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Why get an online loan?
We’ve been reviewing personal loans for seven years, and for our most recent update we looked at 15 of the most popular online lenders to find the best personal loan provider you can find online.
We looked at traditional lenders and peer-to-peer lenders, which have become popular in recent years because they can give you access to loans without going through traditional banks.
We looked for lenders with simple applications that could be processed and approved quickly. These loans are unsecured, meaning they do not require any collateral.
You're not restricted to spending personal loans on specific items, like you would be with a mortgage, car or student loan.
Instead you can use them for whatever you choose to including paying off credit cards and reducing your interest rates, medical debt, home improvements or even to fund new businesses.
Best Overall - Lending Tree
Lending Tree isn’t a lender itself, but by filling out its form, you can receive loan offers from the more than 300 lenders in its network. The online application requires information about where you live and your credit score, income and assets. If you don’t know your credit score, you can find out for free through Lending Tree, which counts as a soft inquiry. Keep in mind, though, when you submit the loan request form, the lenders perform hard credit pulls, which affect your credit score. Typically, all hard pulls made in a 45-day period are consolidated into one.
Lending Tree works with many of the other lenders we reviewed as well as many local banks. However, it can be useful to apply through Lending Tree to compare the offers you receive, rather than apply at each place individually.
One drawback of using Lending Tree is it can’t provide answers to specific questions about the loans. Still, its customer service can answer questions about the Lending Tree process, and the website has many useful tools, including payment calculators and rate estimation tools.
Best For Little or No Credit History - Upstart
Having a low credit score can significantly impact the interest rate you pay – and it can prevent you from being approved for a loan in the first place. One benefit of choosing a newer lender like Upstart is the company is developing new ways of approving loans, including looking at information beyond FICO scores.
Upstart considers your FICO score but also your employment history, your education and your area of study. This means you may need to attach school transcripts and standardized test scores to your application. Upstart is a peer-to-peer lender, so other people invest in your loans, though this has no effect on your approval or funding.
Rates through Upstart vary depending on your financial situation, but they tend to be slightly higher than the other lenders we reviewed. You can get a loan for between $1,000 and $50,000. One of Upstart’s drawbacks is it charges a loan origination fee, which can be quite steep – up to 8 percent of the loan amount.
Lowest Fees - So-Fi
Lenders tend to charge prepayment or origination fees, but So-Fi doesn’t. It is another newer lender that considers nontraditional information when making lending decisions, including career experience. It also offers mortgages and student loan refinancing.
So-Fi loans have either fixed or variable interest rates. Many of the other lenders we reviewed offer only fixed-rate loans. A variable-rate loan can offer some advantages, especially if rates go down. This type of loan may be better if you plan on paying it off in a shorter period – like less than 10 years.
So-Fi tends to have higher standards for loan approval than the other lenders we looked at. These include higher income requirements and a lower debt-to-income ratio. While So-Fi’s proprietary underwriting looks at other factors in addition to FICO scores, it may not be the best option if your credit is bad or if you’re having financial difficulties. It does offer unemployment protection, letting you stop making payments if you lose your job.
One of the benefits So-Fi offers its borrowers that other lenders don’t is the opportunity to get career counseling and attend networking and mentorship events. Business owners who can show they are pursuing new business ideas can also become eligible for a program that defers payments.
Best Peer-to-Peer Lending - Lending Club
Lending Club is the best P2P lender we reviewed. It offers high loan amounts, up to $40,000, and has less stringent eligibility requirements than other lenders – you can get approved for a loan with a credit score of around 600. Loan terms range from 36 to 60 months.
When you apply for a loan through Lending Club, you get multiple options to choose from. As such, you can select the loan with the right combination of rates and terms for your situation. However, Lending Club tends to have high origination fees.
To get a business loan, your business must meet sales requirements and have been active for at least 12 months. This peer-to-peer lender also offers a dedicated advisor.
Best Terms - Prosper
Of the lenders we looked at, Prosper has the best terms on personal loans. Loan terms range from three to five years, and there are no prepayment penalties, so you can pay it off whenever you’re able. To be eligible for a Prosper loan, you need to have a credit score of at least 640, though a higher score increases the likelihood of approval and a lower rate. You also need to have a debt-to-income ratio of around 50. There’s no minimum income requirement.
Rates vary from around 6% to as much as 35%, depending on your credit score and other factors. Prosper charges an origination fee of between 1 percent and 5 percent of the loan cost.
