Personal Loan

What Is a Personal Loan?

A personal loan is a lump-sum loan assigned for personal, individual use. It’s typically an unsecured loan, though some lenders do offer a personal secured loan option at a lower interest rate. Most personal loans have a fixed interest rate, which can make budgeting for monthly repayments more predictable.

 

Borrowers use online personal loans to cover a wide variety of personal expenses, but lenders still have some discretion in how to allocate the loan funds. For instance, if your stated purpose is to remodel your kitchen, you can’t use the funds to pay for educational costs instead.

While some people use personal loans to consolidate debt, it may be a better idea to seek out a dedicated debt consolidation loan to cover student loans or credit card debt.

Personal loans typically have medium repayment terms of two to eight years and low interest rates for individuals with excellent credit. Unfortunately, the interest rate tends to become increasingly severe for individuals with lower credit scores.

How to Find the Best Personal Loan Rates

When looking for the best personal loan rates, it’s important to compare personal loan companies and start with an honest evaluation of your financial situation. This includes looking at your credit history and score, income, and why you need loan funding. All these factors will influence which loan criteria are most important to you and will help you make the right choice in a lending company.

Approval Requirements

Most online lenders will have at least a minimum credit score. It’s a good idea to get your annual free credit report from the three main credit bureaus because that will give you a good indication of which loans you qualify for.

Some personal loan companies may not disclose their minimum credit score or other eligibility criteria. If possible, use the lender’s pre-approval process that runs a soft credit check to see whether you meet the baseline for loan approval.

Interest Rates

It’s always a good idea to hunt for the best interest rate possible. High interest rates can dramatically increase your monthly payments, as well as the total you repay on your loan.

Typically, the best personal loans have an APR range of 3% to 36%. The interest rate you receive depends on several factors, including:

  • The loan amount
  • Your credit score and overall credit history
  • Your income and general creditworthiness
  • The loan term

Lenders always aim to maximize profits, which means giving loans to people who can pay them back. The less of a risk you appear to be to a lender, the better your APR.

Loan Amounts

Loan amounts can vary dramatically between different lenders. Some may offer relatively small maximum amounts, while others let you borrow up to $100,000.

It’s a good idea to estimate the cost of the expense you need for the personal loan. It’s no good applying to a personal loan lender that has a maximum loan amount of $10,000 if you want to remodel your kitchen for $20,000.

Repayment Options

Repayment options often refer to the loan term or how long it will take you to repay the loan. However, some of the best personal loans also offer consumer-friendly options, such as the ability to change the date for monthly repayments.

In general, longer repayment terms mean smaller monthly payments but a larger accumulated loan cost. Shorter repayment terms mean higher monthly payments but lower loan costs. If you can afford the higher payments, it may be the better option because of the long-term savings.

Customer Service

You may think you won’t interact much with your lender, but it’s still important to check its customer service history. If something goes wrong or you have questions about your loan, you’ll want a company with accessible and helpful customer service.

Use services like the Better Business Bureau and the Consumer Financial Protection Bureau to identify which lenders have the best record of good customer service.

Many of the best online loan companies also have extensive knowledge bases, FAQs, and guidance on improving your credit, managing your finances, and taking advantage of debt consolidation and debt management.

These resources may be invaluable if you have bad credit or struggle with credit card debt.

What Are the Requirements for Getting A Personal Loan Online?

Every lender has a different set of requirements that they consider when issuing a personal loan. In general, the best personal loan companies want to mitigate their risk and approve loans only if they think the borrower can pay off the debt. That’s why aspects like credit score, income, and overall credit history are common requirements for a personal loan.

While the specifics may differ, it’s still a good idea to familiarize yourself with common loan requirements. Knowing the criteria you have to meet will allow you to get all the relevant documentation ready while also helping you narrow down your applications for personal loans that you qualify for.

Credit Score

Lenders view your credit score as a good estimate of your risk profile. The three main credit rating agencies all use a FICO scoring system that looks at five main factors when calculating your credit score:

Payment history: Do you always pay your monthly payments by the due date, or do you have a history of frequently missing payments?

