Best Ways to Get a Personal Loan
When you’re getting married, facing huge medical bills or trying to consolidate your debt, you may turn to your financial institution for a personal loan. When you get a personal loan, you will get a big chunk of money upfront, and then spend a set amount of years paying it back with interest. The time frame for repayment usually falls between two and seven years.
Unsecured personal loans do not require you to put up any collateral. The amount you can borrow is typically between $1,000 and $35,000, but some lenders may allow you to borrow as little as $500 and much more than $35,000. Getting a personal loan is as easy as applying with your bank or credit union, though comparing lenders online is recommended to ensure you get the best terms and interest rates.
Difference between a personal loan and payday loan
Personal loans and payday loans are sometimes mistaken for the same product, but they couldn’t be more different.
Payday loans are extremely short term and are usually for amounts under $500. Typically, the lender expects you to pay the money back when you receive your next paycheck. You won’t find these loans at traditional banks. In fact, according to a Milken Institute study, you’ll usually find them at businesses in areas with a lack of traditional financial institutions.
Payday loans also carry extremely high interest rates. While advertised rates may be in the double digits, when you calculate that interest rate out over the course of a year, a typical payday loan has an annual percentage rate of nearly 400% according to the Consumer Financial Protection Bureau (CFPB).
Most payday lenders now have to certify that you can reasonably afford to pay back your loan thanks to new regulations the CFPB put into effect in October 2017, but some lenders are exempt from this requirement.
In contrast, when you get a personal loan, you will have to prove that you can repay the loan by providing your Social Security number and agreeing to a credit check. You will also have to provide income information.
Your interest rate, though, is going to be dramatically lower when compared to payday loans. Currently, you can get rates from 3.24% APR to 35.99% APR depending on your income and credit history. Because of lower interest rates and longer timeframes, personal loans are a much better financial choice. Even if you don’t have a traditional financial institution in your neighborhood, you can go through the application process to get a personal loan online.
Where to get a personal loan
As you shop around for a personal loan, you’ll find that you have lots of options. Each one has its pros and cons.
Getting a personal loan from a bank
Getting a loan from a national bank is likely the first method that pops into your head. This is a good option for those that like paying their loan in person — especially if you plan on moving during the term of your loan. Large banks have traditionally had the easiest access to in-person branches across different regions, though it is worth noting that credit unions now provide a similar perk.
Getting a personal loan from a credit union
Credit unions are now more widely accessible than they used to be. This is because many credit unions join shared branching networks, the largest of which is CO-OP, which allow you to pay your loan in credit unions across the country.
Credit unions also generally have lower interest rates and fees, potentially making their personal loans more affordable than those of large, national banks.
Getting a personal loan from an online lender
Online lenders offer another option for 21st century borrowers. If paying in person is not important to you, online lenders offer competitive — and sometimes lower — rates.
Online lenders also have offered innovative products in recent years. These products provide different benefits and qualification criteria. For example, a SoFi personal loan comes with unemployment protection. This allows you to defer payments for up to three months at a time should you lose your job through no fault of your own.
SoFi also provides job search assistance. Because SoFi looks at your education, cash flow and employment history in addition to your FICO score, this type of loan is easier to obtain if you don’t have a lot of data reported through your credit history.
To get benefits like these from SoFi and other like lenders, you generally can’t have any black marks on your credit report such as missed payments or collection items. You also generally have to earn a higher-than-average income.
Getting a personal loan from peer-to-peer lenders
Peer-to-peer lenders offer loans backed by individual or corporate investors. You may have an easier time qualifying for a loan using peer-to-peer lenders, though if you’re struggling to get approved by banks, credit unions or online lenders, the loan you get from a peer-to-peer lender is likely to come with a higher interest rate — upwards of 36%.
Those with a better credit history are more likely to get better interest rate offers. The lowest rates offered by peer-to-peer lenders may be competitive with online lenders.
How to get a personal loan
The process for getting a personal loan is fairly simple and standard across most lenders. Here’s what you need to know before you apply.
Check your credit score
Financial institutions will only give you a personal loan if you meet their minimum credit standards. In most cases, that means having a credit score of 500 or above. If you have a credit card, most financial institutions now provide you with access to your credit score as a free perk. If you don’t have a credit card or lack access to this feature, you can check yours for free on LendingTree.
Check your credit report
You have a right to access your credit report for free from each of the three major credit reporting bureaus — TransUnion, Experian and Equifax — once every 12 months. The information you find inside your credit report determines your credit score, so it is extremely important to make sure the contents are accurate.
To check your credit report, go to AnnualCreditReport.com, which is the only free credit report site authorized by the federal government. If you find inaccurate information on your credit report, take action to correct it.
If you think you are a victim of identity theft, visit the FTC’s identity theft reporting webpage, where you will also be given a recovery plan.
If you think the inaccuracy is due to a clerical error, such as your mortgage showing up twice, making it look like you have double the debt, get in touch with the credit bureaus directly to file a dispute. You will also want to get in touch with the individual business. In this example, that would be the financial institution that holds your mortgage.
