How to Get a Small Personal Loan

While building financial freedom, you know that credit card debt can be a trap for additional expenses, but what do you do if you need cash to cover an emergency or make a big purchase? Consider small personal loans. Small personal loans can help carry you through in case of unexpected medical expenses or another emergency. You could also use a personal loan to renovate your home, consolidate debt, or pay for something special over time. These loans can help you save on interest and take control of your finances. 

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What is a small personal loan?

Small personal loans are usually defined as less than $5,000. These loans are typically offered with fixed interest rates in lump sums to borrowers. Usually, you’ll pay back a small personal loan over a shorter time. Online lenders, banks, and credit unions can all be resources for small personal loans. 

How to qualify for a small personal loan

If you’re wondering whether you’ll be able to qualify for a small personal loan, you may be able to get a prequalification. Here are the main factors lenders look at: 

1. Credit score

Lenders consider credit score and credit history for loans. Generally, a credit score of 700 or above is considered good, but you may qualify for a small personal loan with a lower credit score. Some personal loans are specifically designed for borrowers with low credit scores.

Not sure what your credit score currently is? You are entitled to a free credit report from all three credit bureaus at annualcreditreport.com. On your credit report, you’ll see your credit score, but you should also look for any inaccuracies and dispute them. If you want to raise your credit score before applying for a small personal loan, here are some tips to:

• Pay all debts on time every month. You can set up automatic payments to avoid missing a deadline.
• Reduce total debt to less than 30% of current credit available.
• Don’t apply for too many new credit cards, mortgages, or loans within a short period, as each hard credit pull will appear on your credit score, and too many credit checks can reduce your credit score.
• Dispute inaccurate information on your credit report.
• Dispute inaccurate charges on your credit cards. 

2. Income 

Lenders typically consider your total income to qualify you to get a small personal loan to ensure you can repay the loan. They may also look at your debt-to-income ratio or require proof of income like a W-2, tax forms, or bank statements. 

3. Employment history

Lenders may also ask for employment history when you apply for a small personal loan. While you can get a small personal loan while working as a freelancer or being self-employed, you might need to show bank statements of assets or provide collateral.  

4. Debt-to-income ratio

Lenders usually look at your debt-to-income ratio in qualification for getting a small personal loan or any other loan. The debt-to-income ratio is the relationship between monthly debt obligations and monthly income. For example, if you earn $8,000 per month and your total monthly debt is $2,000, your debt-to-income ratio is 25%, which is great.

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Where to find small personal loans

There are several options to get small personal loans, from online lenders to traditional banks or credit unions.

1. Online lenders

Online lenders offer some of the most competitive interest rates for small personal loans. These lenders allow you to apply online, and in many cases, you’ll be approved the same day or within one to two weeks.

Pros of online lenders:

• Quick and easy application process
• Competitive interest rates and fees
• More flexible terms in some cases
• Possible to secure smaller loans 

Cons of online lenders:

• Possibly higher interest and fees — double-check terms and compare rates with multiple lenders
• You’ll need to do everything online without the convenience of going to a bank

2. Banks

Banks offer fewer smaller personal loans than online lenders or credit unions, but don’t dismiss your local branch! While banks may have different limits and guidelines for loans, many will offer personal loans of $1,000 or more. 

Pros of banks:

• Easy for borrowers with good or excellent credit to secure
• Easy to go into a local bank and get a loan
• Quick and easy application process
• Straightforward interest rates and origination fees

Cons of banks:

• Possibly higher interest and fees than other options
• Borrowers with low or no credit score might be denied the loan

3. Credit unions

Credit unions usually offer low interest rates and can help borrowers secure small personal loans. You generally need to be a credit union member to apply for the loan.

Pros of credit unions:

• Easy approval for borrowers with good or excellent credit
• Easy to go into a local credit union to apply
• Straightforward interest rates and fees
• Some of the lowest interest rates available

Cons of credit unions:

• May need to be a member of a specific credit union
• Borrowers with low or no credit score might be denied the loan

How to get a small personal loan in 4 easy steps

There are just four simple steps to apply for a personal loan. Here’s how you could apply for a small personal loan.

