Personal loan buyers guide
What is a personal loan?
A personal loan is a type of consumer loan. Personal loans are also sometimes called installment loans because you get a lump sum of money upfront and pay it back in regular installments over a predetermined period. Repayment terms can be anywhere from a few months to over five years.
What can I use a personal loan for?
Personal loans can be used for a wide range of purchases. You can also use them to pay down or consolidate others debts. Some lenders restrict personal loan usage — e.g., you might not be able to use them for college tuition or a mortgage down payment.
Where to get a personal loan
You can get a personal loan from a bank, credit union, online lender or other financial institution. Some lenders only work with borrowers if they have a good credit score. Others have more flexible requirements but charge higher interest rates. The added costs mean you end up paying more over time.
Personal loan interest rates
Interest rates on personal loans vary widely depending on your credit score, income, debt-to-income (DTI) ratio and the lender’s terms. Generally, personal loan rates range from around 8% to 36%. When it comes to interest rates, lower is better. The lowest rates lenders advertise are for the ideal borrower — one with excellent credit, high income and low debt. A good interest rate will be one near a lender’s advertised rate.
How to get a better interest rate
If you’re unhappy with the rate you were given, you can improve your credit by paying off existing debt, reducing your credit utilization and making timely payments. These steps may help you qualify for a better rate in the future.
You can also improve your chances of securing a lower interest rate by shopping around and comparing offers from multiple lenders. Some lenders may offer better rates if you apply with a co-signer who has stronger credit or if you opt for a shorter loan term. Additionally, some banks and credit unions may give discounts to existing customers or those who set up automatic payments. Taking the time to explore these options can help you lock in a more favorable rate and save money over the life of your loan.
How to find the best personal loan
Before you apply for a personal loan, check your credit score. The better your score is, the more likely you are to qualify for a lower rate. It might save you money to fix your credit before taking out a personal loan, though this is not a fast process.
Once you know your score, shop around and compare loan offers for your credit range. Here are five tips for comparing different lenders to help you get the best rate and terms.
1. Research the lender
Remember that if an offer sounds too good to be true, it likely is. Before you apply for a loan, make sure the company is legitimate by verifying that it’s licensed in your state and reviewing its rate and fee disclosure. You’ll also want to find out if the lender allows you to check your rate with a soft or hard credit check.
“Lenders who cannot explain all the loan details, upfront fees, rates, etc., will likely have hidden excessive fees,” said Fred Winchar, president of Max Cash. He also recommends avoiding lenders that promise guaranteed approvals or rush you through the loan process.
Typically, origination fees range between 2% and 6% on a personal loan, but some companies charge up to 10%. A handful of lenders, however, waive origination, closing and prepayment fees entirely. We suggest avoiding lenders that charge prepayment fees that make it difficult to pay off your loan early.
2. Read recent reviews
Reading different lender reviews will give you a sense of what to expect from different lenders. Keep an eye out for multiple reviews that mention high-pressure sales tactics and unexpected charges or fees.
Keep in mind that you will also likely find negative reviews by people who are simply annoyed that they were denied. This information may not be relevant to you.
3. Compare loan offers
The rate you get depends on how the lender evaluates your creditworthiness. That’s why applicants with bad credit rarely get the lowest rate advertised.
“As you decide [your loan term], leave a little room for other unexpected expenses that could set you financially off balance,” said Winchar.
Generally, the interest rate on your loan depends on your:
- Credit history and score
- DTI ratio
- Income and employment information
- Lender
- Size of the loan
- Length of repayment term
You want to consider the total cost of the loan; to do that, look at the APR, which includes fees. Also, check the options for term lengths and the monthly payment amount to make sure it fits in your budget.
4. Apply for the loan
You can apply for a personal loan at your local financial institution or through an online lender; most lenders have online loan applications to make the process faster. The application will ask you questions about yourself, your finances and what you plan to do with the loan. Have these documents ready when you apply:
- Government-issued ID
- Social Security number
- Income verification (pay stubs, W-2s or bank statements)
- Proof of residence (utility bill, rental agreement, mortgage statement)
- Bank account information (routing number, account number)
- Creditor information (for debt consolidation)
Once you submit your application, expect a hard pull on your credit, which can temporarily decrease your credit score. Once your application is approved, you will have a chance to view and approve your rate and repayment terms.
What to do before taking out a personal loan
Before taking out a personal loan, consider the following steps:
- Assess your financial situation: Ensure you truly need a loan and that it aligns with your financial goals. Check your credit score and review your debt-to-income ratio.
- Improve your credit score: A better score can lead to lower interest rates and better terms.
- Compare multiple lenders: Shop around for the best rates and terms available for your credit profile.
- Understand the total cost: Look at APRs and fees to determine the overall expense of the loan.
- Create a repayment plan: Make sure you can afford the monthly payments and have a plan to pay off the debt responsibly.
What to do if you’re denied a personal loan
Here are steps you can take to improve your chances of approval in the future:
- Understand why you were denied. Common reasons include a low credit score, high debt-to-income (DTI) ratio or insufficient income.
- Improve your credit score. Review your credit report, pay down debt and make consistent, on-time payments.
- Reduce your debt-to-income ratio. Focus on paying off high-interest debts to reduce your monthly obligations and avoid taking on new debt.
- Consider a co-signer. This can improve your chances of approval and may help you secure a better interest rate.
- Explore alternative lenders. Some lenders specialize in working with borrowers who have less-than-perfect credit.
- Wait and reapply later. Use the time to strengthen your financial profile. Reapply once your credit score, income or DTI has improved.