How to Apply for an Online Loan
Applying for a personal loan online in many cases is simple. The initial application process may only take a few minutes. Information varies from lender to lender, but you'll most likely be asked to provide your address, employment status, estimated credit rating, Social Security number and income information.
You may also be asked to provide further supporting documentation such as proof of income and your address. This basic information helps the lender or broker determine whether you are a good candidate for a loan. Your credit will also be verified using the three major credit-reporting agencies. Many lenders run what is called a "soft credit check” that will not negatively affect your credit score.
Many online personal loan services, such as LendingTree, are not actual lenders. LendingTree says it is a marketing lead generator and a duly licensed mortgage broker, not a lender. The company obtains your basic information and then connects you with potential lenders you might acquire a loan from. Your loan will be through the specific lender you ultimately decide to work with, not the online company you initially applied through.
What Can You Use a Personal Loan For?
A personal loan is one of the few types with few to no restrictions on what you can use the funds for. Where mortgages must go toward a house, student loans must cover college expenses, and auto loans go toward a car, personal loans – in most cases – can be used for nearly anything you can think of, be it a personal or a household need. Typically, people use personal loans for things like moving expenses, vacations, medical emergencies, large purchases and to consolidate debt, among other things.
Still, it isn’t unheard of for lenders to set limits on what you can use the money for, even though it isn’t standard practice. A lender may specify that you cannot use your personal loan to pay for a car or to cover business or college expenses. Strict lenders may tack on the condition that, in addition to the former restrictions, you also cannot spend the funds on refinancing other loans or accounts through them. There might even be a list of what you can spend your loan on right on the application.
However, there may be worthwhile trade-offs for getting one of these restrictive personal loans. For example, you may get more money, lower fees and rates, or better customer service. On the other hand, loans with similar restrictions may be more difficult to get – for example, you may need a higher credit score to be approved.
The lesson here is to read all the fine print attached to any online personal loan you are considering. That way, you won’t be blindsided by strict requirements that limit how you can spend the money you borrow.
Factors That Influence Your Loan Rate
As with most loans, your credit rating is scrutinized. Each lender has its own requirements, but you're more likely to obtain a personal loan if you have good credit and a dependable, steady income. If you have not established credit through traditional lines, such as credit cards, a mortgage or auto loans, the lender may consider your payment history with other bills such as utilities or rent.
Interest rates can vary greatly. If you have good credit, you can likely obtain a competitive rate. If your credit is bad or marginal, you can expect to pay a much higher rate, or you may not receive an offer at all.
Lenders may also evaluate your income. Many have minimum income requirements, and these vary from lender to lender, but usually the requirement is a few thousand dollars per month, depending on the loan size and your debt-to-income ratio.
Loan Fees to Consider
The first fee to consider is the actual interest rate. Rates vary greatly. Just a few percentage points in the long run can make a huge difference, so you'll want to shop for the best rate possible.
A second loan expense to consider is origination fees. Not all loan companies charge this fee. The origination fee is taken from the loan balance. For example, if you get a $10,000 loan but the lender charges an origination fee, your initial deposit won’t be the full $10,000 because the origination fee has been taken out.
The last fee is a check-processing fee. Most companies nowadays add an extra charge to process check payments.
Loan Rates for Good Credit
Loan offers, as well as their terms and rates, vary wildly depending on your credit score. If you have a good credit score, which is considered to be any score at or above about 690, you’ll have better loan opportunities available. Additionally, if you have good credit, it’s more likely that your loan will have lower rates, more flexible terms and fewer fees, if any. This is especially true for people whose credit scores are considered to be excellent, which is above 720.
Generally speaking, and of course your mileage may vary depending on your particular situation, if your credit is good, you can expect a typical APR range to be as low as 4-7 percent. You may also be able to achieve a lower rate by signing up for autopay.
Individuals with a good credit score will also have a wider variety of lenders to choose from, be it from one of myriad online sources or from your personal bank or local credit union. If your credit score is good, we recommend taking the time to shop around for the best loan, so that you end up with one that has the best terms and conditions, fewest fees, lowest rates and, ideally, payment flexibility.
Loan Rates for Bad Credit
If your credit is far from excellent, don’t fret: There are likely plenty of loan options available to you. The caveat, however, is that with a bad credit score – that is, any score below about 630 – your loan’s rates are likely to be higher. You’ll find that your options are more limited and that you may also have to deal with higher monthly payments or inflexible terms.
