you qualify for. When exploring personal loan options, consider:

  • Interest rates. The best personal loans will offer the lowest interest rates to those with the highest credit scores. The higher your credit score, the lower your monthly payment will be and the less interest you’ll owe over the life of your loan.
  • Terms. Your repayment terms also vary greatly depending on the lender. Some offer repayment terms as short as six months while some are upwards of five to seven years. If you want to pay off your loan sooner, find a lender that offers shorter repayment terms. If you need to keep your monthly payments lower, see if you can find a lender with longer repayment terms.
  • Fees. The better your credit score, the more loans you can qualify for that don’t charge origination fees or other charges. If you don’t have great credit, evaluate each lender’s fees and see which ones you’re comfortable with in case you have to pay them. For instance, if you miss a payment, is the late fee $15 or $30?
  • Loan amount. Some people don’t need to borrow a lot to pay off their debt, while others need to take out a substantial amount. Each lender offers different minimum and maximum amounts. Along with that, your credit score could impact how much you’re allowed to borrow. The higher your credit score, the more trustworthy you look to lenders, allowing you to borrow more.

Alternatives to a Personal Loan

While a personal loan is a great option for debt consolidation, it’s not your only one. Review all your options to see which one is the best fit for your finances.

Credit Card Balance Transfer

You may be able to apply for a new credit card that allows you to transfer balances from existing credit cards, perhaps as a lower interest cost to you. The benefits of a credit card balance transfer include:

  • Interest-free payments. If you qualify for a 0% APR balance transfer, you won’t pay any extra interest charges for the promotional period, which would allow you to pay down your balance more cheaply.
  • No balance transfer fee. Most credit cards charge a fee when you transfer a balance, but you can find a few that waive the balance transfer fee.
  • New perks. If you have decent credit, you might qualify for a new card that offers cash back, travel perks or other types of deals for cardholders.

The drawbacks of a credit card balance transfer include:

  • Eventual interest charges. If you don’t pay off the balance by the end of the promotional period, you could face interest charges on the remaining balance.
  • Loss of promotional offer. Even though interest isn’t accruing, you’re still responsible for making minimum payments every month. If you don’t, you could lose your promotional offer and interest will start to add up on your entire balance.
  • Missing out on qualification requirements. If you don’t have decent credit, you may not qualify for a new credit card line.
  • Not having a high enough credit limit. Even if you do qualify, your entire balance might not transfer over because the card issuer offers you a lower credit limit than you need. This means you’re on the hook for the balance on your new card and any old cards that carry the remaining balances.

Debt Snowball Or Avalanche

You may also decide the best way for you to tackle your credit card debt is by focusing extra payments on one of your cards. There are two primary ways people go about this: either the debt snowball or debt avalanche method.

The benefits of using one of these methods include:

  • Avoiding new credit lines. If you don’t have great credit or don’t want to take on additional debt, these methods let you focus on paying down your debt with what you have, not adding to your burden.
  • Focusing on high interest. With the debt avalanche method, you pay off your debt with the highest interest rate first. This could save you more in the long run.
  • Focusing on little wins. The debt snowball method focuses on paying off the debt with the lowest balance first. If you need a quick win, this might be your best bet.

Of course, these payoff methods also have their drawbacks. You may find:

  • It’s a slow process. Increasing your payments with only the cash you have on hand right now means you may pay off your debt slower compared to a personal loan.
  • Your budget doesn’t work with it. If your budget is already stretched thin as it is, you may not have any extra money to put toward higher credit card payments.

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What Is a Bad Credit Score?

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It can be depressing when you’re on the bottom rung of the credit ladder, but it doesn’t have to stay that way.

You can increase your bad credit score if you use the right techniques and you’re persistent. And I promise it won’t take the rest of your life to build a solid credit score, either. So let’s get started.

Here’s what you’ll learn just ahead:

What Is Bad Credit?

Here’s a broad definition: A consumer who has bad credit, also referred to as poor credit, has a FICO score of 579 or less. With a bad credit score, you might only be approved for credit cards, mortgages or personal loans that come with high interest rates.

In fact, if your score is way less than 579, there’s a chance you can’t get approved for credit at all. But consider this a temporary problem. Once you start working on your score, your ability to get credit will improve.

Understanding how credit scores work can help you make better credit decisions. There are two credit scores that are used most often by lenders: FICO scores and VantageScores. FICO also has score versions for different industries.

About 90% of lenders use a version of the FICO score to help determine an applicant’s creditworthiness. FICO Score 8 seems to be the version used most often, but there’s also a new version called FICO Score 9. It takes lenders a long time to use a new score, so that’s why FICO Score 8 is still so popular.

What You Need to Know About FICO Scores

FICO scores range from 300 to 850. According to myFICO.com, these are the values for each credit score range:

  • Exceptional: 800 and higher.
  • Very good: 740 to 799.
  • Good: 670 to 739.
  • Fair: 580 to 669.
  • Poor: 579 and lower.

The average FICO score as of October 2020 is 711, which qualifies as good credit. It might seem impossible right now, but possessing good credit will be within reach after you spend time rebuilding your credit.

Let’s take a look at the factors that make up the FICO score:

  • Payment history: 35%.
  • Amounts owed: 30%.
  • Length of credit history: 15%.
  • New credit: 10%.
  • Credit mix: 10%.

If you have a poor credit score, it means that lenders think you have a high risk of delinquency. In fact, about 61% of consumers with credit scores below 580 are likely to become delinquent on a credit-related account, FICO says. So this is why it’s difficult to get approved for credit without having to pay high interest rates.

