Situations that call for a significant amount of extra cash, whether it's an unexpected medical expense or a home renovation, can be funded by getting a loan. Ranging between $1,000 and $35,000, a personal loan can be acquired quickly and from a variety of financial institutions, including credit unions, traditional banks, and online lenders such as LendingTree, for qualified borrowers.
Credit is Key to Personal Loan Options
Before you apply for getting a loan, check your credit score, as it will determine whether you qualify for a loan and, if you do, what interest rate and terms you will receive. If you have bad credit, you still can get a personal loan, but you likely will receive a higher interest rate and will qualify for a smaller amount.
Applicants with average to excellent credit, which translates into scores ranging from 630 to 800, could be qualified for a personal loan at many lending institutions, including national banks. Those with less-than-stellar credit, or scores below 629, may need to approach more forgiving institutions, such as credit unions and online lenders who have more flexible lending standards.
Where to Apply for Personal Loans
Research is key before applying for a personal loan, as applicants will want to apply to lenders they are confident will approve their loans. If you already use a bank that is familiar with your financial situation, you can talk to a loan officer there about whether your credit score is high enough to successfully apply for a personal loan.
Otherwise, it can beneficial to start with local lenders, such as credit unions or local banks. Some online services, such as LendingTree, offer free credit checks and walk applicants step-by-step through an online personal loan application. Applicants should exercise some caution when using online lenders, however, because some are simply advance-fee loan scams. Watch out for online lenders that promise personal loans to applicants with bad credit and state that they don't require credit checks, as they likely are frauds.
You can research an online lender by getting in touch with your state's attorney general's office or department of banking or financial regulation, which can tell you whether the lender is registered to do business in your state. The Better Business Bureau also should have a record of any complaints filed against a lender.
How to Compare Loan Options
When you apply for a personal loan, you will receive repayment options determined by the length of the loan. Because personal loans typically have high interest rates, it's always financially beneficial to take a shorter-term loan so that you can repay it quickly with minimal interest.
However, monthly payments on a short-loan may not work with your budget. In that case, determine the most that you can pay toward a personal loan every month and look for loan terms that match your budget. LendingTree's loan calculator will show possible monthly payments and amortize the loan to help you compare options.
When Should You Take Out a Personal Loan?
While getting a personal loan can supply you with a quick infusion of cash, it's not always the best financial option. The reasons for taking out a personal loan can vary widely, ranging from paying for a wedding to financing a big vacation, to consolidating debts into one payment.
To determine whether getting a personal loan is the best financial option for you, think through whether you are using the loan to pay for a need or a want. If you are underwater with monthly debt payments, a personal loan can simplify your debt by consolidating all of your loans into one that requires a single – and often lower – monthly payment. Debt consolidation can give some breathing room while you get your personal finances under control.
Other situations may be less clear. Is a vacation worth going into personal debt, or can you save the money first before taking the trip? On the other hand, a personal loan can help you manage the financial side of an unexpected medical emergency that you can't afford. Either way, personal loans can require you to pay large sums of interest, so consider carefully whether they are the best financial choice in your situation.
Alternatives to Personal Loans
Getting a personal loan is not the only option for situations that require a lot of money. The best alternative is to pay for weddings, vacations, home renovations, and other expenses by saving money and paying cash, which eliminates costly interest charges. You also can consider tapping into your home equity with a home equity loan or line of credit to pay for home improvements or additions.
In some cases, you may want to consider whether you truly need the expense you'd pay for with a personal loan. Can you scale back a big wedding and pay for it with savings instead? Can your child get a part-time job in college and reduce the size of the personal loan you're considering to pay for tuition?
What to Do If You Don't Qualify for a Personal Loan
If you are turned down for a personal loan, there are steps you can take to improve your financial situation. Most importantly, focus on improving your credit score so that you can qualify in the future. Start by making sure to pay all bills on time and look for ways to make extra payments on existing loans. As you pay down loans and develop a history of responsible repayment, you'll become a more qualified candidate for a personal loan.
In dire situations, you may have other options. Family or friends may be willing to make short-term loans or gifts to help you out, and if you owe money to a hospital or other lender, you could try negotiating better repayment terms.
As you consider whether a personal loan is the best choice for you, think through your long-term financial plan. While getting a personal loan could help you through a tough time or help you pay for a big-ticket item, be sure to first determine whether it's the wisest financial tool to help you meet your goals.