To those of you who are financially savvy this article is going to elicit a big sarcastic “duh!” I advise you to skip it and go back to your monthly budgeting, retirement planning, fully paying off your credit cards every month,...
What every informed consumer needs to know...
Personal Loans can be used for a variety of reasons, including but not limited to: unexpected expenses (medical emergencies, vehicle repairs, emergency travel, etc.), credit card debt consolidation (credit cards can have much higher interest rates than personal loans), or a large one-time expense (wedding, home remodel, etc.).
Personal loans are unsecured, meaning that the lender does not require you to put down collateral (assets, such as your vehicle or home) in order to be approved for the loan. It is not a wise decision to use an unsecured loan for a discretionary purchase, such as a vacation or a shopping spree, because of potentially high interest rates. Due to the greater risk involved for lenders (who have no assurance you’ll repay the loan), oftentimes interest rates are higher for personal loans compared to other types of loans. Lenders will likely require a credit check to understand how you’ve historically handled debt, and will usually require a general explanation of how you’ll use the money.
Typically, the loan will be fixed rate and fixed term, meaning the amount you’ll pay per payment interval (most commonly monthly payment) does not change, and there is a set window of time in which you have to repay the debt before you face penalty. Personal loans can be a great option, but they can also potentially ruin your credit if handled irresponsibly. Take the time to look over your finances before taking out a loan to make sure you only borrow what you are able to repay.
1.) Loan Basics
When looking into securing a personal loan, there are some important factors to consider.
First and foremost, think about the potential amount of the loan you’re considering. Typical loan amounts range from $1,000 to $35,000. The amount you will be approved for will vary by lender, and is dependent on your income, credit scores, terms of your loan, as well as other factors. Remember, never take out a loan you can’t afford to pay back. We suggest you examine your income and monthly expenses to accurately determine the maximum amount you can afford to pay every month.
Interest rate refers to the cost you’ll pay to take out the loan. For personal loans, you’ll want to look at the APR, or Annual Percentage Rate, which factors in the interest rate of the loan, along with any additional monthly fees associated to the loan. Not all lenders offer the same APR, and it too is based on your credit scores and other application information. The better your credit scores, the lower your APR will likely be since the lender’s risk is diminished. Also look for a personal loan with fixed interest, meaning the APR will not change throughout the life of the loan, making it easier to plan repayments.
If you want to challenge items on your credit report, view our 10 Best Credit Repair Services list.
The term of the loan is the amount of time you have to repay it, which is typically six months to three years. The shorter your loan’s term, the fewer payments you’ll make and the less interest you’ll pay in the long run. However, keep in mind that the monthly payments will be larger. On the other hand, if you have a longer loan term, your payments will be less each month, however you will pay more interest during the life of the loan.
Additionally, lenders may have an origination fee, or processing fee, in addition to the APR. These fees should be deducted from the loan upfront. For instance, if the origination fee is $50 on a $1000, you will receive $950. You should never be asked to pay any fees before receiving the loan, so if a loan provider asks you to pay a fee in order to receive the funds this it could indicate a scam.
2.) Additional Fees
For each month you have the loan out, you will pay interest, therefore if you are able to pay off the loan earlier than expected, you will save yourself money. Since, lenders make their money from the interest earned on the loan, this also means they will not be making as much as they would if you stuck with your scheduled payments each month. As a result, some lenders will penalize you for early payment of your loan. We suggest looking for a loan that does not have early payment penalties, which many online lenders offer. This will give you the freedom to repay the loan and get out of debt faster.
Just like any other creditor, if you have late or missed loan payments, you may be charged additional fees. Additionally, lenders have the right to report late payments to the credit bureaus, which could have a negative impact on your credit. If you think you will be behind on a payment or miss one all together, we highly suggest contacting your lender before hand. They may be able to renegotiate the terms of your loan or waive the fee altogether. At the end of the day, the lender wants to be repaid, so they may be motivated to work with you to ensure they don’t loose their money.
If you find that the loan term is almost up and you are not able to repay the loan, you may be able to negotiate to extend the length of your loan, or renew it all together. If this is an option, don’t be surprised if the terms of your loan agreement change, including your APR, or you find yourself responsible for additional fees or penalties.
3.) Types of Lending Services
Traditionally, if you needed a loan, you would go to a Direct Lender, or the institution or organization that would loan you the money directly, like a bank or credit union. Now with the help of the internet, companies have changed the way borrowers and lenders are able to connect.
Additionally, some personal loan companies offer an additional service, called Peer-to-Peer lending, or P2P. Many companies that offer loan matching services also offer P2P loans. This allows individuals, organizations and companies looking to invest to be matched with borrowers looking for a loan. This has become a popular option for many consumers, as it typically means lower interest rates for borrowers, and higher returns for lenders. Other direct lenders like banks or credit unions have operations costs to consider (staffing, rental space, marketing, etc.), which they factor into the interest rates of their loans. P2P lending eliminates those additional costs to provide borrowers with reasonable rates. Credit score is still a factor here, but an individual investor may be more empathetic to your situation than a traditional lender.
