Personal loans allow you to borrow money and repay it over time. They can be a useful way to pay for major expenses or consolidate high-interest debt. But how do personal loans work? And how can you get the best loan for your needs? This comprehensive guide will explain everything you need to know about personal loans.
What Are Personal Loans and How Do They Work?
A personal loan is money borrowed from a bank, credit union or online lender that you repay over a set period of time. The repayment period is usually between one and seven years.
Personal loans can be secured or unsecured:
- Unsecured personal loans don’t require collateral. This makes them easier to qualify for but comes with higher interest rates.
- Secured personal loans require an asset like your car or home as collateral if you default. They have lower rates but put your collateral at risk.
Once approved, the lender deposits the loan amount directly into your bank account. You’ll make fixed monthly payments until the principal loan balance and interest are repaid.
Personal loans are best used to consolidate high-interest debt or finance major expenses. Interest rates are typically lower than credit cards.
What Can You Use a Personal Loan For?
Some popular uses for personal loans include:
- Debt consolidation – Combine multiple debts into one loan at a lower rate
- Home improvements – Finance renovations, repairs or new furniture
- Major purchases – Pay for medical bills, a wedding or car repairs
- Life events – Cover adoption or moving costs
- Education – Pay tuition or student loans
- Credit card refinancing – Lower interest by consolidating card balances
How Do Personal Loans Compare to Other Loan Types?
Personal loans have some advantages over other borrowing options:
- Easier to qualify than home equity loans or business financing
- Unsecured so your property isn’t at risk
- Access larger amounts than credit cards
- Fixed rates unlike variable rate lines of credit
However, interest rates may be higher than secured loans or home equity lines of credit. Compare options to find the most affordable financing for your situation.
What Credit Score Do You Need to Get a Personal Loan?
Your credit score is one of the main factors lenders consider when approving your personal loan. The higher your score, the better your chances of getting approved and securing a low interest rate.
Here are the estimated credit score ranges for personal loan approval:
- Excellent Credit (720+): Preferred rates from 3% to 12% APR
- Good Credit (680-719): Likely approval at 7% to 15% APR
- Fair Credit (640-679): May get approved at 19%+ APR
- Poor Credit (below 640): Hard to qualify; subprime lenders only
Having good to excellent credit increases your chances of getting larger loan amounts, lower rates, and better loan terms from reputable lenders.
If your credit score is below 640, look into options to build your credit before applying. Subprime lenders approve borrowers with bad credit but charge very high rates.
How to Get Approved for a Personal Loan
Follow these steps when applying for a personal loan to boost your approval odds:
1. Check your credit score and report
Make sure your credit report is error-free and take steps to improve your score before applying if needed. Many lenders let you check rates without a hard inquiry.
2. Calculate how much you need to borrow
Apply for loans only what you need so you aren’t paying more interest than required. Personal loan amounts often range from $1,000 to $100,000.
3. Compare lenders and pre-qualify
Research different banks, credit unions and online lenders. Pre-qualify to find the best loan offers without damaging your credit.
4. Review terms and choose a loan
Compare APR, loan terms, fees and other fine print. Select the loan with the lowest cost based on your credit, income and budget.
5. Submit official loan application
The lender does a hard credit check and verifies your income, assets and other application details. This is the final approval step.
6. Accept loan terms and get funds
Once approved, you’ll receive final loan terms to accept including rates, fees and payments. The lender then deposits the funds directly into your account.
Improving your creditworthiness, comparing lenders and reviewing all details can help ensure approval for the best personal loan offer.
What APR Can You Expect From Personal Loans?
The annual percentage rate (APR) on a personal loan takes into account the interest rate and fees to show the true yearly cost of the loan. APRs can range anywhere from 3% to 36% for personal loans depending on your:
- Credit score – The higher your score, the lower your APR. Anything under 10% is considered excellent.
- Loan term – Shorter loan terms often have lower APRs.
- Lender – Each lender offers different rates based on their criteria and risk models.
- Loan amount – Borrowing less may qualify you for a lower rate.
- Income – Higher income means lower perceived risk for lenders.
For good or excellent credit, expect APRs around 7% – 15% from most lenders. Anything under 10% is a very good rate.
If your credit needs improvement, an APR over 20% may be your only option until you build your credit profile. Comparing lenders can help you secure the most favorable rate possible.
Personal Loan Lenders: Banks vs Credit Unions vs Online Lenders
You have several options for where to get a personal loan, including:
Banks
Large national banks like Chase, Citibank and Bank of America offer personal loans with competitive rates for those with good to excellent credit.
Approval may be quick and convenient through your existing bank account but rates from online lenders may beat banks.
Credit unions
Not-for-profit credit unions offer lower rate personal loans to members. You’ll need to become a member first by opening an account.
