Imagine waking up to the sound of your alarm, ready to conquer the day. But, as you rush down the stairs, an unexpected slip sends you tumbling. Now, facing unforeseen medical bills, you find yourself in a financial pinch. That’s where a personal loan can step in – a financial tool to help bridge the gap and navigate unexpected challenges.
According to TransUnion, personal loans have become a significant part of consumer finance with total personal loan balances reaching $241 billion in the third quarter of 2023, marking a nearly 15% increase from the same period in 2022.
If you find yourself in need, a personal loan can be a great way to take control of your financial future. Whether you’re looking to buy a car, take that dream vacation, or cover life’s unexpected mishaps, there are many options available.
Let’s take a closer look at personal loans, which loans to avoid, and how to get a personal loan offer with competitive interest from MoneyLion’s trusted partners.
PRO TIP! Unsure if you would qualify for a loan? Check your likelihood of getting a loan offer from one of MoneyLion’s partners with our approval rate calculator.
What is a personal loan?
A personal loan is a type of credit typically offered by banks, credit unions, or online lenders, where you borrow a specified sum of money and agree to pay it back over a predetermined period, usually in fixed monthly installments. This form of borrowing usually involves a fixed interest rate, meaning the monthly payment remains consistent throughout the loan term, simplifying budget management for the borrower.
Personal loans are versatile and can be used for a wide range of purposes, including debt consolidation, home improvements, emergency expenses, or major purchases. They often range in amount from $1,000 to $50,000, though this can vary based on the lender and the borrower’s financial situation.
Unlike some other types of loans, you can use a personal loan for almost anything. Some of the most common reasons why people take out personal loans include:
- Covering an urgent home expense, like a plumbing bill
- Taking a weekend vacation without putting more money on a high-interest credit card
- Paying for books, lab fees, or other supplies for school
- Paying off unexpected fines or bills
- Consolidating debt
- Buying expensive items
- Emergency needs like medical visits and covering rent or mortgage
Steer clear of predatory lenders
When considering a personal loan, it’s important to be cautious about predatory lenders. Debt.org defines predatory lending as “any lending practice that imposes unfair or abusive loan terms on a borrower.” Although the term is most commonly associated with payday loans, it can include other types of loans too, such as car title loans.
These predatory lenders often target individuals who may have limited credit options, offering loans with extremely high interest rates and fees, which can lead to a cycle of debt.
If the lender pressures you to make a quick decision or to take out a larger loan than you need, this is a red flag. Legitimate lenders do not rush customers into borrowing and generally offer clear terms and conditions.
Check for reviews, complaints, and their standing with the Better Business Bureau. You can also look for information on consumer protection sites or consult with a financial advisor.
Bad credit doesn’t have to disqualify you from getting a personal loan. However, it can make your search for the right loan a little tougher. Remember to read the terms and conditions of any loan you consider and know what to look for when you choose a lender.
Characteristics of the best personal loans
It’s not impossible to get a personal loan when you have bad credit or no credit, but it’s a good idea to be picky about which lenders you work with. Here are a few of the things you should look for when you decide on a personal loan provider.
1. Apply for loans online
Chances are good that you don’t have time to sit around, waiting to hear back from a loan officer if you need a personal loan. One of the biggest benefits of getting a personal loan from an online or digital bank is that you don’t have to schedule multiple trips to a physical location to coordinate your loan.
Look for a financial institution that allows you to apply for your loan and submit the necessary identifying information online. Some of the best online loan providers could provide instant approval and deposit your loan into your account as soon as your request is processed.
MoneyLion can help you find personal loan offers based on your background and the info you provide. You can get matched with offers for up to $50,000 from top providers. You can compare rates, terms, and fees from different lenders and choose the best offer for you.
2. Loan limits
Because personal loans are unsecured loans, banks and lenders usually have limits on the amount of money that they’re willing to lend. It’s important to know how much money you need before you start looking for a lender.
A reasonable amount to borrow depends on what you need your personal loan for. You can figure out how much you need by adding up the price of your textbooks, the price of your weekend getaway, etc. Make sure to do this before you start comparing lenders, which will help you easily rule out lenders that don’t offer what you need.
3. Low APR
Lenders calculate insurance in terms of an Annual Percentage Rate (APR). The APR tells you how much money your loan will accumulate in interest.