Step 1: Determine the loan amount and purpose

Determine how much money you need and the specific purpose for which you’re seeking the loan. This will help you find the right lender and loan terms. 

If the expense was already made or the purpose is debt consolidation, focus on what you need. For example, if you’re planning a renovation or need emergency funds, it’s important to take a realistic loan amount to save on interest. 

Step 2: Research and compare lenders

Research different lenders such as banks, credit unions, and online lenders to find the best interest rates and loan terms. Many lenders will give you an initial quote. Compare at least four to five lenders as interest rates, fees, and terms can vary widely.  

Step 3: Gather the necessary documents

When applying for loans, you may need proof of income such as W-2s or tax returns, employment details, government-issued identification documents, and bank statements. Having these ready in advance can expedite the loan application and approval process.

Step 4: Apply for the small loan

When you apply online or in person, you must submit the loan application with your chosen lender. After you apply for a small personal loan, the lender will review the information you’ve shared. It will check your credit reports and score and may give you instant approval. Sometimes, your lender may contact you with requests for additional information or with your results within one to two weeks.

Factors to consider when applying for a small personal loan

Remember that all loans come with specific requirements, interest rates, loan terms, and annual percentage rates (APRs), which can vary by lender, individual credit score, and financial profile. It’s essential to consider and weigh the following to choose the best small loans and avoid scams.

1. Requirements

Online lenders, banks, and credit unions all have set requirements for borrowers. Check these criteria and other standards to see whether you meet the general criteria. In addition, it’s important to double-check the lender’s reputation to prevent falling for scams. 

2. Interest rates

Interest rates vary widely by lenders. Be sure to carefully compare interest rates and total fees to choose the most favorable options. 

3. Loan terms

Loan repayment terms also vary. Usually, small personal loans have repayment periods of two to five years. Some lenders will allow you to repay the loan early, but others will not. Look at loan payment terms and options for repayment terms, additional fees, or penalties to ensure the loan will fit your needs. 

4. Annual Percentage Rate (APR)

APR is the total interest rate for a year rather than monthly fees or rates. This is the most accurate comparison of interest rates to consider loans and offerings from various lenders. 

5. Funding time

Funding time can be a significant factor if you’re in a hurry. Some lenders will approve your loan and offer funding the same day, while others take one to two weeks to process.  Note that faster funding time does not necessarily signify a more reliable lender. Be sure to check total interest and fees, loan terms, and compare average funding times to choose the option that best balances various considerations. 

Alternatives to small personal loans

If you need cash fast, there are alternatives to small personal loans, from online lenders or cash apps to side hustles. Here’s what you can consider:

1. Use cash apps

Cash apps offer a fast and easy way to get small personal loans through simple online applications. 

Pros of cash apps:

• Easier approval and more lenient credit requirements
• Great for borrowers looking for smaller amounts
• Straightforward interest rates and fees
• Possible lower interest rates 

Con of cash apps:

• Smaller loan amounts 

2. Borrow from family and friends

Borrowing from friends or family can be a way to get the cash you need quickly. But unless you’re careful, it could strain the relationship. To protect your relationship, write out a loan agreement and stick to it.

Pros of loans from family and friends:

• No specific approval process necessary
• Could get cash the same day
• May get lower interest rates or pay less in interest overall. 

Con from family and friends:

• If not done carefully, it could stain the relationship

3. Look for side hustles

Side hustles are a great way to bring in extra cash. Sometimes, side hustles can help you earn a few hundred dollars or grow into a full-time career. From driving an Uber or grocery deliveries to tutoring, lawn mowing or repair, or selling extra items you no longer need, there are many side hustles you could start quickly. Find ways to get cash fast or side hustles to make extra cash. 

Pros of side hustles:

• No approval needed for most
• Could start earning cash this week
• No burden of taking on a loan
• Use skills you have to build an additional income stream

Con of side hustles:

• You’ll need to build the business or side hustle, which might not be fast enough if you need cash ASAP

Getting funds when you need them

Whether you need debt consolidation and tips to pay off debt or need $1,000 quickly, like an instant payday loan, you have loan options. Remember to carefully compare loan rates, fees, and terms to choose the best choice for your needs. Need money for tuition? Learn more about private student loans here. 

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