Credit union personal loans have lower interest rates thanks to lower overhead. But maximum loan amounts may be lower.
Online lenders
Online-only lenders like LendingClub, SoFi and BestEgg specialize in personal loans with easy online applications, often with same day preapproval.
Online lenders may offer the most competitive rates and fastest funding but read all fine print.
Compare multiple personal loan lenders to find the best rates, fees and terms for your situation.
What Fees Should You Expect With a Personal Loan?
Personal loans don’t have as many fees as credit cards but you may encounter:
- Origination fees: Upfront fee to process the loan, from 0% to 8%
- Late fees: Around 5% to 10% of the monthly payment
- Prepayment penalties: Charged if you pay off loan early; not common
Always verify full fee details before accepting a personal loan offer. Ask the lender:
- Is there an origination fee? How much?
- What is the fee for late or bounced payments?
- Are there any prepayment penalties if I pay off early?
Minimizing fees by making on-time monthly payments can save you money. Choose lenders that don’t charge origination fees or prepayment penalties.
5 Tips for Getting the Best Personal Loan Rate
Follow these strategies to ensure you get the lowest APR when you need to borrow:
1. Check and improve your credit score
Good credit means better chances for approval and the lowest interest rates. Pay all bills on time and lower credit card balances to boost your score.
2. Take a shorter loan term
You’ll pay less interest overall with a 24-month or 36-month term. But make sure you can afford higher monthly payments.
3. Get a co-signer
Adding a cosigner with excellent credit may qualify you for a lower rate. Just be sure they understand repayment obligations.
4. Provide collateral
Offer eligible collateral like a car or savings account to get a secured loan with a lower interest rate.
5. Compare multiple lenders
Each lender has their own criteria that determines the rate you’ll qualify for. Shopping and comparing offers is key to finding the best APR.
Following a personalized strategy tailored to your credit and finances can help you get approved for the most affordable personal loan.
How Much Do You Need for a Personal Loan?
Loan amounts for personal loans often range from $1,000 up to $100,000. Consider these factors when determining how much to borrow:
- Your credit – Borrowers with good credit can often qualify for up to $100K.
- Your income – Most lenders require a minimum monthly income, often around $2,000.
- Your monthly budget – Make sure you can afford the monthly payments. Keep it under 40% of your income.
- Loan purpose – Know exactly how much you need for the specific expense.
- Interest savings – Borrowing more than required costs more in interest.
Many experts recommend borrowing as little as possible to save on interest charges. A $10,000 loan may make sense. A $50,000 loan is riskier. Have a clear borrowing goal and shop for the best loan amount for your situation.
How Long Do Personal Loans Last? Terms Explained
Personal loans typically have loan repayment terms between one and seven years. The loan term directly impacts your monthly payment and total interest cost.
Shorter loan terms (12-36 months) have higher monthly payments but you pay off the principal faster and less interest overall.
Longer loan terms (48-84 months) have lower monthly payments but higher total interest since you’re borrowing for more years.
Choose the shortest term possible that your budget can afford. This saves you money while minimizing interest paid to the lender.
Many personal loans offer terms in 12-month increments up to 84 months. Know the exact loan length being offered before accepting a personal loan.
What Needs to Be in a Personal Loan Agreement?
Before you sign a personal loan contract, verify it includes these key components:
- Loan amount – The total principal being borrowed
- Interest rate – The annual percentage rate (APR)
- Payment amount – How much is due each month
- Payment due dates – The calendar day that payments are due
- Loan term – The total months until payoff
- Fees – Any origination fees or late charges
- Prepayment terms – Any penalty for early repayment
- Collateral – If the loan is secured, the asset and terms
Never sign a personal loan agreement without reviewing the details first with a fine-tooth comb. Reach out for clarification from the lender on any unclear or concerning sections.
How to Get a Personal Loan with Bad Credit or No Credit
For borrowers with poor credit below 640, getting approved for a personal loan is still possible but more challenging. Here are some options:
- Apply at a credit union you qualify to join
- Find a cosigner with good credit
- Pay down balances and improve your credit first
- Provide collateral for a secured loan
- Consider peer-to-peer lending sites
- Use a credit-builder loan to establish credit history
Subprime lenders approve those with bad credit, but you’ll pay much higher interest rates and fees. Building your credit over time before applying for a personal loan is recommended when possible.
Should You Get a Personal Loan to Consolidate Debt?
Using a personal loan to consolidate high-interest debts like credit cards into one monthly payment at a lower rate can accelerate repayment and save money on interest.
However, you need good credit and discipline to not “reload” those credit cards and end up deeper in debt. Make sure you have a repayment plan and budget prior to consolidating debts with a personal loan.
