A Complete Guide to Personal Loans [Definition, Who Should Apply, Alternatives, Best Personal Loan Companies]
There are loads of reasons for us to seek a personal loan. It could be…
- A financial emergency
- Capital for a new business
- Debt consolidation
- Remodeling or upgrading your home
In this guide, we’ll cover the following:
- Definition of personal loans
- Who should apply for a personal loan?
- Benefits & risks
- Alternatives
- The best personal loan companies
What are Personal Loans?
A personal loan is a private loan you borrow from a lender or financial institution to pay for something. You will then pay it back with an agreed principal and interest rate.
Who Should Apply for a Personal Loan?
A personal loan is best for someone who…
- Has large medical bills to pay
- Financing home renovations, remodeling, or upgrading
- Paying off your debt
- Making a large purchase
The nature of loans is to eventually pay back the money you borrowed, along with interest. Fees, rates, and your due period all vary.
Let’s go over them in more detail in the next sections.
Due Period
A personal loan will typically have a set duration or due period of 1 to 5 years.
Compared to credit cards, a personal loan can reduce the amount you spend on interest and provide a definite payoff date in terms of the loan agreement.
When it comes to a personal loan, there is usually no penalty when it comes to prepayment. This is so you can pay off your loan early and save on interest.
Now, if you have multiple credit cards and have a debt to pay with high-interest rates say, 18 – 20%, a personal loan can consolidate those rates so you can pay off your debt faster.
Fees & Rates
There are some lenders that charge origination fees for personal loans, while others focus more on the cost coming from into the interest rate.
When you pay an origination fee, your lender takes an upfront charge based on the amount you borrow.
These rates or annual percentage rate (APR) range from 1% to 10% of your loan amount and depend on your credit score. As for interest rates, the lowest would be 6% and the highest being, 25%.
Rates and fees VARY depending on the lender. More importantly, two factors that heavily contribute are:
- Debt to income ratio
- Credit score
Lower credit scores would mean higher rates and fees. A higher score would mean better, lower rates.
Take note that creditworthiness includes the close examination of your income, debts, and credit score.
Things to Consider With Personal Loans
There are a number of factors and details that vary from different lenders. Here are some of the basic things to look out for when applying for a personal loan, whatever lender you choose to apply for.
Interest Rates
Your interest rate depends on your credit score. With excellent credit, you may be able to borrow in the single digits of an interest rate.
Personal loans typically have fixed interest rates. This means the interest rate doesn’t change, so you pay the same monthly payment all throughout the span of your personal loan.
A variable rate loan is seldom when it comes to these loans.
A fixed-rate loan is what’s common when it comes to personal loans, so it’s more beneficial to have good credit before applying for the loan.
Personal Loan Rates
Actual personal loan interest rates will be different depending on these three things:
- How creditworthy you are
- The length of the loan
- The loan amount and the lender
Personal loan rates also depend on your credit score. These are one of the largest factors that determine your APR on taking your loan proceeds.
The rule of thumb is: the higher your credit score, the lower the rate will be.
Credit Score : APR
- Poor (300 – 639) : 28.5% – 32.0%
- Average (640 – 679) : 17.8% – 19.9%
- Good (680 – 719) : 13.5% – 15.5%
- Excellent (720 – 850) : 9% – 12.5%
Word of advice: Build your credit to good or excellent scores to get better arrangements and deals when going for a personal loan. This also allows you to apply for a higher loan amount which is always useful when applying for a loan.
Approval for a Personal Loan
All this talk about applying for a personal loan seems promising, but we have to consider what will get us the goods, right?
Before a lender allows you to loan, you have to be credible and accounted for. There are two factors that lenders take a look into before approving a loan.
- Income
- Credit History
Now let’s take a closer look into those two.
Income
Lenders need to verify you have enough income to repay your loan.
To ensure you can pay them back for what you borrow from them, they will most likely ask about your employment and income.
They may also look at your current debt to make sure that adding a loan payment won’t consume too much of your monthly income and make it hard for you to cope with monthly payments.
Credit History
Lenders often check your credit score to find out how you’ve handled credit in the past.
Your credit reports contain details about…
- Previous loans
- Any late payments you might have done, and
- Public records that lenders might want to know about
Your credit history informs lenders how responsible you are with credit, and if they can trust you for a loan or not.
Types of Personal Loans
There are various types of lenders you can borrow from.
Standard Personal Loan
Banks and credit unions have a long history of offering a personal loan to those in need. You can often apply in person or online and receive funds in your checking account quickly.