Amounts owed: Ideally, you want to have as little debt as possible while still showing evidence of credit usage. A major factor in this calculation is the credit utilization ratio, which looks at your current debt vs. your overall credit limit. The lower this ratio, the better.

Length of credit history: Older credit accounts tend to contribute to a good credit score, and active old accounts are even better.

New credit: Hard credit checks that pull up your credit history and new credit accounts can hurt your credit score. It implies that you need credit and may be in financial trouble.

Credit mix: Having a diverse credit portfolio, such as retail accounts, mortgage loans, credit cards, and short-term loans, can provide a small bump to your credit score.

Credit scores range between 300 and 850, with higher numbers being better. Most personal loans require a minimum credit score of about 600 to qualify. Some lenders may offer loans to people with bad credit scores, under 600, but these loans tend to have high interest rates to mitigate the risk of not having a minimum credit score.

Having a good credit history can make a huge difference in the quality of your personal loan, from the amount you can borrow to your repayment terms and interest rate.

Income

Lenders want to know that you can pay your personal loan back and will often have minimum income requirements. These vary dramatically from lender to lender. For instance, SoFi has a minimum income threshold of $45,000 per year, while Avant needs a household income of only $20,000.

Overall, loans that have a steep income threshold tend to have better interest rates because the lender doesn’t have to mitigate as much risk. Individuals with higher incomes are more likely to pay off their loans than those with lower incomes and don’t represent as much of a default threat.

Even when lenders don’t disclose their minimum income threshold, you will have to provide evidence of your income. Examples of proof of income include:

  • Tax returns
  • Pay stubs
  • Monthly bank statements

Debt-to-Income Ratio

The DTI ratio is an indicator of how much of the applicant’s gross monthly income goes to paying off debt. People with higher DTIs may struggle to take on and pay off additional debt, making them a risky venture to lenders.

Ideally, the best personal loan lenders look for a DTI of 36% or less. However, some lenders are willing to offer personal loans to individuals with up to 50%, provided they have an excellent credit history and provable income.

Collateral

Collateral is any valuable asset that lenders use to secure a loan against the threat of default. If you can’t make your repayments, the lender may seize your asset to clear the debt.

Most personal loans are unsecured, which means they don’t require collateral. Most lenders will use high interest rates to offset the risk of not having collateral for unsecured loans.

Some of the best online loan providers will offer a secured loan for personal use. Collateral can include:

  • Cash or investment accounts
  • Real estate property
  • Collectibles

The interest rate on secured personal loans is often much better than those of unsecured loans, but you face the risk of losing your assets if you can’t pay off your debt.

Common Uses for a Personal Loan

The best personal loans offer a great deal of flexibility in terms of what you can do with the funds. While some lenders may offer personal loans for specific uses, most will let you use the proceeds however you want.

Paying Off High-Interest Credit Cards

Credit cards often come with extremely high APRs, which can make them difficult to pay off. Personal loan rates are often much lower, which means that you’ll be paying a much lower total sum while still paying off the same amount of debt.

Credit consolidation can reduce your monthly payment, help you pay off your debt faster, and free up your income for expenses so that you don’t have to take on more debt.

Medical Bills

It’s always good practice to have an emergency fund to cover unexpected medical expenses; saving enough money can take a lot of time and is not something that everyone can afford to do.

Meanwhile, taking out an online personal loan can help cover medical bills and other emergency expenses without having to resort to high-interest credit cards or predatory payday loans.

Debt Consolidation

Most people who have student debt often have multiple loans with several providers, all with different repayment terms and interest rates. Taking out a single debt consolidation loan can make the repayment process significantly simpler and can also save money on interest. If you want to consolidate debt, try to look for the best personal loan with average interest rates lower than those of your current debt.

While the best personal loans can work for tackling student debt, many lenders offer dedicated consolidation loans that work best for debt consolidation. Online loan companies offering these dedicated loans will handle the administrative concerns of paying off various student loan providers while allowing for higher loan amounts and competitive interest rates.

Auto Financing

Most car loans are secured loans that use the vehicle you want to buy as collateral. If you can’t make your payment schedule, then the lender can take the vehicle to pay off the debt.