What You Need to Know About VantageScores

VantageScore ranges from 300 to 850, just like the FICO score does. But since VantageScore weighs the options a little differently, a 700 FICO score can’t be directly compared with a 700 VantageScore. Plus, FICO scores have different ranges for each credit rating.

Here are the VantageScore ranges:

  • Excellent: 750 to 850.
  • Good: 700 to 749.
  • Fair: 650 to 699.
  • Poor: 550 to 649.
  • Very poor: 300 to 549.

As you can see, there are two categories that could be considered a bad score. With VantageScore, poor credit is from 550 to 649. And very poor credit is less than 550. You’ll need a score of 650 to climb into the fair credit range.

Rather than using percentages like FICO does, VantageScore focuses on how influential each factor is in the algorithm. Factors that make up the VantageScore include:

  • Available credit, balances and credit utilization: extremely influential.
  • Credit mix and experience: highly influential.
  • Payment history: moderately influential.
  • Age of credit history and new accounts: less influential.

How to Improve Bad Credit

Now that you know more about how credit scores work, you’re ready to start improving your credit score. Your short-term goal is to move up into fair credit, which for FICO is 580.

Your long-term goal? To get the lowest interest rates, you’ll need a FICO score of at least 760, which puts you in the very good FICO score range. This won’t happen right away, of course, but it’s a possibility if you use the right strategies.

Here are four strategies for improving a bad credit score:

If you don’t have a budget, you need to set one up today. Once you remedy that situation, you also need to track your spending, which is easy to do with an app or online money management tools.

It’s difficult to stay on budget if you don’t know how much you spent and where you spent it. Getting into debt or increasing the debt you already have could make your credit score even worse. So think of this as your financial foundation. A strong foundation helps you build good credit.

With a bad credit score, you’ll have a hard time getting approved for a decent credit card. Before you decide to get an unsecured credit card with a high annual percentage rate and monthly maintenance fees, take a look at secured credit cards.

You will have to put down a deposit to secure the credit card. But you’ll get a regular-looking credit card to use for purchases. These cards are listed on your credit report as a revolving credit account, and as long as your issuer reports your payment history to the credit bureaus, you’ll build a better credit score. That is, as long as you use the card responsibly.

Many people aren’t aware that this option exists. You can check with your local bank or a credit union to see if credit-builder loans are offered. Every institution has its own set of rules and rates for credit-builder loans, but in general, you’ll deposit a small amount, such as $1,000, in the bank or credit union.

You then pay the “loan” back in monthly payments. This type of loan is identified as an installment loan by the FICO score algorithm, so that also gives you a small boost in the “mix of credit” category.

You have a credit utilization ratio, which is the amount of credit used compared with the amount of credit available. If you are carrying balances on your credit cards from month to month, your ratio could be high.

A ratio that exceeds 30% can drag down your credit score. As you pay down debt, your credit score will start to rise. As already noted, available credit is 30% of your credit score. To get the biggest positive impact on your score, keep your balances less than 10%.

Make it a priority in your life to improve your credit, and over time, you’ll see the results of your hard work.

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Mortgage platform matches rejected borrowers to specialist broker

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Borrowers who are struggling to get a mortgage because they are self-employed, have a complex income or are burdened with bad credit can now access specialist deals through a new platform.


Haysto matches customers, based on their profile and financial situation, to a mortgage broker with expert knowledge of securing loans for borrowers in their particular situation.

Traditional lenders and some automated online mortgage platforms may reject some borrowers if they have a less-than-traditional income stream or have a history bad credit.

There are lenders who offer deals to these customers – but they are usually only available through brokers.

Therefore the Haysto platform provides an introduction to these brokers for anyone who has been rejected for a mainstream product or who is worried they may not be approved by going direct to a lender.

Paul Coss, co-founder of Haysto, explained: “Self-employment and poor credit histories are on the rise in the UK, so a growing number of people applying for mortgages simply don’t fit the traditional financial mould.

“Many are being rejected by traditional lenders and online mortgage brokers that can’t see past their situation, while others will be put off from applying at all.”

Coss explained Haysto didn’t simply rely on the ‘computer says no’ approach. Instead the platform provided a personalised mortgage experience by matching customers to specialist mortgage brokers based on their unique situation.

“We want to help everyone access their dream home,” he said.

“Even if they have been rejected before, there are specialist lenders and brokers specifically for self-employed and bad credit mortgages who can help.”

Research carried out by Haysto as part of its launch has found 22% of people turned down for a mortgage blamed their bad credit history and 17% thought it was because they ran their own business.

Coss, who was a specialist broker himself, co-founded Haysto earlier this year after seeing a clear gap in the market for an online platform for customers with complex incomes or credit histories who had been turned down elsewhere.

Case study

Udara Bandera, 52, is just one of the customers he helped. Indeed Bandera turned to Haysto after finding himself £25,000 in debt and with a poor credit rating due to a sustained period of unemployment.

He had been turned down by his bank for a mortgage despite eventually securing a permanent job that allowed him to start paying off his debts, but is now getting ready to move his family into their new home.

He said: “I spoke to six or seven mortgage advisers but they were all telling me different things and it was so confusing. They didn’t seem to understand my situation and I didn’t know who I could trust.”

“I had a lot of support from my specialist Haysto broker and I didn’t feel judged like I had previously. My broker took me through all my options, gave me honest advice and completely put my mind at ease for the first time in ages.

“Thanks to this mortgage and the support I have received from Haysto, I have been able to start my life again. I need to keep slowly building up my credit, and the marks on my credit file won’t go away – even once the debt is paid back – but I am in a much better position compared to any other time over the last five or six years.”



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