Qualifying for a personal loan can be just the ticket to get your hands on cash when you need it. This type of loan can be an important tool for consolidating and reducing your expensive credit card debt. When you borrow responsibly with a personal loan, you can improve your financial situation by consolidating debt and getting you through rough patches when money is scarce.
Responsible borrowing is money you spend on important purchases or services, that charges you a fixed rate, that you can afford to pay back, and that carries a moderate interest charge. While many associate personal loans with “scams”, there are a lot of ways to responsibly use a personal loan to lower your payments and actually help you get out of debt.
Access to personal loans depends on your credit score and history, not on collateral such as your home or car. Unlike credit card advances, personal loans charge a fixed rate of interest, removing a source of uncertainty from your budget. Also, a personal loan allows you to borrow larger amounts and possibly pay a lower interest rate as compared to a credit card cash advance.
Best Uses of Personal Loans
A personal loan can be powerful tool when used wisely. Generally, it’s best to avoid personal loans if you plan to use the money for frivolous purchases, because the interest charges can add significantly to overall cost. However, there are certain situations where a personal loan can be just the right answer, including:
- Consolidating your debts, especially high-interest credit card balances. Instead of making endless minimum payments each month to a bunch of credit cards, use the proceeds from a personal loan to pay off the cards. This way, you have one monthly payment that will pay off the loan at a date certain, and there is a good chance you’ll pay a lower interest rate.
- Paying for emergency bills, such as a sudden illness or injury not fully covered by health insurance.
- Planning for budget-busting expenses, such as a wedding, home improvements, a new vehicle or even a world cruise.
- Paying your taxes on time and in full. If you are self-employed, this includes paying your quarterly estimated payments. Better to owe money to a personal loan provider than to Uncle Sam, because the IRS assesses penalties and charges hefty interest. An IRS lien on your salary will hurt your credit rating, restricting your access to credit and increasing your borrowing costs.
What to Look for in a Personal Loan
When you shop for a personal loan, you need to evaluate a number of features in order to determine the best deal. Specifically, you’ll want to compare the following items:
- Annual Percentage Rate (APR): This is rate of interest you’ll pay on the loan, expressed in a standardized way as an annual rate. Use only APRs to compare the amounts you’ll spend on interest, and ignore any other interest rates advertised.
- Fees: Look for a loan provider that charges the smallest fees for items such as loan origination, late payments, payments made by check, prepayment penalties and so forth. Some fees may be buried in the loan agreement’s fine print, so make sure you read and understand all the documentation before signing on the dotted line.
- Loan Limits: If you have a good credit score, you may qualify for the maximum amount offered by a loan provider, which typically is in the neighborhood of $35,000 to $40,000. When your credit score is less than good, loan providers will limit the amount you can borrow – check with each prospective provider, because they have different loan standards.
- Terms: Look for loan terms that fit into your budget. These terms include the size and number of monthly or biweekly payments, as well as loan costs (APR, fees, penalties etc.). Some lenders limit terms to either three or five year loans, others are more flexible.
- Lender’s Coverage Area: A lender might not be permitted to do business in certain states. The lender’s website will ask for your state or ZIP Code to let you know whether you fall within the lender’s coverage area.
- Access to Information: A reputable lender makes it easy to access all the information you need when deciding where to apply for a personal loan. As we mentioned, always read the full loan agreement, just in case the information disclosed on the lender’s website is incomplete. Be wary of lenders who make it difficult to access information – perhaps they have something to hide.
How to Shop for a Personal Loan
There are literally hundreds of potential personal loan providers out there, including banks, credit unions, commercial lending companies and peer-to-peer lenders.
You could exhaust yourself by spending many hours tracking down suitable candidates, but there’s a better way: consult trusted financial websites, such as Credible, which is one of the few websites where you can get offers from multiple vetted loan providers. Credible serves as a central repository of information about competing loan offers, categorized by type of loan (i.e. personal loans, student loans, etc.) and credit score.
The nice thing about Credible is that you can prequalify for a personal loan rate in just a few minutes by entering information about your credit, income and ability to repay. Make sure the website guarantees that the application will not affect your credit score.
Be aware of scams, and stay away from lenders that:
- Require upfront application fees
- Contact you with unsolicited offers
- Guarantee that they’ll approve your loan before you apply
- Employ high pressure sales tactics, such as disparaging competitors or coaxing you to borrow more than you really need
- Refuse to show you the loan agreement
Once you’ve narrowed down your choices, check all the features that we’ve discussed, but also investigate the lender’s reputation. Online reviews, Better Business Bureau accreditation, length of time in business and customer service ratings all provide useful indications about the pros and cons of working with a particular lender.
