If you want to finance an adoption, consolidate your credit card debt or move cross-country, a personal loan can help you cover your immediate expenses without breaking the bank.
You can get these loans, typically unsecured, in amounts ranging from $1,000 to more than $50,000. And with a good credit score, you’ll likely be able to snag the most affordable interest rates, too.
Your options shrink and your payments rise if you have no credit history or bad credit, but you’ll find some lenders are willing to consider more than your credit score.
Here are some things to consider while searching for a personal loan:
With unsecured personal loans, credit is key
The interest rates on personal loans are typically higher than rates on secured loans, or loans backed by property. Because these rates depend on your creditworthiness, having a good credit score can also make it easier to find a low APR. Your debt-to-income ratio may also be a factor in loan approvals and the amount offered.
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Credit unions, which are not-for-profit, tend to offer the most affordable rates for personal loans. They may also be willing to help you out if you have less-than-perfect credit. They are your best shot if you are looking for a small loan — say, of $2,500 or less.
Lenders that cater to good credit, such as LightStream, Lending Club and Prosper, sometimes offer even lower rates than some credit unions to borrowers with high scores and substantial incomes. If that’s you, compare rates you find online with those from your bank or credit union.
Borrowers with average credit will find plenty of options, along with higher rates. Some lenders will consider additional factors such as your job history or earnings potential in making their underwriting decisions.
With poor credit, you may have an easier time finding a personal loan if you have a cosigner or own property you can use as collateral. If you do find a cosigner, keep in mind that he or she will be on the hook for your missed payments. Do your best to honor your agreement and protect both your credit scores. Rates on these loans from alternative lenders will be considerably higher, as much as 36% APR if your credit is at the bottom of their underwriting guidelines.
Yet that’s downright cheap compared with payday lenders or the most unscrupulous tier of online loan companies, since they usually offer loans with upward of 300% APR and may try to charge you unnecessary fees.
What you need to apply for a personal loan
To apply for a personal loan, here are the documents you’ll typically need to provide:
- Identification – passport, driver’s license, state ID or Social Security card
- Verification of address – utility bills, recent mail or copy of lease
- Proof of past income – W-2 forms, pay stubs, bank statements or tax returns
You may also be asked for this information:
- Social Security number
- Monthly debt obligations (rent, student loans, etc.)
- Gross income
- Employer’s name, work address and phone number
- Address, email, phone number
- Previous addresses
- Date of birth
- Mother’s maiden name
- College name and major
After providing this information, you’ll need to specify the amount of money you want to borrow and some lenders may ask you to choose how much time you need to repay it (typically two to five years). Keep in mind that the longer you pay back your loan, the more you’ll have to shell out for interest payments. If you borrow only what you need, you can keep your costs low.
How to find the lowest rates on personal loans
Here’s what you should do before agreeing to a deal:
See if you qualify for a 0% credit card. If you have good credit, you can probably get a credit card that has 0% interest on purchases for a year or longer, and that may be less expensive than taking out a personal loan.
Consider a secured loan instead. If you have a house, consider using it as collateral in order to get lower rates. A home equity loan or home equity line of credit can often be cheaper than an unsecured personal loan. Keep in mind that using your home as collateral means that if you default, you could lose your home.
Pay off as much of your credit card balance as you can before you apply. The outstanding balance on your credit card — even if you pay it off at the end of the month and never pay interest — counts against you when a lender runs a credit check.
Shop around. Your local bank or credit union may have great rates, especially if you have a long relationship. But online lenders are offering very competitive rates, especially for borrowers without top-notch credit. (See “Where to Get a Personal Loan.”)
What to watch out for with personal loans
If you ignore the fine print in your personal loan agreement, you could find out the hard way that you agreed to less-than-desirable terms. Look for these gotchas before signing your contract:
Prepayment penalties. Most online lenders do not charge a fee for paying off the loan before a certain date, called prepayment penalties or exit fees. But just to be sure, always look for the words “no prepayment penalty” on your loan terms when you apply.
Accidental overdrafts. Many online lenders ask for automatic withdrawals from your checking account, or offer a lower APR for choosing this option instead of paying by check. If you link your loan to your checking account for automatic payments, you might be in danger of overdrawing your account and paying an overdraft fee — usually, about $35. To avoid accidentally draining your bank account, consider setting up a low balance alert with your bank.
Scam artists. Before you sign up for any loan, particularly online, check out the Better Business Bureau and Federal Trade Commission to make sure the organization is legitimate. If you borrow from a lender who has a record of unfair practices or charges usurious rates, you may have a hard time getting out of debt.
Taking out a personal loan can help you relieve your debt load and cover unexpected costs, but take stock of your options before settling on one choice. Find the lowest rates, borrow only what you need and repay your debts on time.
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