What is a personal loan?
If you take out a loan from a bank, credit union, or online lender, it is a personal loan. Typically, personal loans are paid out in a lump sum and repaid in monthly installments.
Some loan types are used to pay for specific purchases, such as a house or vehicle. But the best unsecured personal loans can be used for almost any reason. For example, you can take out a personal loan to make emergency home repairs, finance renovations, pay for a wedding, or cover medical expenses. With an unsecured personal loan, the lender asks nothing more than your good credit rating and your written commitment to repay the loan as agreed.
In return for using the lender’s money, you pay back the loan with interest. The better your credit score, the lower you can expect the lender’s interest rate to be. Even if your credit score isn’t as good as you’d like, you can still qualify for a bad credit personal loan. However, you are likely to pay a higher interest rate than other borrowers.
When is a personal loan a good option?
Say your kitchen was designed sometime during the Truman administration, or you’re looking to consolidate debt. A personal loan can provide you with the funds to get things done. Most lenders don’t care how you spend the money as long as you pay it back as promised. If you know how you’re going to spend the money and have a plan to pay it back, a personal loan can be a good tool to help you achieve your goals.
If you need the money from your personal loan fast, look for a loan with “streamlined approval.” This means you don’t have to wait long to get the loan funds. Because some loans are same-day funded, a personal loan can help you when you hit a financial hurdle — even if you need the money fast.
What should I look out for with a personal loan?
You may be surprised to learn how many loan options there are. Whether you have great credit or are working to improve your credit, the very best loans on the market have three things in common:
Low interest rate
A good loan is one with a low interest rate. Interest on a loan is calculated as a percentage of the total loan amount. The lower the interest rate, the more money you save on the loan repayment.
Let’s say you need to borrow $20,000 to replace the roof on your home and you plan to get a five-year loan. You are considering two options: Lender A and Lender B. Below we have summarized these two imaginary lenders and how their interest rates would affect the cost of your loan. Even a small percentage change can result in significant savings. It is clear that the lender that offers the lower interest rate can save you money over the life of the loan. These are funds that you can use in other ways, e.g. B. to invest in your future.
- Interest rate: 5.5%
- Monthly payment: $382
- Total interest paid over the life of the loan: $2,921
- Interest rate: 6.9%
- Monthly payment: $395
- Total interest paid over the life of the loan: $3,705
You might only pay an additional $13 per month for a loan from Lender B, but that small difference will cost you $780 more over the life of the loan. For help finding the best low-interest loans, see our guide to good personal loan rates.
Do you have bad credit? You will likely pay a higher interest rate on a personal loan. If this is your situation, you have two options. You can take steps to increase your score and wait until it’s in better shape before applying for credit. The second option is to get a loan now and refinance your personal loan later (if your credit history is better and you can get a better interest rate).
Loan terms that suit you
The “loan term” is the period of time in which you must pay back a loan in full. Some people choose a longer loan term because it keeps their monthly payments low. However, the longer you carry a loan, the more interest you pay overall. Find your personal loan term sweet spot, the shortest term with the cheapest payment. The best loans fit your budget and schedule.
Another important feature of a great personal loan is that there are no or very low fees. Fees can be sneaky. Suppose a lender offers you a low interest rate but piles up fees. This loan can end up costing more than a loan with a slightly higher interest rate but no fees. The best personal loan lenders charge no processing fee and keep other expenses — like prepayments and late fees — to a minimum.
For example, many lenders charge processing fees to cover the cost of processing and distributing your loan. Handling fees range from 1% to 8% of the amount borrowed. Using the above scenario and borrowing $20,000 to replace a roof, you could end up paying anywhere from $200 to $1,600 in construction fees alone.