When something comes up in life that requires a chunk of money, personal loans can be a big help. Usually, you can borrow with reasonable terms, pay the amount back over time, and take care of whatever financial need you have. Sounds great, right? Many people think so and are choosing this route when they need funds. In fact, in 2016, personal loan applications were at their highest level since 2008!
So who should you turn to for a loan? Here are our top picks.
Don’t worry, if your credit is considered ‘fair’ or ‘poor’, you still have options. Click here for a list of the best personal loans for bad credit.
How Personal Loans Work
Personal loans work in much the same way as all other loans. First, you will need to find a loan provider to apply with.
You will follow the application process and, depending on your credit score as well as various other risk factors; you will either be approved or rejected. If you are approved, the loan amount offered will depend on your monthly income and current debt.
You will then receive the money and repay the loan amount with added interest over a set term through installments agreed with the loan provider. Other fees, such as loan origination fees, may apply.
What can personal loans be used for?
Personal loans are taken out for a wide range of reasons. You can use them for whatever personal need or want you may have such as to consolidate debt, make a purchase, repair your car or home, pay for a medical emergency, or start a small business.
How much can you borrow?
A wide range of loan amounts are available with some starting around $50 and going up to $150,000 or more. The amount you can get will depend on the lender you choose and your credit.
How much does a personal loan cost?
The cost of a personal loan will vary greatly depending on your credit and the lender you choose, hence why it is so important to choose a good one! Here are the basic costs that are usually involved.
If you have a variable rate loan, the interest will change according to the conditions in financial markets. That means that your installments could either go up or down accordingly. Fixed rate loans often have a slightly higher interest rate applied to them due to the security they provide.
The interest rate you’re offered will depend on your credit. The better your credit, the less interest you will have to pay. Take a look at the credit score evaluations below to find out how your score will be considered.
- Excellent credit (a credit score of 750 – 850)
- Good credit (a credit score of 700 – 749)
- Fair credit (a credit score of 640 – 699)
- Poor credit (a credit score of 560 – 639)
- Deficient (a credit score of 559 or below)
Where can you find personal loans?
There are many lenders to choose from. These include conventional sources like banks and credit unions, finance companies, P2P marketplace lenders, lending brokers, and payday lenders.
Now that you know the basics of how personal loans work, lets take a closer look at the types available.
Types of Personal Loans
Secured vs. Unsecured Loans
To take out a secured loan, you will need some form of collateral. This can take many forms such as jewelry, your home, or a vehicle.
Unsecured loans are not backed by any collateral so the lender must trust you will pay it back. As a result, to take out an unsecured loan, you will need to be sufficiently creditworthy.
Marketplace lending platforms
This loan uses a model based on crowd funding to provide money to applicants. When applying for such a loan, you can expect to provide much more personal information than if you had applied for a more conventional personal loan. You will also need to be fairly patient before you hear if your loan has been approved or not as the process can take longer than other loan types.
A payday loan is a very short-term loan for small amounts but with a high-interest rate attached to it. Here you will borrow a certain amount of money and then pay it back in one installment, usually after payday, hence the name. These are simple to apply for and can be done online in most cases, with approval in a matter of minutes. They should be a last resort due to their high-interest rates and admin costs.
These long-term loans are often offered by banks and credit unions and traditionally have lower interest rates while providing large sums of money. Repayment takes place monthly.
Want to Compare Personal Loan Options?
Understanding how personal loans work is crucial to make sure you get a good deal and can pay it back according to the terms. Be sure to look at the type of loan it is, how it works, the interest rates, fees, loan amount available, loan terms, and benefits.
The loans mentioned above are some of the best out there if you have a good or excellent credit rating, but even if you don’t, you can still find lenders to suit your needs. If you want to compare more loans for all credit scores, by type, amount, features, and more, head over to our personal loans review and comparison page.