This is a faster and easier process if you already have an existing bank account and responsible credit history.
Online Lender
Peer-to-peer (P2P) sites and other online lenders offer loans from investors and financial institutions.
With the application process being simple, these online services are the most likely to use alternative credit scoring models given its platform.
Specialized Lenders
There are some lenders that work directly with service providers for specialized clients.
They might fund dental work, fertility treatment, landscaping projects, and the like.
Equal Housing Lender is an example of a specialized lender for those who have been denied housing or financial assistance due to discrimination.
Borrowing from these specialized lenders are convenient, though it’s wise to look around and compare lender from lender to know what’s best for you and your specific situation.
Benefits and Risks
Your financial health is important, and this section uncovers whether a personal loan is the best option for you. This is not to say these loans are bad and should be avoided.
Knowing the risks and benefits that come with a loan are crucial so you don’t end up with more debt.
Benefits
No Collateral
For those who have high credit scores, this is one of the biggest benefits of personal loans.
No collateral also means it’s an unsecured personal loan. What this tells us is you don’t have a to give up an asset – a car or house – to secure a loan.
If you have a high credit score, this is highly beneficial to you. However, this might also mean higher interest, so be careful.
Flexible
Another great aspect is how you can practically use a personal loan for almost anything. You can cover expenses ranging from home improvement down to wedding expenses.
However, some lenders may not allow loans for certain things like starting a new business or for university fees.
Useful for Consolidating Debt
Rather than worry about multiple monthly payments, you can streamline your finances by paying your monthly payment to one lender instead of various institutions.
It MAY reduce your overall interest spread over multiple payments per month, making it a great option to pay off debt faster and reduce the risk of forgetting to pay.
Competitive Rates & Borrowing Limits
Rates tend to be lower and borrowing limits also tend to be higher IF you have a good to excellent credit score.
However, compared to other loans like a home equity loan for instance, a personal loan is still relatively higher.
Better Budget Planning
Being able to pay fixed monthly payments allows you to take charge of your budget plan.
Since this provides better predictability, you can plan and set aside payments easier compared to variable rates.
Risks
May Come With High Fees and Penalties
Always read the fine print. Although it’s not common for most lenders to charge prepayment penalties, some do.
Additionally, some institutions will charge higher a higher origination fee than others. Keep a close eye during the application process.
Might Require Collateral
For those with a low credit score, lenders might ask for collateral to minimize risk on their end.
Sure, the down payment and fees may be relatively lower, but if you’re putting up collateral, the biggest risk is losing these assets e.g. your car or home.
Lead to Further Credit Damage
Failure to pay on time or missed payment dues only leads to poorer credit scores.
That means you may be allowed to get a loan this time, but if you fail to pay for your current loan and apply again, it’s much harder to qualify.
Higher Interest Charges
This mostly applies to applicants with lower credit scores. Again, credit score plays a significant role in the application process.
With higher interest rates, it’s not impossible to pay the money you borrowed, but it is still a risk you should account for.
Alternatives
Balance Transfer Credit Card: For Consolidating Your Debt
A balance transfer credit card is ideal for those with good credit.
The way it works is:
- You put all your debt into one credit card (Balance Transfer Credit)
- You’re given a grace period, typically between 9 to 18 months to pay for your debt
- Pay off your debt at 0% interest
If you’re confident you can pay off your debt within this short amount of time, this is a great alternative.
If you can’t, take note that the interest rates are VERY HIGH if you don’t pay during the grace period you’re given.
Home Equity Loan or HELOC: For Home Improvements/Renovations
A home equity loan or HELOC (Home Equity Line of Credit) is like taking out a second mortgage.
The biggest benefit to a home equity loan is a lower interest rate between 4 and 6%. Furthermore, you can pay off your debt over a longer period of time.
Unlike a personal loan, paying off your debt ranges between 1 to 5 years. So definitely consider Home Equity as part of your alternative if you need the cash for home improvement, remodeling, or renovation costs.
Best Personal Loan to Apply For
Here are the best personal loan lenders to look out for that have great agreements when applying for this loan.
SoFi
SoFi is a digital lender that’s convenient for anyone and everyone.
They offer products such as personal loans, student loan refinancing, and private student loans. They even offer home loans, investing, and various types of insurance.
The company establishes itself as an all-encompassing place to save, spend and manage your money.
Personal loans range from $5,000 to $100,000 and must be repaid in two to seven years. A fixed interest rate loan can range from 5.99% APR to 18.85% APR.