A personal loan only makes financial sense if:
- You get a much lower APR than your current debts
- You have a plan to not rack up new card charges
- You create a monthly budget and commit to payment
Without the right plan and discipline, debt consolidation loans can make your situation worse. Analyze your total debt and your behavior before taking the consolidation route with personal loans.
Are Personal Loans Risky? How to Make Them Safer
Personal loans do carry some risks, including:
- Accumulating more debt than you can realistically repay
- Not having a plan for use of funds and paying on time
- Too high of payments strain your budget and lead to default
- Relying on them versus improving financial health
You can make personal loans safer by:
- Borrowing as small amount as realistically possible
- Using loans only for needs versus wants
- Committing to a monthly budget and repayment plan
- Improving your credit before applying
- Selecting the shortest loan term you can manage
- Never borrowing more than you need
While personal loans have clear advantages when used well, they still create a financial obligation that impacts your credit and future borrowing ability if not repaid as agreed.
Personal Loan Requirements: What Lenders Look For
When reviewing your personal loan application, lenders analyze:
- Credit score – The primary factor determining your eligibility and rate
- Income – Most require monthly income over $2,000
- Debts – All your monthly expenses and liabilities
- Assets – Savings and property may boost chance for approval
- History – Time at your job and residence shows stability
- Loan purpose – Reason for borrowing may determine decision
Having good to excellent credit is the biggest factor lenders look for. They also want to see you can truly afford payments based on your income, job history and existing obligations.
Strong applicants have:
- 700+ credit scores
- At least $2,000 monthly income
- 2+ years at current job
- Minimal existing debt and expenses
- Significant assets like savings
Building up these areas before you apply strengthens your approval odds and can mean better loan offers.
What Documents Do Lenders Require for Personal Loans?
Personal loan lenders require documentation to verify your identity, income, and overall ability to repay. Common documents include:
- Valid government-issued ID – Driver’s license, passport, etc.
- Social Security number – Primarily for full credit check
- Pay stubs – Most recent 30 days to confirm income
- Tax returns – Often last two years to show income stability
- Bank statements – May be used to supplement other docs
- Proof of address – Utility bill or statement in your name
- Evidence of collateral – Statement showing asset value like auto title
Reputable lenders only require documents for verification purposes. Be cautious providing anything that gives full account access or compromises identity.
Can You Get a Personal Loan With No Proof of Income?
Most traditional lenders require proof of income, often pay stubs and tax returns, before approving unsecured personal loans. However, some options like peer-to-peer lending sites may offer personal loans without income verification. These carry more risk for both you and the lender.
Possible ways to get a personal loan without formal proof of income include:
- Peer-to-peer lending sites like Prosper and LendingClub
- Title loan using your paid-off car as collateral
- Down payment on a secured loan from a credit union
- Having a cosigner with verifiable income sign with you
- Providing bank statements showing regular deposits
If you don’t have pay stubs or tax returns, these options can provide alternative ways to document your ability to repay. Just be cautious taking on loans without income verification, and make sure you can afford payments.
Can Self-Employed Borrowers Get Personal Loans?
Yes, self-employed individuals can qualify for personal loans, but may need to provide different documentation than traditional W-2 employees’ pay stubs and tax returns.
Many lenders require 1-2 years of self-employment history before they will approve loans. Possible documentation for the self-employed includes:
- 1099 forms from the past 1-2 years
- Business tax returns for the past 1-2 years
- Business bank statements showing regular income
- Letter detailing your self-employed income
- List of regular business clients
Having strong business revenue, tax returns, and banking activity is key to being approved as a self-employed personal loan borrower. Stable self-employment income can satisfy most lenders.
What is the Easiest Personal Loan to Get Approved For?
The easiest personal loans to get approved for are:
- Secured loans – These require an asset like your home or car as collateral but are easier to qualify for.
- Local community bank loans – Small local banks offer more flexible underwriting.
- Credit union loans – Membership-based credit unions may have lower credit requirements.
- Cosigned loans – Adding someone with good credit increases approval chances.
- Peer-to-peer loans – More flexible income and credit requirements on these platforms.
Building your credit score above 640 can make approval much easier as well. Shopping among multiple lender types, providing collateral, or adding a cosigner can help those with poor credit still get approved.
5 Tips to Improve Your Chances of Personal Loan Approval
Follow these 5 tips to boost your odds of successfully getting approved for a personal loan:
1. Check your credit score and get a report to fix any errors before applying. Good credit history is key.
2. Lower credit card balances to under 30% of limits and pay all bills on time going forward.
3. Provide collateral or add a cosigner if your credit needs improvement to reduce lender risk.
4. Shop with multiple lenders as each uses different approval criteria and you may find one more flexible.
5. Only apply for the amount realistically needed as smaller loan requests get approved more often.
Taking steps to optimize your credit, income stability, existing obligations and loan amount requested can help overcome poor credit or other disadvantages and