When you need cash quickly, it can be tempting to turn to payday or title loans. But these types of loans often have high-interest rates and hidden fees, which can trap you in a cycle of debt.
A personal loan from a bank or credit union may be a better option as they typically have lower interest rates and fees than other short-term loan options. You can use a personal loan for any purpose, including debt consolidation, home improvement, or medical expenses.
These loans are easily accessible at a variety of financial institutions. In this guide, we will dive deep into personal loans and discuss their benefits, drawbacks, and how to choose the best loan lenders.
But before we start, let’s make sure we’re on the same page with a simple personal loan definition.
What is a personal loan?
A personal loan is a type of loan that consumers can receive from banks, credit unions, or private lenders. Personal loans are typically short-term loans, which means they are meant to be paid back within a few months to a few years.
The interest rates on personal loans can vary depending on the lender, but they are typically lower than the rates on credit cards.
Personal loans can be used for a variety of purposes, including debt consolidation, paying for home repairs or making a major purchase.
When you take out a personal loan, you will need to make monthly payments to the lender until the loan is paid off in full.
If you default on your personal loan, the lender may be able to take legal action against you in order to recoup the money you owe.
Types of personal loans:
Unsecured loans
Unsecured personal loans are loans where the security is not furnished by any property of an individual but instead some other form of consideration given. This collateral could be a lien on real estate, or something else that proves ownership.
The absence of such as guaranteed asset to secure the loan means it is riskier than secured financing, which can usually get more difficult to obtain.
The most common unsecured loans are credit card debt and personal loans from a bank or credit union.
In the case of a unsecured personal loan, the borrower is given a set amount of money that they can borrow and is expected to pay back over time with interest.
These loans usually have a fixed interest rate, meaning that the borrower knows exactly how much they will owe each month. There are also unsecured loans available through online lenders.
Secured loans
Secured loans are intended for borrowers who have steady but limited income or assets. They are also popular with people who need money in a hurry, such as homeowners looking to pay off a property tax bill or college students trying to buy new books before classes start.
Secured loans are typically given by local banks and loan providers like credit unions because they know the borrower and their credit history.
Borrowers who take out a secured loan are usually required to put up some form of collateral, such as a car, home equity, or savings account.
This collateral serves as security in case the borrower cannot make payments on the loan. If this happens, the lender can seize the assets used as collateral to repay the loan.
Secured loans typically have lower interest rates than unsecured loans, because the lender has less risk if the borrower defaults on the loan. They are also easier to obtain, because the lender has more assurance that they will be repaid.
Pros
1. Fixed rates and monthly payments
Personal loans tend to have fixed interest rates, so your payments will remain the same each month. This can make budgeting and financial planning easier.
2. Flexible loan amounts
One of the main benefits of personal loans is their flexibility, You may have access to loan amounts ranging from $1,000 to $100,000 based on your creditworthiness and the lender.
This can give you the financial breathing room you need to cover unexpected expenses or consolidate high-interest debt.
3. Lower starting APRs than credit cards
For consumers with strong credit, personal loans typically have lower APRs than credit cards. This can save you money on interest charges over the life of the loan.
In addition, personal loans often have shorter terms than credit cards, which can also help you save on interest.
4. Get money quickly
A personal loan can be a great way to get the money you need quickly. Depending on the lender, you may be able to get your money within as little as a day.
Cons
1. Increase in debt
One of the risks of taking out a personal loan is that it can add to your overall debt load. If you’re not careful, you could find yourself in a situation where you’re struggling to make your loan payments along with your other monthly expenses. Before taking out a personal loan, be sure to take a close look at your budget and make sure you can handle the additional debt.
How to choose the best personal loan lender?
Approval requirements
Every lender has its own threshold for approving potential borrowers, considering things like your income, credit score, and debt-to-income ratio.
Some lenders may also require collateral, such as a car or home equity. If you don’t meet the minimum requirements for one lender, you may still be approved by another.
Interest rates
The interest rate is one of the most important factors to consider, but it’s also important to look at the fees and terms of the loan. The lowest advertised interest rate is not always the best deal, so be sure to compare your actual quotes before you make a decision.
Repayment options
One of the most important things to consider when taking out a personal loan is how you will repay the debt. A good lender will offer multiple repayment options so you can choose the one that’s most favorable for your situation.
For example, some lenders allow you to make interest-only payments for the first few years, which can lower your monthly payments and give you time to rebuild your credit.
Other lenders may offer a longer repayment period, which can help keep your monthly payments affordable. Ultimately, the best repayment option is the one that allows you to comfortably meet your financial obligations while also making progress on paying off your debt.
Customer service
Good customer service is essential for any business, but it’s especially important if you’re dealing with high-ticket items or services. After all, you want to be sure that you’re able to get help when you need it, and that you’re dealing with a company that values its customers.
When investigating a company’s customer service options, be sure to ask about wait times, accessibility (is there a phone number you can call, or do you have to go through a lengthy online process?), and satisfaction rates. In addition, it’s always helpful to read online reviews to get an idea of what other customers have experienced.
Uses of personal loans
There are many situations in life when it can be helpful to have access to extra funds. For example, if you experience a major unexpected expense, such as a car repair, you may need to take out a personal loan to cover the cost.
Personal loans can also be useful for home renovations or major purchases, such as a new refrigerator or an international trip.
And if you’re planning a large event, such as a wedding or a milestone birthday party, a personal loan can help you to cover the cost of food, entertainment, and overhead expenses.
