What is a Personal Loan?
A personal loan makes a great option when you’re looking to consolidate debt, pay off a large purchase or handle a financial emergency. There are many types of personal loans and they can be arranged from a wide variety of vendors making them an efficient way to get cash in your bank account when you need it most.
A personal loan is a lump sum of money that you borrow from a lender. The lump sum comes with specific terms and it may be tied to other assets you own. Personal loans will have a set interest rate and a set number of payment, which makes them easier to manage than credit cards, which use revolving credit.
When you take out a personal loan, you will borrow a specific amount for a set amount of time. You will be required to pay the loan back in regular installments, typically monthly. When you’ve made all of the installments, you will have repaid the loan in full.
What Are the Types of Personal Loan?
A secured personal loan will be tied to collateral. A home equity loan, for example, will be tied to the equity in your home. If you fail to pay back the loan according to the terms, the lender will have the option to take your home. But because you have used collateral to secure the loan, you may wind up paying a lower interest rate, making the loan cost less over time.
Unsecured personal loans are loans that are tied simply to your ability to repay. Lenders calculate how much you can borrow with an unsecured loan by using your credit score and your income in most cases. The higher your income and higher your credit score, the more you are typically able to borrow with an unsecured personal loan. Your unsecured loan does not have collateral, so the lender is acting in good faith loaning you’re the funds, assuming that you will be paying them back in a timely manner.
How Much Does a Personal Loan Cost?
The primary cost for a personal loan is the interest you’ll be paying the lender for the privilege of borrowing. You borrow a lump sum of money and the bank charges you interest. When you repay the funds, the interest will be a set amount included in your monthly payments.
The amount of interest you pay with your personal loan can vary according to several factors including the amount you’re borrowing, the length of the loan, your credit score and the current financial marketplace. Generally the higher your credit score, the lower the interest rate. The higher the dollar amount, the higher the interest rate. Also, some banks will offer a lower interest rate for shorter loan terms.
While rates can vary from day to day in the world of finance, you can expect to pay between 13 and 27 percent interest on most unsecured personal loans. Secured loans may have lower rates due to the use of collateral which lowers the bank’s risk in lending you money. Some personal loans also include origination fees, which can reduce the amount of money you actually have deposited in your account. A loan for $10,000 may be reduced to only $9,000 if the bank charges a 10% origination fee, for example.
How Can I Use a Personal Loan?
The beauty of a personal loan is that it is not tied to any specific goal. A car loan buys a car. A mortgage buys a house. Personal loans can buy just about anything else. If you want to buy a boat or pay for a vacation, you can do so with a personal loan. If you want to open a new business or add some capital to an existing business, you can take out a personal loan for that as well. Many individuals take out personal loans to help clear off existing debts or to pay off credit cards. Still others use personal loans to pay off medical bills or to handle financial emergencies like car repairs or home expenses.
When you apply for a personal loan, you will likely be asked how you plan to use the proceeds of that loan. Some lenders prefer to offer loans for only certain things and the type of personal loan you’re applying for may require additional documents as well in order to complete the application process. Other loans are wide open and can be used for just about any purpose provided your credit and income are strong enough to qualify.
Where Do I Get a Personal Loan?
There are several types of lenders who handle personal loans. You can find personal loans through:
- Traditional banks
- Online lenders
- Loan aggregators
- Credit unions
- Peer lenders
Traditional banks are the same banks that handle your checking account and paychecks. You can approach these banks and fill out an application in the bank or through their online banking services. Traditional banks tend to have the most requirements and have the most rigid lending requirements due to their large scale and wide range of financial services.
Online lenders are banks that are only online. You apply for a personal loan from an online lender through an online application. The application is process and approved quickly and you get your response online as well. The loan is then funded from the online bank and you make online payments to repay the loan in full.
Loan aggregators pull many different lenders together in a single location. You will only need to fill out a single application with a loan aggregator that will then be sent to multiple lenders on your behalf. The loan aggregator will offer you various possibilities based on what their lenders are able to provide and you can select the loan that is the best fit for your specific circumstance.
Credit unions are like banks, but rather than being owned by a company, they are owned by the customers. Credit unions are a not-for-profit institution, and they may have more lenient lending standards than some traditional banks. Most require an in-person application, however, with limited online presence.
Peer lenders are like online credit unions in a sense. They are a collective of individual investors who are willing to lend their money to their peers for various reasons. Peer lenders will often have the least restrictive terms as they have the most flexibility in their lending practices.
What do I need to apply for a personal loan?
In order to apply for a personal loan, you will need to decide first how you want to apply. If you are hoping to complete the full process online, you will start with an online lender or loan aggregator. Then you will gather the necessary documentation including paystubs, social security or identification numbers, bank account information, and driver’s license.
Once you have all of the required documents, you will fill out the online application. In most cases, you will be filling out a combination of personal information, financial information about bank accounts and loan requests including why you’d like the personal loan. The online lender will consider your application and reply quickly.
If approved, you will review the loan terms presented by the lender and accept them if you are comfortable with the interest rate and payment terms. Then the funds are deposited in your bank account and you are able to use them as you need while starting timely payments to repay the loan. The entire process is straightforward and, in most cases, can be done entirely from your home computer or mobile device.
While the typical borrower of a personal loan at Sofi has good to excellent credit, they do not have any hard credit or income requirements.
Sofi offers an assortment of fixed and variable rates that compare well to the competition. There are no known origination, application or prepayment penalty fees.
While Sofi offers lower rates for personal loans that are compelling, not everyone will qualify. Sofi mainly accepts borrowers on the upper end of the credit scale with a good credit history.
Some of the minimum eligibility requirements of a Sofi loan can vary by the type of loan applied for, but in general these might include; employed or steady income, living in a state SoFi is licensed to lend, and to be a US citizen, permanent resident or visa holder.
Prosper is a peer-to-peer (P2P) loan that is funded by investors and comes with either a three- or five-year term, and can be used for any purpose, including debt consolidation and home improvement.
Prosper personal loan rates average between 7.95% to 35.99%, which includes an origination fee of 2.41% to 5%. As with many lenders, taking out a longer term can also land you a more expensive loan. Since Prosper is a P2P lender, it can take up to five business days to get your funds.
To borrow from Prosper, a credit score of 640 or better is usually required. Prosper relies on TransUnion to obtain credit scores. Common factors may include credit score, income and debt-to-income (DTI) ratio when requesting a personal loan from Prosper.
Some of the minimum eligibility requirements of a Prosper loan may also include; regular income, DTI below 50%, no bankruptcies within the last 12 months, less than 7 credit bureau inquiries within the last 6 months, and living in a state Prosper is licensed to lend
A personal loan from Upgrade can be the right choice for fair credit borrowers, but you may need strong cash flow in order to qualify.
Upgrade personal loan rates average between 7.99% to 35.97% APR, which includes an origination fee of 2.9% to 8%. A loan from Prosper comes with either a three- or five-year term.
With most personal loans you often require a good credit score of about 760, combined with a disposable income (after bills) of over $1,000 per month to qualify. With Prosper, fair-credit borrowers have an option, with a minimum credit score of 600 still being considered for a smaller loan, but the rates and fees will likely be on the higher end. Loan terms and fees can vary by state.
Some of the other minimum eligibility requirements of an Upgrade loan may also include; valid bank account, steady income, DTI below 60%, and being a US citizen, permanent resident or visa holder. Upgrade may also accept co-signers who meet their minimum credit score requirements.