4.) Application Process
For most personal loans, lenders require a credit check. As we mentioned, personal loans are unsecured, so the risk is higher for lenders. By checking your credit, a lender will be able to see how you’ve managed previous debt to give them an indication of how you may manage a loan with them. The minimum credit score accepted is typically in the low 600s, but this depends on the lender.
If you are using a Loan Matching Service, a credit check may not be required to browse loan offers, or if it is, these companies will make a “soft inquiry” on your credit report, which will not impact your score. However, once you are matched with a direct lender, they may require a “hard inquiry” in order to be approved for the loan. A “hard inquiry” will show up on your credit, and too many over a short period of time may scare off potential lenders.
If you have poor credit, it is still possible you’ll find a willing lender, but you’ll likely be paying an enormous interest rate in order to lessen that lender’s risk. Keep that in mind before accepting the line of credit right away.
When you apply for a loan, lenders will require you to submit personal information. This application information often includes your name, Social Security number, government-issued identification, home address, phone number, email address, checking account information, and possibly more. They also require that the applicant be at least 18 years of age, and some require US citizenship or permanent residency.
If you’ve filed for bankruptcy, you may not qualify for a loan with some personal loan providers. There are some companies who do not exclude potential borrowers because of bankruptcy, but just like individuals with poor credit, this may result in much higher interested rates and low loan amounts.
All lenders require a regular and reliable source of income. Most lenders require the borrower to be employed, however, some will consider disability payments, child support, alimony, or other income sources sufficient. Again, it all comes down to the policies of the particular lender. Additional income-related information that may be required during the application process includes pay dates, monthly income verification, and a minimum employment duration requirement.
Some lenders require loan applicants to fax documentation to them, while others are able to process loans without hard copies. Before you apply for a loan, make sure you know what steps you’ll need to take to make the loan processing move quickly.
5.) Service Features
There are several features and stipulations to keep in mind when applying for a personal loan. Each state has different rules and regulations when it comes to personal loans, and not all lenders are licensed in every state. If you are not eligible for a loan because of the state you live in, try looking at another provider or think about visiting a local bank or credit union instead.
Once you have filled out your application, the lending company will considers your eligibility and get back to you whether your loan has been approved or not. Typically this approval process takes just a few minutes, however depending on the lender your application could take longer, though this is not as common.
Some lenders also offer direct deposit to checking accounts. All of the Top 10 personal loans providers will directly deposits your funds into your checking account. Most commonly the funds are deposited by the next business day, but some lenders offer same-day or overnight deposit. Inquire about these options if this is something you would prefer.
Loan providers also understand that taking out a loan is a major decision, and many give their customers the opportunity to change their minds after the loan has been approved and the funds has been moved to the borrower’s account. Typically if this is offered, the company will give you a 24-hour cancellation window after the loan has been deposited in your account to change your mind.
Additionally, some providers allow you to have multiple loans out at the same time, while others set the limit to one active loan per borrower. If you are interested in a second loan, some companies may not allow this, while other may require you to show regular and timely payments on your first loan before being considers for a second loan. Typically this means anywhere from six to 12 on-time payments. When repaying the loan, most lenders will allow you to set up electronic transfers to make paying on time easier. All of the Top 10 companies this option.
6.) Customer Service
If you are looking for a loan from an online loan provider, chances are you will need to apply online. However, some companies are able to accept applications by phone.
Customer support through these companies is offered a number of ways, including email support, live chat, and a customer service phone line potentially. We prefer companies who allow customers to speak to a live representative. There is a lot to consider when applying for personal loans, and committing to a loan can be intimidating. Having the ability to speak to someone is a big plus, especially when your personal information and large sums of money are in play.
No matter what kind of customer support options the provider has, make sure you are comfortable with the method of communication they emphasize. That way, if there are problems or you have questions about anything, you want to know the company is available to help in a way that suits your personal preference.
Be aware of information security. You are sharing a significant amount of private and personal information about yourself and your finances with the loan provider. You want to make sure that their website is secured with encryption. You can tell a site or page is encrypted by looking at the URL. An encrypted page will start with, “https” as opposed to “http.” Some websites only encrypt pages where data is transmitted, like the loan application screen or a customer log-in page, so we suggest checking there instead of on the company’s home page.
Finally, use common sense. If a loan offer sounds too good to be true, you can never seem to get in contact with the company, or anything else seems off, do not give them your information or accept the loan. There are a number of scams and disreputable companies out there preying on consumers, so it’s better to be safe than sorry.
If you do give your personal information to what you find to be an unreliable source, feel free to refer to our articles regarding identity theft for tips and precautions you may want to take to better protect yourself.
With so many Personal Loan companies to choose from, reading reviews from consumers who have been in your shoes can be a great way to help you decide. Here are a few things to look for when combing through reviews.
To find the best personal loan for you, visit the Top 10 companies here!
Other Reviews: Guide to Lenders • 3 Year Loans • PersonalLoans • Lending Club • Money Today • SignatureLoan • LoanStart Personal Loans • Upstart • LendingPoint • 100 Day Loans • 100 Lenders • eLoan Personal • Cash Mojo • One Hour Loan • Avant Personal Loans • One Click Loan • 5 Minute Loan Application • NetCredit Personal Loans • Bad Credit Loans