Unlike credit cards, personal loans are installment loans that are popular because they’re easy to apply for and come with relatively low interest rates, if you have a good credit score. From debt consolidation to paying for life events, personal loans give borrowers quick cash that they can pay back over time. In most cases, people pay monthly, same as they would with a credit card, but with personal loans, payments are always the same whereas credit card payments might change depending on your balance.
Read on to find out where to get a personal loan, how much you can borrow, what to expect and what questions to ask before you sign.
1. Is a Personal Loan Right For Me?
Millions of Americans take out personal loans every year — and they’re growing in popularity for good reason.
Personal loans can be a way to consolidate high-interest credit cards at a lower rate. Some people prefer to use personal loans instead of credit cards and for those people, loans might be the ticket to a home-improvement project, a wedding or other large undertaking that involves lots of smaller purchases. Either way, personal loans give borrowers cash up front that they pay back in predictable installments over a fixed period of time, typically at a rate that’s lower than revolving-debt credit cards can offer.
2. How Do I Get a Personal Loan?
If you’re considering taking out a personal loan, you can go to a traditional bank or credit union, or you can shop online at one of the many services competing for your business. Peer-to-peer services match borrowers with private lenders. Both the platform and the lenders make money off the borrower’s interest payments, which are often lower since web-based services don’t have physical branches to maintain. Most P2P loan amounts are between $1,000 and $40,000.
No matter how you pursue a personal loan, include origination fees and other charges along with interest rates in your research.
3. What Are the Different Types of Personal Loans?
There is more than one kind of personal loan, and some should almost always be avoided. Payday loans are risky short-term, ultra-high-interest loans that can put desperate, high-risk borrowers in inescapable cycles of debt. Comparatively, personal loans offer lower interest rates, usually around 12 percent, which is why they’re often used to pay off credit cards, which tend to have interest rates around 20 percent. But personal loan rates can vary widely depending on how much you’re borrowing, the term of the loan, your income and, of course, your credit history and credit score.
4. What Is My Credit Score?
Your credit score just might be the three most important numbers in your financial life — never more so than when you’re applying for a loan. Your score represents your creditworthiness and the risk you pose to lenders. Tracked by America’s three credit reporting bureaus — TransUnion, Equifax and Experian — credit scores range from 300 to 850. The higher your credit score, the better your odds of getting a loan at a good rate.
If you have a bank account or credit card with a major bank, you can usually check your score for free through the bank’s website.
5. What’s the Personal Loan Application Process Like?
Most personal loans are unsecured, which means no collateral is required. You’ll have to provide proof of identity, proof of income and give permission for the lender to check your credit and your background. In most cases, you can apply for personal loans online or over the phone and get results in just a few minutes, provided you have the necessary documentation. If you’re borrowing from a bank or a credit union, you can complete the application in person.
6. Does Applying for a Personal Loan Hurt My Credit?
When a potential lender checks your credit, it shows up on your credit report as a hard inquiry, which stays on your credit report for two years, according to Experian. But that doesn’t have to be a bad thing, depending on how you do it.
If you apply to different lenders, do it in rapid succession. When hard inquiries are condensed in a short period of time, it just looks like you’re shopping around. That’s not a bad thing, and it won’t count against you. Try not to spread out applications over long periods of time and consider asking for pre-approval, which is a soft inquiry that doesn’t go on your report at all.
7. How Do I Sort Through All the Different Personal Loan Options?
Personal loans are big business, which means there’s a lot of competition. In fact, a quick Google search leads to an overwhelming number of options, many of which all claim to be some combination of the best, cheapest, most popular or most reliable.
Consumer Reports offers a review-based comparison of many of the top companies, as does Credit Karma. Some of the top companies for people with good credit are Lending Tree, PenFed Credit Union, SoFi, Even, Monevo and Best Egg.