What are Personal Loans?
A personal loan is a flexible type of loan you can use for just about anything at your discretion. Both traditional institutions like banks and online providers offer them, including credit unions and online lenders. Personal loans typically have fixed interest rates, fixed repayment terms, and set monthly payments. Unlike secured loans, like mortgages, personal loans don’t require you to put up collateral, so they’re a popular choice for those who need access to funds.
Credit unions often offer competitive rates and personalized service, while online lenders may provide faster processing times and lower fees.
According to our data, more than half of Americans don’t have enough savings to cover a $1000 expense, so it’s no wonder that approximately the same percentage have taken out a personal loan at some point in their lives.
How Personal Loans Work
Personal loans are a type of installment loan that allows you to borrow a lump sum of money from a lender and repay it over a fixed period, usually with a fixed interest rate. When you apply for a personal loan, you’ll typically need to provide personal and financial information, such as your credit score, income, and debt-to-income ratio. The lender will review this information to determine whether to approve your loan application and at what interest rate.
If approved, the lender will disburse the loan amount into your bank account, and you’ll begin making monthly payments, which will typically include both principal and interest. Personal loans can be unsecured, meaning you don’t need to provide collateral, or secured, which requires collateral such as a car or home. Understanding how personal loans work can help you make informed decisions and manage your finances effectively.
Average Personal Loan Rates
Your credit score largely determines the interest rate on a personal loan. Aside from your annual income, you should also consider the amount you need to borrow. When choosing a loan, comparing rates from different lenders is a good idea, including personal loan lenders such as banks, credit unions, and online lenders. If you’re not getting a desirable rate, try lowering the loan amount. The table below shows the average APR for each credit score based on stats from brands we’ve reviewed on Lendstart.
Understanding Personal Loan Fees
Personal loans often come with fees that can add to the overall cost of the loan. These fees may include origination fees, late payment fees, prepayment penalties, and others. It's essential to read the fine print and understand all the potential costs before committing to a loan. Personal loans can be unsecured, meaning they do not require collateral, affecting interest rates and fees. By being aware of these fees, you can better compare loan offers and choose the one that best fits your financial situation.
Some common fees associated with personal loans include:
- Origination fees: The lender charges these fees to cover the cost of processing the loan. They can range from 1% to 8% of the loan amount.
- Late payment fees: If you miss a payment or make a late payment, you may be charged a fee, which can range from $25 to $50.
- Prepayment fees: Some lenders may charge a fee if you pay off the loan early, which can range from 1% to 5% of the loan amount.
- Credit check fees: Some lenders may charge a fee to check your credit report, which can range from $10 to $30.
It’s essential to review the loan agreement carefully and understand all the fees associated with the loan before signing. Being aware of these fees can help you avoid unexpected costs and manage your loan more effectively.
How to Get a Personal Loan
To get a personal loan, you'll need to follow these steps:
- Check your credit score and report to estimate how much APR you'll need to pay.
- Compare personal loan options from multiple lenders.
- Review each lender's terms and conditions, including interest rates and repayment periods.
- Choose a lender and complete the loan application, including providing information about your income and employment.
- Wait for loan approval and, if approved, receive the funds.
Qualifying for a Personal Loan
To qualify for a personal loan, you’ll typically need to meet certain requirements, which may vary depending on the lender. Some common requirements include:
- Credit score: A good credit score can help you qualify for a personal loan with a lower interest rate. A credit score of 690 or higher is generally considered good.
- Income: You’ll need to have a stable income to qualify for a personal loan. The lender will typically require proof of income, such as pay stubs or tax returns.
- Debt-to-income ratio: The lender will also consider your debt-to-income ratio, which is the percentage of your monthly gross income that goes towards paying debts. A lower debt-to-income ratio can help you qualify for a personal loan.
Improving your credit score, maintaining a stable income, and reducing your debt-to-income ratio can increase your chances of qualifying for a personal loan with favorable terms.
Types of Personal Loans
As a borrower, your credit history, income, and debt-to-income ratio will determine your eligibility and interest rate for your personal loan. If you do decide to take out a personal loan, here are some common uses of personal loans:
- Paying Off Debt
- Credit Card Refinancing
- Wedding
- Vacation
- Medical expenses
- Emergencies
- Home Improvement
- Relocation
- Debt consolidation
Top Personal Loans
Common Uses of Personal Loans
Personal loans can be used for a variety of purposes, including:
- Debt consolidation: You can use a personal loan to consolidate high-interest debt, such as credit card debt, into a single loan with a lower interest rate.
- Home improvement: You can use a personal loan to finance home improvement projects, such as renovating a kitchen or bathroom.
- Emergency expenses: You can use a personal loan to cover unexpected expenses, such as medical bills or car repairs.
- Major purchases: You can use a personal loan to finance major purchases, such as a car or a wedding.
It’s essential to carefully consider the purpose of the loan and whether it’s the best option for your financial situation. Personal loans can provide the funds you need for various expenses, but it’s important to ensure that taking on additional debt aligns with your long-term financial goals.
Should you Take a Personal Loan?
When making a financial decision, it’s important to consider your unique financial situation, life circumstances, and expenses. If you decide that taking on a personal loan is right for you, shop around to get the best APR and loan terms. Personal loans can also be a useful tool to consolidate debt, simplify payments, and potentially reduce interest rates.
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