The Ultimate Guide to Shop for Personal Loans in 2020
If you’ve lost your job while the COVID-19 pandemic ravages the world, you may want to consider a personal loan.
A personal loan can be a smart way to consolidate debt and lower the interest rate you pay, allowing you to pay off credit card debt faster.
Personal loans can be used for a variety of reasons. They can be used to pay for a wedding, home repairs, hospital bills, and moving costs, among other things. A loan can even be used to fund a vacation.
But paying off credit card debt with high interest rates may be the best reason to get a personal loan. Instead of paying interest of 18-24% on credit cards, a personal loan could drop your APR to 6% and allow you to pay off the loan faster.
- How Much Can I Borrow?
- What Are My Interest Rates?
- How Do Rates Vary By Credit Score?
- Will I Have To Put Up Collateral?
- How Long Are The Loan Terms?
- What Is The Best Way To Use a Personal Loan?
- When Is a Personal Loan a Bad Idea?
- Are There Other Options To a Personal Loan?
- What About a Payday Loan?
- Where Can I Get a Personal Loan?
- How Do I Know If I Can Afford a Personal Loan?
- What Fees Should I Expect?
- How Do I Apply?
- How Do I Shop For a Personal Loan?
- What Are Lenders Looking For?
- Do I Need a Co-Signer?
Here are some common questions and answers about personal loans:
How Much Can I Borrow?
Personal loans range from $1,000 to $100,000. Your creditworthiness and need will determine how much you are eligible to borrow. Each bank will have different criteria.
What Are My Interest Rates?
As of May 2020, interest rates for personal loans range from 5% to 36%, according to Bankrate. The average personal loan rate was 11.14% as of April 29, 2020.
Rates are based on factors such as credit score, annual income and debt ratios.
How Do Rates Vary By Credit Score?
The higher your credit score, the more likely you are to qualify for a personal loan with a low interest rate. Here are general guidelines for credit scores needed to get personal loans at specific interest rates:
- “Very Good” credit scores range from 720-850: 10.3-12.5% interest rate
- “Good” scores range from 690-719: 13.5-15.5% interest rate
- “Fair” scores range from 630-689: 17.8-19.9% interest rate
- “Poor” scores range from 300-629: 28.5-32% interest rate
Will I Have To Put Up Collateral?
Most personal loans are unsecured. This means that no collateral such as a car or home is needed to back the loan. You may need a loan co-signer if your credit score isn’t high enough to qualify on your own.
How Long Are The Loan Terms?
Personal loan terms vary by lender, but can generally last from two to five years. Some allow seven years for repayment, and some offer personal loans for as little as one year.
The longer the loan period, the lower your monthly payments will be. But you’ll also pay more in interest over a longer loan term. A higher monthly payment over a shorter period will save you money on interest.
What Is The Best Way To Use a Personal Loan?
Paying your bills may be your highest priority for getting a personal loan, especially if you’ve just lost your job. Borrowing money to pay daily bills, however, will likely only put you further into debt and could leave you unable to repay the loan.
Lenders are unlikely to approve a personal loan to pay daily bills. And not having a steady job will make approval more unlikely.
To save you the most money, a personal loan is best used to consolidate high credit card debt into one payment that’s low and can be repaid faster.
Emergency loans can be another good reason to get a personal loan. An unexpected car repair or hospital bill can deplete your savings, if you have any, and a small personal loan that you can pay off in a few months could help.
When Is a Personal Loan a Bad Idea?
Unnecessary expenses or purchases that can be put off should not be paid for with a personal loan. These include vacations, weddings, engagement rings and anything close to frivolous. Paying interest on a loan so you can take a vacation, get married or invest in the stock market isn’t a way to save money.
All of those could create more debt. However, eliminating high credit card with a personal loan is a prudent way to lower your overall debt. And that makes a lot more sense than going into more debt by taking out a personal loan to pay for something you don’t immediately need.
Are There Other Options To a Personal Loan?
There are cheaper options than personal loans for some expenses. Home equity loans are often used for home repairs, or you could refinance your mortgage to save some money on your monthly house payment and put that savings to work elsewhere. Either of those loans could be cheaper than the APR on a personal loan.
