A personal loan can solve immediate financial problems without having to raid your savings account.
Paying for a wedding, moving costs, home repairs, a medical procedure, and consolidating credit card debt are among the uses of a personal loan from $1,000 to $50,000 or more.
Where to get a personal loan? The options can seem overwhelming. Many banks, credit unions, cash advance companies and other lenders are easily found online. Here are some tips to make finding a personal loan easier.
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Benefits of personal loans
One of the major benefits of a personal loan is that you can use it for anything you want. Want to go on a lavish vacation? Did your car break down and you need some cash for major repairs? A personal loan can help.
Here are some benefits of personal loans:
- Little paperwork. You fill out an application and provide documents to verify your finances.
- No bank needed. Loan can come from online lender, friend or family member.
- Quick approval compared to conventional loans.
- Lower interest rates than credit cards.
- Fixed rate interest for a fixed term with set monthly payments.
A personal loan can be a secured or unsecured loan. If it’s secured, it uses an asset such as a car or house as collateral. If you don’t pay the loan, the collateral can be taken from you.
The Federal Trade Commission recommends being wary of a salesperson trying to talk you into using your home as collateral for a loan you may not be able to pay back. It offers some warning signs of unscrupulous lenders, including telling you to lie about your income or something else on the loan application.
An unsecured personal loan doesn’t require collateral. That makes it a high risk for the lender, who will charge a higher interest rate for that risk. That higher interest rate won’t seem so good to you as a borrower, but at least you won’t lose your car if you default.
Choosing the right type for your use
There are many types of personal loans to choose from. They right loan for you should match your needs and lifestyle. Here are some of common types of personal loans:
- Bank loan
If you have an account with a bank, it may offer you a low interest rate in return for using its other services.
- Credit union
An unsecured personal loan from a credit union can be at a low, fixed rate. Family member or friend. This loan can be informal, though a formal loan agreement can help make it less emotional. You don’t want a friendship to end because you couldn’t repay a personal loan.
- Peer-to-peer lenders such as Lending Club, which has an average interest rate of 14.09 percent.
- Home equity personal loan
This loan is secured by the equity in your home.Home equity line of credit. You borrow money as you need it, secured by your home equity.
- Payday loan
A cash advance on your paycheck that usually charges high interest rates in the triple figures when computed as an annual percentage rate. The Consumer Financial Protection Bureau (CFPB) has proposed a rule requiring payday lenders to make sure borrowers can afford to repay the loans.
How much are the loan rates?
Here’s a comparison of some of the national average loan rates at credit unions and banks as of Sept. 30, 2016, according to SNL Financial, a company that tracks interest rates:
|Unsecured fixed rate loan||36 months: 9.22%||10.12%|
|Home equity loan, 5 years||4.40%||4.96%|
|Used car loan, 48 months||2.79%||5.06%|
|New car loan, 48 months||2.60%||4.55%|
How to apply
Personal loans are easy to apply for. You can walk into a bank or credit union and fill out an application. Or you can fill out an online form for your bank or another online lender.
The lender will check your credit score. The better credit score you have, the better loan rate you’ll get. For example, a “good” credit score of 700 to 749 will help you get a lower loan rate than a “poor” score of 600 to 649.
You may also be required to submit two recent pay stubs, provide employment information and personal references, and have a low debt-to-income ratio. You may also need tax returns, your bank account information, and the title for your car if you’re using it as collateral.
A quick call or check of the lender’s website should tell you before you apply what information it will need to approve your loan.
There are many online lenders for personal loans. Interest rates vary. LightStream has one of the lowest interest rate ranges, from 2.99 percent APR to 14.99 percent with autopay.
Peer-to-peer lending is another option. Prosper, for example, is one such lender. It connects borrowers with individual investors who have access to their credit scores. Loans can be for up to five years, though the longer terms will have higher interest rates.
Even people with poor or very bad credit — a credit score of 560 to 639 — can get a personal loan online. The rates can be high. The payday and title loan lender Check Into Cash can approve a loan in five minutes. Interest rates range from 153% APR to 1,041% on a 14-day loan.
Such high payday loan interest rates can lead to them being debt traps that lead to more borrowing. Within a month, almost 70% of payday loan borrowers take out a second payday loan, according to the CFPB. The average annual interest rate on a payday loan is more than 300%, the CFPB says.
How to compare?
As with any other loan, it can pay to shop around for a personal loan. Ask the lender about these factors before you sign a contract:
Also called a closing fee, origination fees can be deducted from the loan amount. They can be a flat fee or a percentage of the loan. The online lender Pave has a 1% origination fee. The list of personal loan reviews at SuperMoney can filter out lenders that have origination fees.
Compare the annual percentage rate (APR) instead of the interest rate. An APR includes the origination fee and assumes you don’t pay the loan off early.
Paying a loan off early can be a good thing for a borrower to do. Make sure the loan terms don’t include a prepayment penalty. Most lenders don’t charge this fee, but it’s worth asking about.
Some lenders will give you a lower interest rate if you set up automatic withdrawals from your checking account. They’ll get your money quicker than if you sent a check.
But if there isn’t enough money in your checking account to cover an automatic payment when it’s due, the payment could still be made. Your bank might then charge you for an overdraft.
Online lenders and traditional banks aren’t the only places to go for personal loans.
You can also use your car as collateral for a secured loan or something else you own that has a high value.
A loan co-signer is another option, though they’ll have to make the loan payments if you don’t make any.
Credit cards also offer personal loans. These can be at high interest rates, unless, you qualify for a 0 percent introductory interest rate as a new customer. A zero-interest credit card will usually only be that low for six to 12 months, when interest will start to accrue.
But if you can pay the card off before the free introductory period ends, it can be less expensive than a personal loan.
That’s one of the key things to remember when shopping for a personal loan. It will have to be paid back eventually with interest. Any other option that doesn’t require paying interest is a much better one.
Visit SuperMoney’s list of personal loan reviews to compare lenders.