It’s possible to use personal loan proceeds as an informal, unsecured car loan. The main advantage of doing this is that you don’t have to put up the vehicle as collateral, but you will have to consider the higher APR range of personal loans vs. secured car loans.

Home Improvement

There are two main reasons to take out a personal loan to work on your home: emergency repairs or making it more appealing to buyers.

Emergencies like burst pipes, a broken HVAC system, or electrical concerns can cost a lot of money to repair. By their very nature, it’s vital to fix these problems as soon as possible to avoid costly repairs in the future, which means that saving up isn’t the best way to go. Instead, taking out a personal loan lets you address the issue and worry about the finances later.

Some home renovations can dramatically increase a house’s value. If you’re looking to sell, investing a bit of money into a new roof or appealing kitchen may entice buyers and help you get a better selling price. While it’s possible to save up for these projects, personal loans can provide a quick, reliable influx of cash to complete the renovation and put your home on the market sooner.

Pros and Cons of Personal Loans

Before you start hunting for the best personal loans for bad credit, it may be a good idea to consider whether a personal loan is the right option for your financial situation. Just like other lines of credit, there are advantages and weaknesses to taking out a personal loan. It’s up to you to decide whether you can live with the drawbacks and whether the advantages of a personal loan are the ideal fit for your needs.

Pros:

A fixed interest rate means that you have a predictable monthly payment for the entire lifespan of the loan.

Lower qualification requirements than for other loan types. While you do need a minimum credit score for most personal loans, they are much more accessible than many other financing options.

You have a lot of leeway with what you can use loan funds for, making them suitable for many applications.

The online nature of personal loans means that they’re a quick way to access additional funds. The best personal loan providers will often approve and pay out a personal loan within 48 hours of application.

Unsecured loans aren’t tied to any of your assets, which can make them safer for borrowers. However, it does mean a higher interest rate to compensate.

Cons:

You have to repay the full loan amount, and interest on the full amount, even if you don’t end up using all of the loan funds. You can avoid this pitfall by making sure that you’re requesting only the loan amount that you need.

Most of the best lenders charge an origination fee that can be between 1% and 8% of the full loan amount. These origination fees may be built into the APR or taken out from the loan amount before it enters your bank account. It’s vital to determine how the lender handles the origination fee because it may affect the loan amount you need to request.

The best personal loans are often unsecured, which means that they have a higher interest rate than secured loans or other financing alternatives. People with poor to fair credit may end up paying higher interest rates on their personal loans than on their credit cards, especially for loans that don’t have a minimum credit score.

Personal loans are a long-term financial commitment. People with stable incomes may find it easy to make the same monthly payment and budget it into their expenses, but individuals with fluctuating incomes may find the long-term commitment challenging to meet.

The Best Place to Get a Personal Loan

If you’ve decided that personal loans are the right option for you, you’ll have to start the tricky process of finding the best personal loan lender.

It’s a good idea to shop around for the best personal loans because they can vary wildly in minimum credit score, interest rates, fees, and repayment terms.

Many lenders offer personal loans. These lenders will have different requirements—whereas some will focus exclusively on credit score, others will look at your total credit report and consider other factors, as well.

These three lenders all offer different benefits, and some will better suit your needs.

Online Lenders

Online lenders are non-bank companies that operate only online. They often offer several lending products, such as debt consolidation loans, personal loans, and auto loans.

These lenders tend to offer the most competitive interest rates for people with a superior credit score, and many have a wide range of repayment terms to suit your situation.

Pros:

Online lenders will run soft credit checks that let you see whether you’re eligible for a personal loan and get an estimate of your interest rate and repayment terms before committing to the loan.

Many web-based lenders have a very low min credit score, making it an appealing option for individuals with poor credit.

The application procOnline lenders will run soft credit checks that let you see whether you’re eligible for a personal loan and get an estimate of your interest rate and repayment terms before committing to the loan.

Many web-based lenders have a low minimum credit score, making them appealing options for individuals with poor credit.

The application process is streamlined and simple. In most cases, you will get your approval result within the day and see the funds in your savings or checking account within one to two business days after that.