The lenders that offer loans to people with low credit scores typically scrutinize your credit history more intensely than they would for applicants with higher scores. Before signing on to any old loan, we recommend checking out the personal loan options at your local credit union first as they have your best interest at heart and usually have a cap on the interest rate they can charge you.
If you have a really low credit score and think you might not pre-qualify for a loan, your other options are to get a co-signer for your loan, borrow against your home’s equity or ask a relative or friend to take a loan out for you in their name. Payroll advances and borrowing against your 401K or life insurance are also options, but they aren’t something we recommend, as they have steep interest rates and can end up hurting your credit in the long run.
How to Get a Personal Loan
Do your research. Though it’s tempting to grab the first loan you see, taking the time to research your options can pay off – quite literally – in the long run. Before applying for a loan, look at any requirements it may have. Does it require a co-signer or collateral? Does the lender run a soft or hard credit check? Are there better options through your bank or local credit union? Knowing the answers to these questions can help point you in the right direction.
See if you pre-qualify. Many loans give you the ability to see if you are eligible for them before formally applying. The pre-qualification process typically requires you to verify your employment, age, residency and income, and it may involve a credit check. Be sure to check whether the lender will do a soft or hard credit check, so your credit score isn’t unnecessarily impacted.
Shop Around. There are thousands of loan options out there from a variety of lenders. Once you get pre-approved, taking the time to shop around gives you a better chance to find the best deal for your needs. While looking around, it’s important to keep in mind what a lender will get out of you taking out a loan through them. Many lenders are predatory, advertising a great deal while disguising sky-high interest rates and fees or ridiculous terms. Try to avoid loans with variable interest rates that flux over the life of the loan, in favor of fixed rates instead. Your best bet is a loan through your local credit union.
Apply. Before formally applying for a loan, be sure to read any fine print. Here you should be able to see all the fees, rates, terms and conditions attached to the loan. You should also be able to see any hidden fees here, including application fees, establishment fees, origination fees or early repayment fees. If you’re unsure about anything in the fine print, we recommend contacting the lender directly and asking for clarification.
Get approved. This is the easiest step! The lender will inform you that you have been approved and for how much. Note that some lenders may approve you for an amount exceeding what you needed; and though it’s tempting to accept the full amount, doing so can cost you more in the long run with fees and interest.
Receive your funds. Once you’re approved, you’ll receive your money either by direct deposit or physical check. How long it takes to get your money varies by lender. With some lenders, it may take a couple of weeks; with others, you’ll receive the money the same day that you’re approved.
Repayment. You’ll start paying back the loan according to the terms set forth by your lender. In most cases, you’ll have a set monthly payment. If you want to pay off the loan all at once, check beforehand to see if the lender allows you to do so without penalty.
Managing Your Loan
One of the benefits of getting an online personal loan is that it’s easier to manage than one you’d take out in person at a bank or credit union. Once you log on to your lender’s website, you should be able to view all pertinent details for your loan. In most cases, you should be able to view related documents, along with your current balance, next payment amount and due date, payment instructions, a single payment portal and lender contact information.
Good lenders will also provide you with your payment history, automatic payment setup, the ability to view and edit your account information as well as a way to review your loan’s rates, fees, terms and conditions. They’ll also have an intuitive and clearly labeled interface that makes it easy for you to view all of your pertinent information, and they won’t try to hide anything from you in confusing menus or fine print. We also like lenders that provide a mobile app so you can view your loan, its related information and even make a payment, no matter where you are. Good lenders may also include a link where you can view your FICO credit score, allowing you to manage both the loan and your credit while repaying the loan.
Your payment options. Your lender should provide you with at least two ways to make a payment on your loan. The easiest way to make a payment is to set up autopay – the amount due will be deducted from your account automatically each month. This is also the easiest way to ensure you don’t miss a payment, which can negatively impact your credit score and possibly even affect your interest rates or other loan terms. You should also be able to make a manual online payment or call the lender’s customer service number to make a payment over the phone. Depending on the lender, other repayment methods may be available as well, including mailing in a check or cash, or making a payment in-person at a brick-and-mortar branch.
We found that, in addition to offering multiple convenient payment methods, the best lenders also make it easy for you to make a payment. Whether you’re making a payment over the phone or online, they should provide step-by-step instructions for paying your bill every time. This feature is especially handy for those who haven’t made a payment through the lender before. Typically, your physical or online bill will give you instructions and provide a way for you to review extra information online.
