Personal loans are a common way to get money to consolidate credit card debt, start a side business, or finance home improvements. You can use a personal loan to do almost anything. It is relatively easy to make personal loans compared to mortgages or auto loans, and approval is based on credit history and income.
How do personal loans work?
A personal loan is an amount that is loaned to you by a bank, credit union, or online lender. After that, it works by repaying the loan - plus interest charges - in monthly installments over a predetermined period of time. Unlike other loans for a particular type of purchase, such as a home or car loan, personal loans can be used for almost any purpose.
A personal loan is used to:
- Buy a car
- Cover rent and groceries while you're unemployed
- Pay off credit card debt
- Pay for medical bills
- Take a vacation
- Buy a boat
- Get braces for yourself or your child
- Cover other expenses, bills, or purchases
Where can you get a personal loan?
You can get a personal loan through many financial institutions, such as online lenders and traditional lenders (dependent on branches). Here's our updated list of the best personal loans.
Most common loan categories
All personal loans fall into the same general category, and there are some subcategories you should know:
- Personal loans for good credit:Many personal lenders focus specifically on "prime" borrowers -- that is, consumers with strong credit histories.
- Personal loans for bad credit:Some companies have personal loan products designed for borrowers with suboptimal credit.
- Personal loans for debt consolidation:These loans allow you to combine (or "consolidate") multiple debt payments (credit cards, auto loans, etc.) in a simple one-off payment. A debt consolidation loan usually has a lower interest rate as well, which means you're likely to have a lower monthly payment.
- Medical loans:The medical loan is generally used to pay for health care.
- Renovation loans:These types of loans can help finance home improvements, such as installing a swimming pool, restoring a bathroom or kitchen, or finishing a basem*nt.
How does a personal loan impact credit score?
When you apply for the loan, the app will make a difficult investigation into your credit file. This reduces your credit score, but only with a small amount. the effect is less than five points.
The good news is that a personal loan can have a more positive impact on your credit score. If you make loan payments on time, this will improve your payment history - the most important factor in your credit score.
If a personal loan is used to consolidate credit card debts, it will help you score your credit points more. For one thing, premium debt (loan debt) is generally considered more appropriate than renewable debt (credit cards). Plus, your credit card utilization percentages will be much lower percentages after integration (you won't be too close to your credit card cap). This can also provide a big boost to your score.
How to choose a personal loan
Before you shop for a personal loan, there are some things you should be aware of to make the best decision for your financial situation.
Your credit score and monthly income
Read the minimum credit score requirements for each lender to make sure you are eligible before applying. Some lenders also have income requirements.
If the credit score or income is low, look into secured vs. unsecured loans. Most personal loans do not require collateral - known as "unsecured" loans. This means that the lender cannot take your car or home if you cannot pay the loan. But if your balance is weak, you may not qualify for an unsecured loan. In this case, you may have to offer guarantees (such as money in a savings account or CD-ROM) to qualify for a loan.
Details of the loan you want
How much you want to borrow and how long you want to pay it back - the personal loan structure - are two of the most important details you will need to know before choosing a loan.
- Interest rate. This is arguably the most important feature to pay attention to because it is the main determinant of how much your loan will cost over time. You want to secure the lowest possible interest rate. Pay particular attention to annual percentage rates, or APRs, which include the loan interest rate plus the origin fee (if any).
- Loan term.The term of the loan is the term of repayment ofthe loan. You want to repay your loan as quickly as possible to save money on interest. But shorter loan terms also mean larger monthly payments. Of course, you don't want to accept a loan with a monthly payment that you can't afford.
- Loan amount.Personal loans can range from $1000 to $100,000. Take enough to cover what you need, but don't borrow more than you need.
Read more:How to borrow a lot of money
Knowledge of different fees
Some loans charge fees that exceed only the interest rate. Here are a couple you may see:
- Origination fee.Although it's not very popular, some lenders charge a Genesis fee. This is a percentage of the total loan amount. Find loans with little or no upbringing fees.
- Prepayment penalty.A prepayment penaltyis a fee the lender can collect if you repay your loan before the expiration of the loan term. Avoid loans with pre-payment penalties, because it is always better to repay your loan ahead of schedule when you can.
How to get the best rates
The interest rate you pay on your loan can vary based on two factors, including the credit score and the lender. how to make sure you get thebest rates.