If you’re unhappy with your credit score and none of the above apply, there are some steps you can take to improve it. According to credit scoring giant FICO, the top two things you can do to improve your credit after checking your report are to make sure you’re making on-time payments and reduce the amount of debt you owe, particularly the percentage you’re using of your available revolving credit (like credit cards). You may not see results immediately, but if you consistently practice these two tenants while avoiding missteps, you are likely to see your score go up over time.
Before applying for a loan, it’s smart to get prequalified for loan offers, based on your credit profile, which you can do on LendingTree. First, you’ll select the reason you need a personal loan. This could be:
- Debt consolidation
- Credit card consolidation
- Home improvement
- Home buying
- Green energy loans
- Auto financing
- Other major purchases
Then, you’ll need to enter how much money you need to borrow — generally anywhere from $1,000 to $35,000. From there, you’ll be asked about your credit score, employment status, pre-tax income, housing situation and address.
After entering all of your information, you may be shown loan offers you are prequalified for. You’ll be able to compare rates and terms at this point.
Remember that you’ll still have to furnish supporting documentation for final loan approval. For example, you’ll need proof of income and employment, Social Security number and proof of residence.
If you’re denied, either during the prequalification process or after submitting your final application, it’s likely because your credit score isn’t high enough, you have too much debt or you don’t have enough income to reasonably expect to pay back the loan.
The fine print
As with any financial product, you need to understand the fine print before you sign a contract. Be sure to look out for these common fees and gotchas before getting a personal loan:
- Origination fees. This fee, which typically ranges from 1%-8%, is applied just for taking out the loan. Some lenders do not charge origination fees.
- Fixed vs. variable interest rates. Variable interest rates (which are uncommon for personal loans) generally start out lower than fixed rates, but variable rates change based on the market. That means your interest rate could potentially increase over the course of your loan. Fixed-rate loans are predictable.
- Prepayment penalties. Some loans will charge you a fee if you pay off your loan early.
- Costs of insurance. Evaluate any insurance offers carefully. Unemployment insurance can be useful for a personal loan, but it depends on its cost. Do the math before signing on. Life insurance tagged onto your personal loan doesn’t make much sense as your family will only be held responsible for your debt as far as your estate can pay for it. If you want them to have money to pay your debt, look at life insurance policies that aren’t attached to your personal loan. You’re likely to get a better premium offer.
- Precomputed interest. Precomputed interest frontloads your interest. This means that if you pay off your loan early, you’ll end up paying a higher effective interest rate than the one you see in your paperwork.
Other financing options
Chris Haviaris, a certified public accountant (CPA), certified financial planner (CFP) and owner of TTR Wealth Partners, LLC, notes that personal loans are not the right solution for everyone.
“The biggest thing about personal loans is that they generally have higher interest rates than many other sources of funding out there,” she says. “If it’s the only source you have access to and you absolutely need the funding, personal loans sometimes have better rates than credit cards, but a collateralized loan (such as a HELOC) is usually better.”
Be sure to compare and contrast the pros and cons of each funding option before you take out a financial product. Here are some of the basics to get you started:
Type of financing
Advantages over personal loans
Disadvantages compared to personal loans
- You can borrow smaller amounts of money.
- You won’t have to pay interest if you pay your balance off in full at the end of your billing cycle.
- You could potentially earn rewards points on your purchases, depending on the credit card.
- Interest rates are typically higher, potentially much higher.
- Payment amounts are less consistent.
- Rewards points could tempt you into a cycle of debt that’s hard to escape.
Credit cards with 0 percent APR introductory balance transfer offers
- You can refinance your debt at 0 percent APR for a fixed amount of time, as long as you meet minimum monthly payments.
- If you miss a payment or fail to pay off the entire debt by the time the 0 percent APR offer expires, you could end up paying higher interest rates than on a personal loan.
Home equity lines of credit (HELOCs)
- Interest rates are typically lower than personal loans.
- You could potentially borrow more money, depending on how much equity you have in your home.
- Credit is accessible whenever you need it.
- Unsecured personal loans don’t have collateral. If you default on a HELOC, you could lose your home.
- Payments may be less predictable if you’re not paying off your debt in full every month.
Borrowing from family or friends
- Your credit score doesn’t matter.
- Depending on your agreement, you may not have to pay interest.
- If you fail to repay, it could damage your relationship.
- Your friend or family member may feel entitled to influence how you manage your finances.
Responsibly managing your personal loan
Taking out a personal loan may solve your immediate money woes, but you have to handle that debt responsibly. A loan won’t end your money problems, Haviaris says. In fact, it could end up perpetuating a negative cycle.
“One con when you’re consolidating debt is that it doesn’t address the underlying issues,” she says. “Perpetuation of the debt cycle happens when people don’t understand why and how they’re using debt.”
For example, she says that the real answer to getting out of debt or financing a big goal may be accepting the fact that your income doesn’t sustain your current lifestyle. Alternatively, it may be that you need more financial education, or that you lack financial self-control when it comes to making purchases large or small.
If, after you’ve faced these hard realities, you decide that a personal loan is still the right path for you, be sure to handle your debt responsibly. Make on-time payments. Make a plan for paying down your debt and stick to it. Don’t take on additional debt that could drain your resources to a point where your monthly payments are no longer sustainable.