Five Top Places to Get a Personal Loan Online
There is no doubt about it: Online lenders are disrupting the personal loan business that was once dominated by brick-and-mortar banks and credit unions. That’s a good thing, because it promotes competition and widens the availability of personal loans. Here are five of the top places to get a personal loan online that are listed on Credible, where borrowers’ information will never be shared with lenders until they select an offer:
Avant is an online lender that welcomes low-credit borrowers. It sets no minimum criteria for gross income, credit history or debt-to-income ratio. Avant makes loans ranging from 9.95 percent APR to 36 percent in amounts between $1,000 and $35,000. Loan terms range from two to five years.
Avant is very fee friendly: no origination, prepayment of personal-check processing fees, and the $25 late fee will be refunded if you pay the subsequent three installments on time. Avant allows a borrower to refinance a loan at a lower rate up to two times during the life of the loan. You can ask Avant for a due date adjustment if you are having trouble meeting the current payment schedule. Avant loans are not available in Iowa, Maine, North Dakota, and West Virginia.
Reasons to consider: Avant is a good choice if you have a low credit rating. It is fee friendly, but it’s minimum interest rate is higher than that of many competitors. Avant claims a customer satisfaction rate of 96 percent.
Lending Club is the largest peer-to-peer lender in the industry. It makes personal loans of $1,000 to $40,000 in all states except Iowa. To qualify, you must be a U.S. citizen, permanent resident or holder of a valid long-term visa, have a Social Security number and valid email account, be at least 18 years old and have a bank account.
Lending Club personal loan APRs range from 5.99 percent to 35.96 percent. Normally, loan terms are three or five years, although the highest rated borrows may qualify for special two-year loans. Lending Club is one of the few online lenders that accept joint loan applications.
Reasons to consider: Lending Club is the big daddy of online peer-to-peer lenders. It is extremely well known, offers good information transparency and accepts credit scores down to 600, which is lower than some of its competitors’. Its fees are in line with industry norms.
Pave has cut out a niche as a personal loan provider to Millennials who are looking to improve their lives. It offers borrowers who are enrolled in educational courses to defer the initial three months of payments (although interest accrues during this time).
Avant lends from $3,000 to $25,000 with terms of two or three years and APRs ranging from 6 percent to 26.26 percent. Pave charges an origination fee between 1 percent and 6 percent, a late fee of 5 percent or $15 (whichever is greater), a personal-check processing fee of $2 and no prepayment fee. Pave doesn’t operate in Arizona, Connecticut, District of Columbia, Maine, Massachusetts, Nebraska, New Jersey, Nevada, North Carolina, North Dakota, Oregon, Pennsylvania, Tennessee, Vermont, West Virginia, Wisconsin and Wyoming. Applicants younger than 19 in Alabama or younger than 21 in Mississippi are not eligible for Pave loans.
Reasons to consider: Pave is a good choice if you are young and have a solid future earning potential. Unlike many of its competitors, Pave conducts a phone interview with approved applicants to receive feedback on the lending process.
Prosper is the second largest peer-to-peer lender. It’s known for slightly more accommodative lending standards. Prosper uses its own proprietary scoring system based upon FICO scores, debt-to-income ratio, and other items. Prosper evaluates several additional factors in order to get you the best deal, such as your cash flow, debt repayment history, number of recent credit inquiries and why you want a loan.
Personal loans are available ranging from $2,000 to $35,000 in all states except Iowa, Maine and North Dakota. You must have a bank account and a Social Security number to qualify. Loan terms are three and five years, and there are no prepayment penalties. APRs, which vary over time, are easy to find on the Prosper website. Currently, fixed interest rates range from 5.99 percent to 36 percent.
Reasons to consider: Proper is a major force in the peer-to-peer lending arena, gets good marks for transparency of information, and has slightly more liberal lending criteria.
Upstart is an online personal loan provider that concentrates on upcoming and recent college graduates. Part of its underwriting process includes evaluation of college attended, grade point average and SAT scores, with loans of $1,000 to $50,000 available nation-wide (except for West Virginia), with terms of three or five years. APRs range from 4.66 percent to 29.99 percent, with no minimums for gross income, credit history or debt-to-income ratio (although the ratio averages between 15 and 16 percent).
The origination fees vary from 1 to 6 percent, and there are late fees, but no check-processing or prepayment fees. Payment plans can be altered if a borrower runs into financial trouble, such as a job loss.
Reasons to consider: Upstart makes sense for borrowers just out of school who have thin credit histories. It offers an attractive minimum APR, low fees and a degree of payment flexibility.
Accessing the Best Personal Loans
Personal loans can make sense for a wide swath of borrowers. They are often a better deal than what you can get from a credit card advance, and they certainly beat the dreaded payday loan schemes out there that can ensnare you in endless cycles of debt. Check Credible to find the best personal loan providers and to pre-qualify for an interest rate in just a couple of minutes.
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