Whatever your needs, personal loans can provide enough financial flexibility so that you don’t fall short of money anytime.
How much can you borrow with a personal loan?
You can borrow anywhere between $100 to $100,000 with a personal loan. However, depending on your credit score and financial history, you may be able to borrow more or less than that amount.
The maximum amount you can borrow with a personal loan will also vary depending on the lender. Some lenders will offer loans up to $50,000 or $100,000. But be sure to read the terms and conditions of any loan before applying, as there may be other factors that determine how much you can borrow.
Average personal loan interest rates by credit rating
Excellent-credit loans
Excellent-credit loans can be a great way to finance a major purchase or consolidate credit card debt. Because lenders perceive borrowers with excellent credit as being low-risk, they typically offer these loans at very favorable terms, including low interest rates and flexible repayment options. As a result, borrowers with excellent credit can save a significant amount of money over the life of their loan.
In addition, borrowers with excellent credit may also qualify for additional perks, such as loyalty programs and rewards points.
Good-credit loans
To qualify for a good-credit loan, you’ll need a minimum credit score of 690 to 719. With such a high score, you may be able to get an APR as low as 13.5%. Like excellent-credit loans, good-credit loans offer borrowers low-interest rates and flexible repayment terms.
Additionally, many lenders offer borrowers the option to take out a loan amount that’s equal to their annual income. This can be helpful for borrowers who need a large sum of money to finance a major purchase or pay off debt.
Fair-credit loans
Fair-credit loans are personal loans that are offered to borrowers with a fair or average credit score. If you have a credit score that falls between 630 and 689, your credit score is considered average.
While you may not be eligible for the lowest interest rates or the best terms, there are still plenty of options available to you. There are a number of lenders who specialize in fair-credit loans, and many of them offer competitive rates and fees.
In addition, there are a number of online lending platforms that can help you compare rates and fees from multiple lenders. As a result, it is possible to find a fair-credit loan that meets your needs and offers reasonable rates and fees.
Bad-credit loans
Individuals with bad credit often find it difficult to obtain loans from traditional lenders such as banks. However, there are a number of specialized lenders that offer bad-credit loans.
These loans typically come with higher interest rates than conventional loans, but they can still be a helpful option for borrowers who need immediate access to funds. In general, the best interest rates for bad-credit loans are available to borrowers with scores of 630 or higher.
However, even borrowers with scores in the 300-629 range may be able to qualify for rates as low as 28.5 percent. As a result, bad-credit loans can be a useful tool for individuals who need access to financing but have been unable to obtain a loan through traditional means.
Best personal loan lenders for 2022
Best overall: SoFi
SoFi is a personal loan company that offers personal & debt consolidation loans to consumers with good and excellent credit. SoFi borrowers enjoy consumer-friendly features like no origination fees, no-prepayment penalties, and unemployment protection.
SoFi also has an easy online application process, fast approvals, and fast funding. Moreover, SoFi offers autopay discounts and a cosigner release program. You can also pause the loan payments in case of an emergency.
The APR ranges between 6.99%–21.78%. Loan amounts vary from $5000 to $100,000 with term lengths starting from 2 years and allowing a maximum of 7 years. To qualify for the loan, the borrower will need a min credit score of 680 along with a $45000 yearly income. The customer support team at SoFi is available seven days a week to answer any questions borrowers may have.
Best personal loan for favorable repayment terms: LightStream
LightStream offer user-friendly features and loans large enough to cover big expenses like home improvement projects. Plus, the loan terms range from two to seven years for most loans (and up to 12 years for loans for home improvement, swimming pools and solar energy systems), which means you can take longer to pay off your loan and benefit from lower monthly payments.
LightStream allows you to choose when to receive the money, so you can have the cash in hand to start your project as soon as possible.
To apply for a LightStream loan, all you need is a completed application, good credit, and a few other documents.
However, it may ask for several years of credit history along with retirement savings, investments, or other savings to evaluate your creditworthiness.
After your loan is approved, the money could be deposited into your bank account as soon as the next business day.
Best personal loan for people with bad credit: Avant
Avant offers personal loans that can even be used by people with a poor credit scores. Avant is an online lender, meaning their customers can complete the whole loan process without the need for visiting the bank.
Plus, there are no prepayment penalties so you can always pay your loan off early if you’re able to. Even people with credit scores between 600 & 700 can be approved for a loan.
Avant requires borrowers to have a 70% debt-to-income ratio or less, so be sure to factor that into your budget when deciding how much you want to borrow. The loan amounts offered are lesser ($2,000–$35,000) as compared to other lenders.
Avant also offers a wide range of loan amounts, so whether you’re looking for a small personal loan or you need a little more money to cover your costs, they likely have a loan that will work for you. And if you’re not sure whether a personal loan is a right option for you, Avant offers a knowledge base and forum on their website so you are able to choose the best financial plan for your needs.
Closing Thoughts
There are many reasons to take out a personal loan, from consolidating debt to financing a large purchase. But before you apply for a loan, it’s important to understand the risks and benefits involved.
Personal loans can come with high-interest rates and fees, which can add up over time. And if you miss a payment, your credit score could suffer.
On the other hand, personal loans can provide the financial flexibility you need to improve your financial situation.
When used wisely, personal loans can help you reach your financial goals. So if you’re considering taking out a loan, be sure to do your research and compare different lenders to find the best option.