Web-based lenders and aggregate platforms make it easy to comparison shop. These platforms let you compare maximum loan amounts, origination fees, and interest rates to find the best personal loans.

Cons:

While online lending companies may have great terms for people with good credit scores, online loans for people with bad credit tend to be much higher than average. This is especially true of lenders who specifically target the low-credit-score market.

Origination fees and other costs may make the total cost of the loan significantly higher than you’d expect. It’s important to read the fine print before signing any documentation to avoid unpleasant surprises.

Most web-based lenders will not allow co-signers, which means that you need to meet the minimum credit score and other requirements by yourself.

Banks

When people think of personal loans, they probably think of going to a bank. Banks often have consumer lending departments that offer extensive financing options to the general public.

Most people already have accounts at a bank, which means getting the best personal loan from the same bank makes logistical sense.

Pros:

Banks can offer much larger loan amounts, often up to $100,000 for personal loans.

Keeping all your finances in the same ecosystem can make it easier to manage them. Many banks also offer APR discounts for customers who already have savings or checking accounts at the bank. Because these banks have your financial information, qualifying and applying for a loan may be simpler, too.

The best personal loans often come from smaller, local community banks. These banks are more flexible, may have a lower minimum credit score, and can offer better interest rates than their larger multinational cousins.

Cons:

Applications can be more complex than those of web-based lenders. Because larger banks have to handle thousands of queries per day, you may need to wait several days to hear your approval status and even longer to see the funds in your account.

Most banks have high minimum credit score requirements, 680 or higher. Some banks may take other factors into account to offset a poor credit score, but most will outright reject applications with low scores.

Because banks are for-profit institutions, they may have higher interest rates than their competitors, regardless of your credit score.

Looking for the best personal loan can be tricky because you’ll have to repeat the application process for each bank to find out what your interest rate and repayments will look like.

Credit Unions

A credit union is a nonprofit financial institution that often serves a relatively small geographic area. Unlike banks, credit unions are member-owned, which means they often have better interest rates and fees than those of large commercial banks.

Pros:

Because most credit unions are local, it’s easy to find a nearby branch.

Personal loans from a credit union have some of the lowest interest rates. The federal interest rate cap on a credit union personal loan is 18%, compared with the 36% maximum from web-based lenders.

Credit union members are more likely to be flexible in terms of loan amounts, repayments, and fees. If the credit union doesn’t have a product that meets your needs, it’s more likely to work with you to find a solution instead of writing you off.

Credit unions offer smaller loan amounts, making them the best personal loan choice for smaller, fast cash loans.

Cons:

You need to work with the credit union in your area, which may be restrictive if you move or are unsatisfied with its performance.

Credit unions sometimes restrict membership to individuals from a certain employer or geographic area. You may need to do some searching to find a credit union in your area that you qualify for.

Not every credit union offers personal loans.

Some credit unions don’t have a pre-qualification process, meaning they don’t do soft credit checks. You will need to complete an entire application process and go through a hard credit pull to see whether you qualify. This may influence your credit score, especially if you’re rejected for the loan.

Understanding Loan Interest Rates and Fees

The interest rate is either an additional payment on a loan or a reward on an investment. The amount paid or rewarded is a percentage of the principal, or the initial loan amount or investment.

When it comes to the best personal loans, the amount of interest you pay depends on the total unpaid portion of the personal loan. If you miss a payment, the interest will get added to the sum you owe, and the new interest rate will factor in that extra sum during the next repayment. This is one of the many reasons it’s vital to make your monthly payment on any loan.

A high interest rate will make the total cost of the loan higher because you’re paying back a higher amount each month. Lower interest rates are always better when it comes to looking for the best personal loan, assuming all other conditions are equal.

While some people use interest rates and APR interchangeably, they’re not wholly the same thing. The APR is the total cost of the loan, which includes the interest rate as well as other costs, such as the origination fee and other administrative add-ons.

However, it’s important to note that some lenders do not include the origination fee in their APR and instead deduct it from the loan before paying it out to the borrower. Make sure to confirm with the lender how it handles its origination fee because it can affect the total loan cost, as well as the loan amount you need to borrow.

Frequently Asked Questions

What’s the Difference Between a Secured and Unsecured Loan?