Some Qualifications:
- Must be a U.S. citizen, permanent resident, or visa holder
- Must be a legal adult in your state
- Must be employed, with sufficient income
- If not yet employed, must have an offer of employment to start within the next 90 days
SoFi is a good choice to go with if you have a good credit history. They offer low interest rates, have no fees, and are flexible with monthly payments.
Fast Details:
- Minimum Credit Score: 680
- Loan Amount: $5,000 to $100,000
- Term Length: 2 to 7 years
- Estimated APR: 5.99%to 18.85% (discounted with autopay)
They also have a mobile app that helps manage your loan. Additionally, SoFi offers their loans as an unsecured loan so if you need loan funds without the risk of collateral, this is a good option.
LightStream
LightStream is the online lending division of Trust, which used to be SunTrust Bank. Personal loans are available for borrowers with responsible good credit in all 50 states.
They offer loans for any occasion, such as medical needs, pre-K-12 education, or a family need.
Some prefer to use a personal loan plan for remodeling or house repairs with the benefits of taking longer to pay off the loan and lower monthly payments.
Some Qualifications:
- Preferably with several years of credit history (at least 5 years according to LightStream).
- Must have multiple account types within your credit history.
- Must have strong payment history (preferably with few or no delinquencies).
- Must have enough income to pay existing debts and a new LightStream loan.
LightStream aims to service strong credit borrowers with no prepayment fees and low interest rates that vary based on loan purpose.
Fast Details:
- Minimum Credit Score: 660
- Loan Amount: $5,000 to $100,000
- Term Length: 2 to 12 years
- Estimated APR: 2.49% to 20.49% (discounted with autopay)
A great thing to know about LightStream is they’re a secure loan that doesn’t require a loan origination fee. They also have competitive rates among online lenders.
Plus, they’re great for long-term secured loans!
What might be a downside for some of you is it requires several years of credit history for you to be able to pply for a loan with LightStream.
Payoff
Payoff loans are specifically for those who borrow money to pay off high interest credit card debt.
The company is a California-based financial wellness firm that works with lending partners that originate loans.
For those of you struggling to get out of credit card debt and having to deal with higher interest debt, Payoff is great to work with.
Taking loan proceeds can help get rid of your existing debt and then make a fixed monthly payment to your Payoff loan.
Some Qualifications:
- Must have a credit history of at least 3 years.
- Must have at least two open accounts on credit report.
- Must have zero credit delinquencies.
- Must provide a Social Security number.
- Must be able to provide income verification.
- Must have bankruptcies filed within the past two years.
Payoff specializes in helping with a borrower registration agreement which saves money on interest charges and help them get out of debt payment obligations faster.
Fast Details:
- Minimum Credit Score: 640
- Loan Amount: $5,000 to $40,000
- Term Length: 2 to 5 years
- Estimated APR: 5.99% to 24.99%
While there is an origination fee of up to 5%, it does offer direct payment to creditors. They also don’t have prepayment or late fees.
Borrowers with fair a credit score, such as those with credit card debt who sometimes have a hard time looking for loan approval, can apply with loan amounts that help with the monthly expenses.
After all, thats what makes Payoff one of the best personal loan companies.
Upstart
Upstart is an online marketplace lender that originates personal loans via connecting a borrower and a credit union to one another.
They offer these for borrowers with fair to excellent credit nationwide, with the exception of Iowa and West Virginia residents.
An Upstart personal loan can have loan amounts range from $1,000 to $50,000. The actual secured loan depend on APRs that range from 6.95% to 35.99%, and good for a short term loan term.
Some Qualifications:
- Must be at least 18 years old.
- Must have U.S. residential street address where borrower resides (unless military personnel on active duty).
- Must give a valid email account.
- Must have a bank account with U.S. routing number.
- Must have either a full-time job, full-time job offer starting in 6 months, a regular part-time job, or another source of regular income.
The actual loan terms depend a lot on your annual gross income, so that’s one thing to consider for being consistent with monthly payments. A loan amount as low as $1,000 are available in most states too.
Fast Details:
- Minimum Credit Score: 580
- Loan Amount: $1,000 to $50,000
- Term Length: 3 to 5 years
- Estimated APR: 6.95% to 35.99%
There is no prepayment penalty for paying your loan term off early.
They also have an origination fee of up to 8%, as well as a late fee that’s around 5% of the payment due.