Contact information for the lender should also be readily available and clearly listed on the bill or website portal so you can quickly get ahold of them should you have any questions about making a payment or you encounter a problem when trying to make a payment. If you call in, some lenders have an automated interactive voice response system that can help you make your payment without ever having to talk with a representative.
What happens if you default on your loan? It is fairly easy to get a personal loan – the tricky part is making payments regularly and repaying it in full. With a bank account and a decent internet connection, you can easily set up auto payments and not spend another minute worrying about the loan. But what happens if you miss a payment or end up defaulting on the loan?
Depending on factors like your loan terms, your location and the lender, you could be considered in default after missing just one payment, or it could take months of missed payments. Typically, when you default on a loan, you can expect your credit score to take a hit, and the blemish on your credit report could remain there anywhere from three to 10 years. This bad mark could even affect your chances of getting a job or buying a house down the line.
Beyond that, the lender could potentially sue you or place a lien on your assets. If that happens, you can end up on the hook for paying court or attorney fees. In court, the contract you signed with the lender saying you agreed to repay your loan will most likely be held against you. The lender could also send your debt to a collections agency, and you could have your tax refund or wages garnished or even be required to repay your overdue balance in a single, immediate lump sum.
Keep in mind, you still owe a payment even if you don’t receive a bill – mail can get stolen or lost, you may forget to change your address after you move, or the lender may put in fine print that it is a paperless company and will never send you a physical bill. Either way, it is your responsibility to contact the lender over the phone or online if you don’t know when your bill is due. Depending on the lender, you may also be able to change your payment due date.
When to Avoid a Personal Loan
When you’ve got an unexpected expense, or simply need to add some temporary padding to your bank account, it’s tempting to apply for a personal loan advertised online. However, this may not be the best idea for the health of your finances or your credit.
Make sure you’ve looked through all your options and are sure a personal loan won’t negatively impact your financial health. You can even look at low-interest and low-limit credit cards to help you. If you aren’t sure, we’ve compiled a list of three times when it’s unwise to take out a personal loan.
While working on rebuilding your credit. If you’ve committed to work hard on improving your credit, you’ll want to avoid doing anything that will impact it negatively, like taking out a personal loan. Though it may seem like the logical way of paying down a bunch of smaller debts or another similar tactic, it will likely require a hard inquiry on your credit which could hurt it. You’d need to make sure that the benefits of taking a loan here would outweigh the cons.
When saving up for big event purchases without resale value. If you have a large financial event on your horizon, like a vacation or wedding reception, you might be thinking about taking out a personal loan to help cover some of the costs. However, since event purchases like these have no resale value, it’s just more money you’ll owe in the long run and another bill to pay. We recommend saving up in advance for event purchases.
When you aren’t being mindful of your current spending habits. If you aren’t regularly tracking your everyday purchases and credit health – especially if you’re buying lots of costly things on credit that you don’t really need – and are still thinking about taking out a personal loan, we don’t recommend doing so. Rather, we recommend looking over your budget, seeing where you can tighten things up and perhaps even using a low-limit credit card to help you cover this kind of spending.
When to Get a Personal Loan
Above, we listed a few situations where you probably shouldn’t take out a personal loan. Of course, there are also plenty of good reasons to get one. Here are a few examples.
Home improvements. Whether it’s for an emergency, such as a flood, or you want to remodel your kitchen to increase your resale value, a personal loan is a viable option. This is especially true if you lack the equity needed to borrow credit against your home. Both repairs and remodeling can mean a return on your investment in the long run if you ever sell your house, making them a great thing to use a personal loan for.
Paying off medical expenses. Few expenses add up quicker than medical bills, especially if they are for procedures or events you didn’t plan for. A personal loan can be helpful whether you have one small bill or several large ones. It could cover anything from routine trips to the dentist to cosmetic surgery to emergency room hospital bills.
Financing a purchase. Whether you need to finance something for your small business, or you simply want to buy a new boat or car, a personal loan can sometimes be cheaper than dealer financing or taking out a business or auto loan. It can also make a cash transaction run more smoothly. A personal loan for your small business is especially handy in the event you don’t qualify for a small business loan.
Consolidating or reducing debt. Having multiple financial accounts, student loans or high-interest credit cards open with high balances can really take a bite out of your monthly finances and hurt your credit if you start missing payments Taking out a personal loan to reduce your overall owed amount, or to consolidate your debts, is a good way to rein in your finances and improve your credit at the same time.
