More than 20 million consumers have a personal loan, with an average balance of $6,382, according to TransUnion. In fact, personal loans are the fastest-growing type of consumer debt. The most popular reason to get a personal loan is debt consolidation, but it can be used for everything from unexpected expenses to college tuition or home repairs.
If you’ve ever thought of applying for a personal loan, it can help to know the ins and outs of this form of financing.
What is a personal loan?
Personal loans are installment loans that provide a lump sum that you pay back with interest in set monthly installments over the term of the loan. Once the loan is paid in full, it is closed. If you need more money later, you have to apply for a new loan. Personal loans can be secured or unsecured. Secured loans are backed by collateral that a lender can seize if the loan goes into default.
Where is the best place to get a personal loan?
Banks and credit unions can be popular places for acquiring a loan, and if your credit score is good you may find it easier to qualify. However, these traditional financial institutions aren’t the only option.
You can also find personal loans from online lenders, consumer finance companies and even peer-to-peer programs.
What Are Typical Terms?
Loan amounts, rates, lengths and fees vary, depending on the lender as well as your personal credit score. Most loans range from $1,000 to $50,000, although some lenders will give as much as $100,000 to consumers with excellent credit.
Lender annual interest rates can range from 5 percent to 36 percent. Borrowers with higher credit scores generally receive lower interest rates. Some lenders will charge an origination fee to process the loan. This can range from one to eight percent of the amount of the loan. And most personal loans can be taken for a term of 12 to 60 months.
Be sure to consider all of the costs and terms before committing to a loan and how they fit with your budget. If you want to pay off the loan before the end of the term, make sure the lender doesn’t charge a prepayment penalty.
How Do I Qualify?
Lenders approve borrowers based on creditworthiness and set their interest rates accordingly. They’ll look at your credit score, debt-to-income ratio, income level, employment history and credit payment history.
The most common reason that the majority of millennials are rejected for loans and credit cards is due to a low credit score. In this case, the intended borrower may be asked to have a cosigner on the loan that guarantees the amount in case of default. Or they may be offered a secured personal loan that is backed by collateral, such as a CD.
What Are Some Alternatives to Personal Loans?
For some consumers, a personal loan may not be the best choice, due to interest rates or borrowing limits. In this case, there are some alternatives to consider.
If you can qualify credit card with a zero percent introductory rate, this may be a better option, especially if it allows you to transfer balances in the case of debt consolidation. However, you will need to pay off the balance before the end of the introductory term or you will be charged accrued interest.
Or if you own a home, consider a home equity loan or home equity line of credit. Depending on your equity, this could provide you with a larger amount at a lower interest rate. It’s important to remember that your home becomes collateral, and the lender can foreclose if you default on the loan.
Make the Right Choice
Personal loans can be a good way to get the money you need, but only borrow what you know you can repay. Use Credible’s personal loan calculator to estimate your monthly payments so you can determine how the payment will impact your budget. You can also use the personal loan calculator to determine how to pay it off early. Always shop around for the best rates and terms before committing to a loan and lender. It can pay to take your time and make the right choice.