A secured loan requires some form of asset as collateral. If the borrower fails to pay off the loan in time, the lender can recoup its losses by taking the asset. Common assets used as collateral include bank accounts, investment accounts, retail holdings, and valuable collectibles.

Unsecured loans don’t need collateral, which means that even if you default, your assets are secure. However, these loans tend to have higher interest rates to alleviate the increased lender risk.

Do Personal Loans Affect Your Credit Score?

Yes. Personal loans are a form of credit that can affect an individual’s credit score in various ways.

In terms of positive contributions, they can:

  • Contribute to your credit mix by adding another line of credit. It’s especially useful if you predominantly have credit card debt because it shows a more stable borrowing portfolio.
  • Help build up a payment history as long as you pay each installment on time.
  • Reduce your credit usage ratio if you use the loan to consolidate credit card debt. Your credit card limit will remain the same, but your balance will be lower. Personal loans don’t factor into the credit utilization ratio because they’re not a form of revolving debt.

However, if you have poor to fair credit, you need to know that personal loans can also hurt your credit score. A hard credit inquiry lowers the credit score for a few months, regardless of whether you get the loan. Missed payments can dramatically lower your credit score, so you need to be sure that you can afford the loan, plus interest and origination fee, before signing off on it.

What’s the Difference Between Fixed and Variable Interest?

A fixed interest rate remains the same for the lifetime of the loan. A variable interest rate fluctuates based on changes in the economy and market. Each type has its strengths and weaknesses, so it’s worth considering which one works best for you.

In general, personal loans use fixed interest rates, resulting in predictable payments for the loan’s lifetime. A variable rate will often be lower than a fixed rate because of the inherently higher risk to the consumer, as the rate can rise dramatically over the lifespan of the loan.

How Much Money Can You Borrow with a Personal Loan?

It depends on the lender. Most tend to have a range of between $2,000 and $50,000, though some will go as high as $100,000. Banks and web-based lenders will offer higher caps than loans from a credit union.

Can I Get a Personal Loan with Bad Credit?

While many banks and lenders have a minimum credit score for personal loans, some lenders specialize in providing loans to individuals with bad to fair credit.

You can find out whether you meet the minimum credit score requirement through pre-qualification. Most web-based lenders will have a pre-qualification process that performs a soft credit check and lets you know whether you qualify for the loan. It also gives you useful details about the loan, such as the cost of the origination fee, loan terms, and estimated APR.

If you’re struggling to secure a loan with a minimum credit score, consider going with a co-signed or secured loan instead. Secured loans often have a lower minimum credit score requirement because the lender has a fallback if you fail to make your payments on time. Co-signers will add their credit score to yours, which is often enough to clear the minimum threshold.

Can I Refinance a Personal Loan?

If you don’t have the best personal loan, you can consider refinancing it with another personal loan with better terms and interest rates.

Some lenders will allow you to refinance a loan from another lender, but not their own loans. Others will let you use your personal loan for any purpose, including refinancing another of their loans.

It’s a good idea to consider refinancing a loan if you’ve improved your credit score and can secure a better APR because it lets you take advantage of a lower interest rate that can save you a lot of money in the future.

If you’re looking for a loan that’s best for debt consolidation, consider specialized offerings as well as personal loans. Some lenders have dedicated credit card consolidation loans with better rates than even the best personal loans.

Is It Possible to Get a Low-Interest Personal Loan?

When looking for the best personal loans, a major factor is your interest rate. Lenders look at many factors when deciding on your APR, such as:

  • Loan amount
  • Your credit score, income, and DTI
  • Current market trends

However, if you barely meet the min credit score, you may find that you receive a much higher rate than the minimum APR advertised.

Luckily, you can still employ some strategies to lower your interest rate and save you money. These include:

  • Getting a secured loan instead of an unsecured one
  • Signing up for the auto-pay discount that many web-based lenders offer
  • Avoiding integrating the origination fee into the APR and offering to pay it as a portion of the loan instead
  • Shop around for lenders with a lower origination fee and different qualification requirements
  • Choose a shorter loan term
  • Get a co-signer, if allowed by the lender

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