Financing personal development. Though most people think of college – and, consequently, student loans – as the options you must to turn to for personal development, keep in mind that one size doesn’t always fit all. There are lots of alternative educational resources out there for personal development that student loans won’t cover. Typically, these types of educational opportunities allow you to improve your resume, work toward a promotion or find a better-paying job, giving you a return on the investment you make with this loan.
These opportunities include bootcamps, seminars, conferences and similar events, all of which provide ongoing education that may be required for your job or teach vital networking skills needed within your profession. You might also need to pay for expensive professional certifications to make yourself more marketable.
Other major life events. Sometimes life just happens. Without any warning, you may need to pay for a funeral or relocate across the country for a job. If your savings don’t cover such expenses, a personal loan might be the best option.
Differences Between Online Lenders and Banks
When thinking about getting a loan, it’s worth knowing the difference between types of lenders. Though online lenders and banks both offer a similar product, that’s where the similarities end. From paperwork to loan rates, we recommend reading up on how these two lender types vary so that you can make the smartest decision for your financial needs.
Online lenders. One of the biggest benefits of shopping for a personal loan online is you can easily compare multiple loan options from several lenders at the same time. Additionally, online lenders have less stringent application processes that don’t require as many qualifications. Many don’t even require a hard check on your credit. Online lenders also boast more unsecured options, less paperwork, and quicker approval and funding times, so you can get the money you need fast.
On the other hand, it is easy to get scammed online. With so many loan options at your fingertips, it can quickly become difficult to tell which lenders are trustworthy and which only have their best interests at heart. Once you choose an online lender, you’ll also find that you have limited support options. Whether you have questions about filling out the application or about the loan itself, you’ll only have the communication tools they provide to you. This could be troubling if you don’t understand some of the terminology or their website goes down. Online loans typically also have higher APRs and more fees.
Banks. Getting a loan from a brick-and-mortar bank brings peace of mind. Banks usually offer bigger loans for cheaper, meaning lower APRs and fewer fees. And while online lenders typically only offer unsecured loans, banks usually have secured options as well. Going into a bank to get a loan also means you can get help filling out your application from someone in person. They will also be able to answer more questions and provide helpful support throughout your entire loan process.
The downsides to getting a loan from a bank aren’t many – at least not compared to online lenders. A bank may require more paperwork and have a more rigorous application process. They may pull a hard credit check and ask you to provide more extensive documentation. It usually also takes longer for your loan to get approved and funded through a bank. And you’ll have access to fewer loan options.
Differences aside, what matters most is what you bring to the table. Your qualifications, credit score and history, and total needed loan amount, are all individual factors that help shape the loan offers you quality for. It’s no secret that people with excellent credit scores and a healthy credit history have access to both more loan options and better loan options than those with a poor credit score.
Personal vs. Payday Loans
There are several differences between personal and payday loans. Consumers also may have different purposes in mind when seeking a loan. Credit requirements may vary as well.
These types of loans are usually in the thousands, are repaid over a few years, and take into account your credit rating and history. Consumers seek out personal loans to fund expenses that a traditional loan may not cover. They use personal loans to consolidate debt, including credit card and medical debt; to fund a new business venture or as a small business loan; or to cover home repairs. Some even use loans to fund events such as a wedding or vacation. To the lender, your ability to repay the loan is more important than what you plan to use the loan for.
Personal loans are often unsecured and require no collateral. Loan seekers with marginal credit may be able to obtain this type of loan with the help of a cosigner.
Alternative Personal Loans Through Your Credit Union
If a traditional loan doesn’t seem like the perfect fit, check out the personal loan options available to you through a credit union. You can use these loans for pretty much anything, just as you would with a traditional personal loan. Since credit unions are not-for-profit organizations, you can expect to receive a lower interest rate on your loan than you would elsewhere, even if you have an average or poor credit score. Credit unions are member-owned and designed to focus on the needs of their members rather than profits, which is why they can offer lower rates and fees.
Typically, credit unions can offer you secured and unsecured personal loan options. A secured loan requires you to make a deposit as collateral, which the credit union will use to cover its losses should you default on the loan. This type of loan has lower rates than the secured option and may allow you to earn interest on your deposit. An unsecured loan doesn’t require this and is the more common option. No matter which option you choose, however, credit union loan rates are much more affordable than nearly any other option out there.
Personal Loan Traps to Watch Out For
Whether because of an unexpected emergency or the stress of the upcoming holidays, it’s easy to be tempted by a personal loan when money gets tight. However, rushing through the loan process can lead you to fall victim to the traps that can accompany these types of loans.