Best Egg
Best Egg is a national online lending company that offers personal loans with a loan amount that starts at $2,000 for a variety of purposes such as debt consolidation, refinancing for your credit card, family needs or home improvements.
A personal loan with Best Egg can be funded in as short and quick as a single business day. They also have a low interest rate to look out for.
Some Qualifications:
- Must have a fair to good credit score.
- Must have a low debt to income ratio (at least below 36%).
- Must have a stable source of income or employment.
- Must have a valid identity and address registered to the state of residence.
A Best Egg secured loan is great for borrowers that look forward to interest rates that start as low as 5.99% for those with a good credit score.
Good for debt consolidation loans with loan amounts that work for your financial needs.
Fast Details:
- Minimum Credit Score: 600
- Loan Amount: $2,000 to $50,000
- Term Length: 3 to 5 years
- Estimated APR: 5.99% to 29.99%
Best Egg has no prepayment penalty. They’re also available to fund loans within one business day to three at most. It’s useful when wanting quick processes when handling your personal loan term.
A downside to this is the origination fee of 0.99% to 5.99%, as well as a late fee of $15 which is charged within three days of a missed payment.
Upgrade
Upgrade is a lender generally based online and offers one of the best personal loan deals nationwide.
They offer loan amounts that range from $1,000 to $50,000.
You can use your personal loan for nearly anything, such as home improvements, large personal expenses, refinancing credit usage for your credit cards and even debt consolidation loans.
What’s great about Upgrade is you can get your funds within one business day after approval of this best personal loan.
Some Qualifications:
- Must have a credit history of at least 3 years with at least 2 accounts.
- Must have at least a monthly free cash flow amounting to $800.
- Must have a good debt to income ratio.
- Must have good source of annual income.
We love that Upgrade allows for secured loans, as well as co-signed and joint loans. They also offer a rate discount with direct payment to creditors on debt consolidation loans.
Plus, if you gave a strong credit score to qualify, interest rates start at 5.94%.
Fast Details:
- Minimum Credit Score: 580
- Loan Amount: $1,000 to $50,000
- Term Length: 2 to 7 years
- Estimated APR: 5.94% to 35.97% (with autopay)
Upgrade has minimum loan sizes that are incredibly useful when it comes finding quick fixes to financial management.
With an interest rate that isn’t so bad, we appreciate that it’s one of the best personal loan choices.
On the other hand, watch out for the origination fee of 2.9% to 8%, as well as the $10 failed payment fee.
Avant
Avant has low starting rates, which means Avant is a good option for borrowers with low credit scores and income.
They offer loans with low loan amounts, which is helpful if you don’t need to borrow a lot of money but still need fast access to cash.
Like we said, the most favorable loan terms from Avant is you don’t need good credit scores in order to apply for a loan from them.
Some Qualifications:
- Must be at least 18 years old.
- Must provide a Social Security number.
We love that you’re able to get the loan proceeds in a single business day. Also, you have the option to change your payment date to schedule your monthly payment better for your benefit.
Fast Details:
- Minimum Credit Score: 580 FICO and 550 Vantage
- Loan Amount: $2,000 to $35,000
- Term Length: 2 to 5 years
- Estimated APR: 9.95% to 35.99%
Watch out for their fees which include: origination, administrative, late and unsuccessful payment.
On the plus side, they have an option for a secured loan!
FAQs
How Does My Credit Score Affect My Offer?
A personal loan may come with higher APRs than other types of loans because they are, most of the time, unsecured.
Unsecured loans often pay extra attention to your credit score. The lower a borrower’s credit score is, the more they’ll have to pay in interest.
How Much Can You Borrow With a Personal Loan?
The amount you can borrow from a personal loan depends on your credit score and the lender you choose to borrow from.
It can range from as low as $2,000 to as high as $50,000.
How Fast Can I Get a Loan?
There are many online lenders that approve the applications of qualified borrowers on the same or next day of application, while others may take up to a week. It depends on the lender.
What Happens If I Can’t Pay Back My Loan?
If financial hardship means you can’t pay back your loan, your loan will eventually fall into default. A defaulted loan will likely rack up fees and cause a decline on your credit score.
With some lenders, default could happen as soon as you miss a payment, while with others it could happen after a few months of missed payments.
Conclusion
A personal loan is something you can do easily, as long as you have the qualifications and follow up with your monthly payments.
It’s bound to work out for you, whatever financial needs you may be looking for, as long as you study and review different lenders and see where you are with your credit.
Best of luck to you and your loan adventures!
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