Improve your credit score
In general, you will get a low-interest rate if you have anexcellent credit score.
you can still get a personal loan for fair credit. These loans generally charge a higher interest rate, but the interest rate will (usually) still be lower than the credit card interest rate. There are also several ways to build credit fast if you want to try to increase your score and improve your chances of landing a low-interest rate.
Compare multiple lenders
It is not uncommon for a borrower to find loan offers by 8 percentage points or more on the interest rate, even when applying to the best personal lenders. This means that if you apply to a group of lenders, offers with APRs ranging from 8% to 16% will not be unusual. You will never know what interest rates exist unless you apply for many lenders.
Most personal lenders allow you to get pre-approved, which includes checking your interest rates, in just a few minutes. An hour or so of shopping for loans is easy and can save you hundreds (or even thousands) of dollars.
Know how much time you need to repay the loan
It may be tempting to determine the longest loan repayment period to keep your monthly payments low. However, it is wise to consider repaying your loan in the shortest time period you can reasonably afford.
Let's say that you borrow $20,000 to finance home renovation at an interest rate of 8. Repaying the loan over 48 months will result in a monthly payment of $488.26, while the 72-month period will come with a payment of $350.66 - keeping an additional $137.60 in your wallet every month.
However, the longer term will lead to the payment of $5,248 in gross interest, while the 48-month loan will have a total interest charge of $3,436. By choosing to pay more each month, you will save $1,812 in the long run.
Resources
Select the right personal loan for you
- Are personal loans bad?
- Does a personal loan help your credit?
- How to get a loan instead of paying cash
- Balance transfer vs. personal loan
Qualifying for a personal loan
- Credit score requirements
- What credit score do I need for a personal loan?
- What credit score do I need for a car loan?
- When do I get a loan without credit?
- Cosigners, co-borrowers, and collateral: Do you need them?
- Cosigners/Co-borrowers
- What is a cosigner?
- What is a co-borrower?
- Co-Borrower vs. cosigner: What's the difference?
- Collateral
- Getting a personal loan with collateral
- What is a secured loan?
- What is an unsecured loan?
- Secured vs. unsecured loans: What's the difference?
- Cosigners/Co-borrowers
- Income requirements
- Can you get a personal loan if you are not working?
- Can you get a loan without a job?
- Can you get a loan while on disability?
- Other debt:How many personal loans can you get?
Finding the right personal loan
- Deciding on a loan amount
- How much personal loan can I get?
- How to borrow a lot of money
- What's the lowest amount you can borrow ?
- How much car can you afford?
- Comparing interest rates
- How to compare personal loans
- What is a good interest rate for a personal loan?
- What is a fixed interest rate?
- What is an adjustable interest rate?
- Figuring out monthly payments
- Pros and cons of long loan repayment periods
- What is an equated monthly installment? (EMI)
- All about loan fees
- What is an origination fee?
- What is a prepayment penalty?
- What is force-placed insurance?
- Types of lenders
- Can I get a personal loan online?
- What are coronavirus hardship loans?
- What is a credit-builder loan?
- What are no credit check loans?
- What are payday loan alternatives?
- What is a peer-to-peer lender?
- Small business loan vs. personal loan
- Personal loan scams to avoid
Applying for a personal loan
- How to get a personal loan
- How personal loan pre-approval works
- How to negotiate loan fees
- How long does it take to get money from a personal loan?
Paying off a personal loan
- How to pay off a loan faster
- How to refinance a personal loan
- How to get out of payday loan debt
Reasons you can get a loan
- Significant life events
- Getting a loan to move
- Getting a loan to pay medical bills
- Getting a loan to pay a pet's medical bills
- Getting a dental care loan
- Getting a vacation loan
- Getting a loan to pay off credit card
- Getting a loan to buy an engagement ring
- Getting a Wedding Loan
- Getting a divorce loan
- Getting a loan to pay for a funeral
- Purchases
- Guide to financing a purchase
- Boat loans
- Car loans
- RV loans
- Tiny house loans
- Home renovations
- Guide to financing home renovations
- Bathroom remodel loans
- Emergency home repair loans
- Kitchen remodel loans
- Pool loans
- Roof loans
- Solar panel loans
Other resources
- How the president-elect can affect personal loans
- How to stop relying on payday loans
- Quick and easy online loans
- What is debt consolidation?