Before applying for a personal loan, be sure to research it thoroughly. Though this process can be time-consuming, it can potentially save you a lot of money and stress in the long run. Careful research can get you a loan with lower fees and interest rates, as well as better terms and conditions. We recommend shopping around for a loan, rather than jumping at the first one that looks acceptable, especially at those offered by credit unions.
Once you are approved for a loan, ensure that you only borrow the amount that you need. It’s not uncommon for lenders to approve you for more than you need hoping that you’ll take the higher amount so they can make money off of you via interest and fees.
These loans are usually small, short term and available to those with high-risk or marginal credit. They are called payday loans because, originally, the loan term lasted only till the borrower’s next payday. Consumers turn to these loans to pay for unexpected emergencies or to cover living expenses. They should be a last resort since they come with burdensome fees.
What We Evaluated, What We Found
For our reviews, while we didn't obtain a loan through each service, we did evaluate the application process, customer support and repayment options. Most services provide simple-to-use online applications. We contacted customer support representatives by email and telephone.
For the most part, we had positive experiences with each loan service's customer support staff. Most took their time with us to thoroughly answer our questions, and response times were within an acceptable range. We didn't find too much variance with repayment options except that some loan services charge an additional fee for processing check payments.
Some of the services on our lineup work with multiple lenders, and we can’t review every lender out there. We also could not compare rates and terms. Rates vary greatly depending on your income, credit rating, location, state regulations and more. Your experience will be unique, and we suggest that you carefully consider each service and the terms of the loan before signing.
How Are Personal Loans Funded?
Not all online personal loan services are bank funded. Some are funded by individual investors. Lending Club and Prosper offer investment opportunities to individuals who want to fund loans, portions of loans or loan portfolios. Typically, investors are repaid the amount they loaned plus interest. This is not the same as peer-to-peer lending, but rather, it's an investment for individuals with capital. Prosper investors have funded over $6 billion in loans.
Your Rights as a Consumer
Lenders are legally obligated to provide consumers certain protections. Legal documents are often confusing, and the loan process can be overwhelming. Perhaps you are unsure what questions to ask. Below is a list of your consumer rights and the questions you are entitled to ask. This isn't a complete list. The Federal Trade Commission (FTC) website offers some helpful resources in the consumer information section of its website.
Some of your rights include the following:
- Credit decisions cannot be based on your race, color, gender, national origin or other such identifiers. Credit decisions can, however, be based on your financial status. If you feel you have been unlawfully discriminated against, contact your state attorney general's office.
- You do not have to reveal your marital status if you are applying for a loan in a non-community property state.
- Creditors are not allowed to discriminate if you receive public assistance.
- Within 30 days of applying for a loan, you should receive notification whether you've been accepted or rejected.
You have the right to ask for the following:
- If you are denied your loan request, ask why. There may be information on your credit report you may not be aware of, or there may be incorrect information. You also have the right to obtain a free copy of your credit report.
- Inquire about the total cost of the loan, including interest, fees and other charges. While a low monthly payment may seem attractive, you may discover, on closer analysis, that it is not in your best interests. For example, some lenders charge fees for processing check payments.
- Request clarification on any terms or legal language you do not understand. Do not sign any type of legal agreement if you do not fully understand the terms.
Avoiding Personal Loan Scams
Loan scams are real, and you should be wary of offers that seem too good to be true. The FTC and other consumer-rights groups regularly warn consumers about loan scams. Here's how you can protect yourself:
- Always be suspicious of unsolicited loan offers. If you receive a phone call or mail you didn't request, you should be careful.
- Be wary of lenders that are not interested in your credit history. All legitimate lenders and banks will evaluate your credit history.
- Verify that the lender you are considering is registered in your state.
- Do not send any money to a lender that asks you to make a payment upfront before you've received your loan funds. Legitimate lenders will not ask you to do that.
- If you're using a loan broker, always verify the bank or institution. Do your research. Physical locations, P.O. boxes, etc., should be thoroughly investigated.
- If you have bad credit and are seeking a personal loan, you'll need to be extra cautious. That said, there are numerous legitimate lending agencies available to help those with marginal credit. In addition, each state provides free resources to those desiring to improve their credit. In many states, it is the Consumer Credit Counseling Service that can assist you.
How to Monitor Your Credit
Keeping an eye on your credit is important even when you aren’t actively seeking out a personal loan. Monitoring your credit can help you make smarter financial decisions and potentially even help you get qualified for better loans with better rates and terms.