The Truth in Lending Act (TILA) of 1968 requires lenders to disclose the APR they charge to borrowers. This act ensures transparency in lending practices, allowing borrowers to have a clearer understanding of the cost of borrowing.
High APRs generate more interest, which can make it harder to pay back your loan. Low APRs save you money, so you should prioritize lenders who offer you the best rates.
4. No repayment or origination fees
Some lenders charge you high fees. Lending fees are common, so it’s a good idea to keep your eyes open for unnecessary fees.
Make sure that your loan doesn’t include any kind of early repayment fee or penalty. As the name suggests, If you make a payment early, sometimes you’ll have to pay an early repayment fee. You may also need to pay the fee if you make more than the minimum payment every month.
Just like when you look for your loan’s APR, make sure you’re reading all your loan’s terms and conditions before you sign.
How to apply for a personal loan in 6 steps
Taking out a personal loan can be a financial tool to help you achieve your goals, whether it’s consolidating debt, covering unexpected expenses, or funding a major purchase. It’s important to understand the key steps involved and the potential pitfalls you might encounter.
1. Assess your financial situation
Before you begin the loan application process, assess your financial standing comprehensively. Consider how much you need to borrow, evaluate your income, and realistically analyze your ability to repay the loan. This self-assessment will lay the foundation for a successful loan application.
2. Research and compare lenders
With your financial picture in mind, the next step is to research and compare different lenders. Not all lenders are the same, and finding the right fit for your needs can save you money and ensure a smoother borrowing experience. Look into interest rates, loan terms, and additional fees or requirements. Take the time to identify reputable lenders with positive customer reviews.
3. Check your credit score
Your credit score is a critical factor in securing a favorable loan offer. According to Experian, it’s possible to get a personal loan with a lower credit score, but a score of at least 670 has the high approval odds. Here’s how to manage this step:
- Obtain your credit report: Obtain a copy of your credit report from the major credit bureaus (Equifax, Experian, TransUnion). You’re entitled to one free report from each bureau annually through AnnualCreditReport.com.
- Review for errors: Scrutinize your credit report for any inaccuracies or errors. If you find discrepancies, dispute them with the credit bureaus to ensure your report is accurate.
- Credit improvement: If your credit score is lower than desired, take steps to improve it. This process may involve paying down existing debts, making payments on time, and avoiding new credit inquiries.
PRO TIP! Building your credit is easier than you think. It starts with knowing and understanding your score, creating goals, and then monitoring your credit as you take steps to help build it.
4. Gather necessary documents
Lenders will require specific documents to process your loan application efficiently. These documents typically include proof of income, identification, bank statements, and other financial information. Organize these documents in advance to streamline the application process and expedite your approval.
5. Fill out and submit the loan application form
With your financial documents in order, complete the loan application form accurately and provide all the requested information. Be ready to furnish details about your income, employment history, and outstanding financial commitments. Read and understand all the terms and conditions before submitting your application.
6. Accept the loan and repay
Once accepted, follow the provided instructions for repayment. Timely monthly payments not only repay the loan but can also contribute to improving your credit score, enhancing your financial health in the long run.
A Path to Financial Success
Personal loans are a type of credit, which means that you need to use them sparingly and wisely. Like any other tool, these loans can help you or hurt you, depending on how you use them. If you use them responsibly, a personal loan can be a lifeline in a time of need. But, if you get in over your head and fall behind on the payments, you’ll risk ruining your credit and accumulating more debt. You may also end up paying higher rates in the future.
Take out a small personal loan with a reasonable interest rate and always make your payment on time, and you could see your credit score increase. Fall behind on your payments, and your score may be worse off than when you took out the loan.
How long does it take to get approved for a personal loan?
The approval timeline for a personal loan can vary depending on several factors.
What factors are considered in the loan approval process?
Lenders consider several factors when evaluating a personal loan application. These include your credit score, income, employment history, debt-to-income ratio, loan amount, credit history, and the purpose of the loan.
Can I get a personal loan with bad credit?
Yes, it’s possible to get a personal loan with bad credit, but it may be more challenging and come with less favorable terms. Lenders that specialize in bad credit loans or consider alternative factors besides credit scores may be an option.