If you have good credit, you may qualify for a 0% APR credit card. The introductory offer is usually for one year, giving you time to pay off the debt without paying any interest for a year.
If you want to buy a car or home, a secured loan will likely have a lower interest rate than a personal loan.
What About a Payday Loan?
If you’re looking for a short-term loan of only a few hundred dollars, a payday loan is an option. But it can be an expensive option if you don’t repay it on time. You’ll likely be better off if you can qualify for a personal loan, which often start at $1,000.
Payday loans are often predatory, and the federal government recommends first learning about their costs and fees before using them. A fee of $15 per $100 borrowed is common, equating to an annual percentage rate of almost 400% for a two-week loan.
Paying $15 per $100 borrowed means paying back $345 on a loan of $300 until your next payday. That only adds up if you rollover the loan because you can’t pay it in two weeks. The renewal or rollover fee could be $45, adding up to $90 in fees for borrowing $300 for only four weeks.
Where Can I Get a Personal Loan?
Banks, credit unions, online lenders and peer-to-peer lenders are the main places to get personal loans.
We've identified some of the top lenders you can get a personal loan from below:
How Do I Know If I Can Afford a Personal Loan?
A lender will tell you what your monthly payments are for the amount of money you’re borrowing. Your interest rate will be determined by your credit score, income and other factors.
Personal loans are set for a specific amount of time, so the monthly payment will remain the same. It won’t fluctuate like credit card bills can if you don’t pay the balance in full each month.
Once you know how much the monthly payment is, look at your household budget to see if you can afford it. If you’re already having problems making minimum payments on your credit cards, then getting another loan may not be worthwhile.
However, if you can borrow enough money through a personal loan to pay off your high-interest credit cards and your new monthly payment is lower, then a personal loan can make sense.
What Fees Should I Expect?
Late fees are the most common fees for personal loans. Autopay can help you avoid missing a payment, which will lower your credit score.
If there isn’t enough money in your checking account to make an automatic payment, the lender may charge a fee for returned payments.
Most lenders charge an origination fee of 1-6% of the loan amount. Having a high credit score can lower this fee, which is basically an administrative fee the lender charges. A 3% origination fee on a $25,000 loan is $750.
Another fee to look out for is a prepayment penalty. Some lenders require paying a fee if you pay the loan off early, so ask if a prepayment fee is charged.
How Do I Apply?
Start by figuring out how much you can afford to pay each month. A longer loan term can make a monthly payment more affordable, though you’ll be paying more interest.
Next, compare lenders to see what preapproved interest rates you qualify for. You’ll have to give lenders some personal information, along with the amount you want to borrow and why.
They’ll run a soft credit check, which won’t affect your credit score. You’ll then be told what rates they can offer, and be given the option to formally apply for the loan.
Loan applications should be available online to fill out.
How Do I Shop For a Personal Loan?
You should shop for a personal loan just as you would for any other loan. Here are some factors to consider when shopping so that you’re comparing apples to apples when they offer you terms:
- Loan amount
- Interest rate
- Length of loan
Read the J.D. Power 2019 U.S. Personal Loan Satisfaction Study to see where the loan providers you’re considering rank in customer satisfaction ratings.
What Are Lenders Looking For?
Simply, they’re looking to see if you can afford the loan. The higher risk you profile you have, like having a low credit score, the more interest you're going to pay.
A good credit score and a long credit history are just part of the minimum requirements to get approved for a personal loan.
Your debt-to-income ratio should also be low. This compares your monthly debt repayments to your monthly income. Ideally they prefer borrowers spend less than 30% of their income on debts.
Minimum income requirements may also be needed. You might also need to be in your current job for a year or more to qualify.
If you’re a low-income borrower just starting your career, lenders may take into account your education and earning potential when approving a loan.
If you’re approved for a loan, you may have to submit recent pay stubs, tax returns, bank account information, employment information and personal references.
Do I Need a Co-Signer?
You won’t if your credit score is high enough. A low credit score might need some help from a co-signer with a good credit score.
You and the co-signer should be clear that the co-signer will be responsible for making loan payments if you can’t make them. The loan will appear on their credit history and could affect future loans they apply for.