The better your credit is, the more likely you are to be approved for a personal loan, especially one with good rates and terms. Learning about your credit’s health and history can give you an idea of how likely you are to be approved for a loan, or if it’s even a good time for you to be applying for a loan.
There are many ways to monitor your credit, all of which are easy and cost little to nothing. The Federal Trade Commission states that you are entitled to “one free copy of your credit report every 12 months from each of the three nationwide credit reporting companies.” Additionally, most banks and credit cards provide similar services, or you can use a third-party app like Mint, Credit Karma or Wallethub.
Mint helps you track your spending and provides a credit report and education about credit scores. Apps like Credit Karma can provide you with your credit scores from TransUnion and Equifax, with regular updates. They let you view the factors that affect your credit, such as credit card utilization, open accounts, hard inquiries and payment history. These apps can even recommend credit cards and loans tailored to your credit history and help determine if you pre-qualify for them.
Are Debt Consolidation Loans a Good Idea?
One of the most common reasons for getting a personal loan is to consolidate debt. If your credit card, student loan, medical or other debts are piling up and you’re having trouble making payments or are just making minimum payments, a debt consolidation loan could help you greatly.
When you get a debt consolidation loan, you use the money to pay off your existing debts, leaving you with only one monthly payment. The average APR on credit cards is around 15%, which is about the rate you can get on a debt consolidation loan with the best credit. If you have weaker credit, you could end up paying closer to 36%.
This doesn’t necessarily mean a debt consolidation loan is a bad idea if you have less than optimal credit. Remember, you’re taking different loans with their own interest rates and combining them into one loan, so you still may come out paying less. Also, having poor credit doesn’t mean you’re less likely to get approved – lenders look at other factors like your income and debt levels.
Another benefit of a debt consolidation loan is it isn’t open ended – there’s a set endpoint when you’re expected to pay off the loan, usually between two and five years. However, if your debt problems stem from overspending or other bad financial habits, you need to curb them to avoid getting into the same situation again. Using a personal loan to consolidate debt can help you get out of a bad situation, but it won’t stop the underlying issues. So if you’re struggling with debt because of lost income or other factors, you may need to look at ways to budget or cut spending to avoid falling back into debt.
Should I Get a Co-signer?
If you’re applying for a personal loan and aren’t confident you’ll be approved or worry that a low credit score might leave you with a high rate, getting a co-signer can help. Having a co-signer with a higher income or better credit history improves your likelihood of being approved and can get you a better rate and terms.
When looking for a co-signer for a personal loan, you need to keep a few things in mind. First and foremost, your co-signer is a loan guarantor – they appear on all paperwork, and if you fail to make timely payments, they become liable. This means late payments don’t just affect your credit. They affect your co-signer’s credit too. Failing to make payments on time opens your co-signer to liability and could damage your relationship with that person.
Unlike student loans, most personal loans don’t have a co-signer release period. If you want to relieve your co-signer of their responsibilities later on, you need to refinance the loan to remove them as a co-signer. To do this, you need to improve your personal financial situation to the point where you can get approved solo. This means making on-time payments on all your debts, not just your personal loan. Also, improve your debt-to-income ratio by paying down other debts.
Ultimately, the decision to have a co-signer on your loan depends on their willingness to help you and open themselves to liability. If you have friends or family who are willing to help you out, make sure you stay on top of payments to ensure they aren’t left footing your bills.
Is a Home Equity Loan a Better Option Than a Personal Loan?
A home equity loan or line of credit can be an attractive alternative to a personal loan. If you’ve owned your home for a while and have built up significant equity, you may be able to tap into it and get a better rate than you would on a personal loan. Deciding which type of loan to get depends on several factors, including your equity in your home, how much money you need and your credit score.
Typically, you can take out personal loans in amounts ranging from $10,000 to $100,000. The limit on a home equity loan depends on your home’s value and how much of the existing mortgage you’ve paid off. Most lenders only lend up to 85 percent of your available loan to value, which is the difference between your loan balance and your home’s current value. So the loan amount will be less than your total equity. If you only need a small sum of money, a personal loan may be the better option. However, you could consider a home equity line of credit – it has the flexibility of a credit card and may have better rates than a personal loan.
Another factor that may guide your decision is your credit score. Personal loans tend to have stricter credit requirements than home equity loans – a poor credit score can affect your rate, loan amount or even your approval. Typically, to get the best rate on a personal loan, you need a credit score in the 700s. Home equity lenders’ credit requirements aren’t as strict. Typically, you can get good approved and even secure a good rate if you have a score in the mid-600s.
One drawback of a home equity loan is the application process is longer than that for a personal loan. The process is similar to the one you go through to get a regular mortgage – you need to have your home appraised, and it can take up to a month to get approved.
Can I Use a Personal Loan to Pay for School?
The short answer is yes – you can use a personal loan to cover tuition and other costs associated with higher education. However, there are several reasons this may not be a good choice, especially since rates for both types of loans tend to be comparable if you have good credit.
If you need help paying for school, check with the federal government first. Fill out a FAFSA form to see what aid you’re eligible for. Your credit score isn’t used to determine whether you are eligible for a federal loan, so that isn’t an impediment. In addition, there’s no age limit on a FAFSA, so you can apply for federal aid even if you’re older and considering going to school.
Lenders consider your credit score when you apply for private student loans, and they have higher rates than federal loans. However, they’re available in larger amounts, so a private student loan may be an option if you’ve already taken out $57,500, or $31,000 if someone can claim you as a dependant, from the federal government – the max it allows. To get a good rate on a private student loan, you need a score in the 670 range or better.
It may seem like a good idea to get a personal loan in lieu of a private student loan, but student loans generally have features that make them a better choice. The primary reason to get a student loan to pay for school is you don’t have to make payments until you complete your education, and most have a six-month deferment period. With a personal loan, you need to begin making payments immediately, which can be a problem if you want to focus on your studies and not work while you are in school. Student loans also have a variety of forbearance and deferment options that aren’t available with personal loans.
How to Build Credit & Improve Your Odds of Getting Approved
Your credit score is one of the biggest influences on whether a lender will approve or deny your personal loan application. Often, having just an OK score means that even though you’ll be approved, you’ll have a higher rate than you may like. If you’re thinking of applying for a personal loan, check your credit score first – if it's 660 or below, you may want to try to improve it before applying. Here are some ways to improve your score:
Stay Current: Make sure you pay your bills on time. A history of prompt payments on past debt is a reliable indicator to lenders that you’ll make your payments on future loans on time. Set payment reminders or use auto-pay if you’re confident it won’t result in an overdraft. Don’t stress too much if you’ve missed a payment in the past – credit scores weigh recent late payments heavier that older ones, and anything older than seven years no longer shows up on your report.
Check Your Report for Errors: The credit bureaus aren’t infallible, and you may be surprised to know that errors on credit reports are quite common. You can contest errors and have them removed or work with a credit repair service. Common credit report errors include listing wrong accounts, duplicate accounts, having incorrect personal information or having old information, such as paid-off accounts, still listed.
Pay Off What You Can: Credit utilization – your total credit card balance divided by your total credit limit – plays a big part in calculating your score. One way to increase your score is to reduce your utilization by paying down debt and keeping as low a balance as you can. Lenders look for utilization ratios of 30 percent or less.
Are Peer to Peer Loans Better than Bank Loans?
Peer-to-peer (P2P) loans represent a growing alternative to traditional loans offered by banks or credit unions. These loans allow individual investors to back your loan using the P2P service as an intermediary. According to data from the Mercator Advisory Group, 10 percent of consumers who got a loan in 2018 used a peer-to-peer lender. These loans are even more popular with 18- to 34 year-old borrowers, 23 percent of which used these lenders in 2018.
One of the main appeals of a P2P lender is convenience. The application process is easier; it’s typically done online and there are less stringent requirements. P2P lenders often have their own lending requirements, and some don’t focus as much on traditional metrics like credit scores. This doesn’t mean your credit score doesn’t matter. If you have excellent credit you’ll likely get better terms and rates, but having poor credit doesn’t mean you won’t get approved.
As far as rates are concerned, it's possible to get a low rate from a P2P lender if your credit is excellent and you meet their other thresholds for being a prime borrower. Generally, rates for a personal loan through a P2P lender range from 7% to 39%, while bank rates range from 6% to 36%. Banks can offer lower rates at the high and low end of the spectrum, but there’s a lot of room in the middle where the two types of lenders offer comparable rates.
Banks come out ahead of P2P lenders in the fees they charge. Most lenders will charge an origination fee, which can be between 1% and 6% of the loan amount. P2P lenders tend to occupy the higher end of this spectrum. Some lenders may not charge origination fees but may give you a higher interest rate.