If you need money now and don’t have collateral, such as a house or car to use, you may need a personal loan or even a secured personal loan for poor credit.
Personal loans are often easy to qualify for, processed fast, and give you the funds you need in a matter of days. While you can go to your local bank for a loan, they often have strict guidelines that many borrowers can’t meet. Personal loan lenders, on the other hand, are more flexible and can fund your loan in as little as a day or two.
What is a Personal Loan?
A personal loan is a loan from a bank or personal loan lender that you can use how you want. It differs from a home or car loan, which are for a specified purpose (buying a home or a car). You may use personal loan funds however you need and often don’t need any collateral.
Many people use them to consolidate high interest credit card debt, pay unexpected expenses, or make a large purchase, even paying for college. Lenders offer secured and unsecured personal loans, but the unsecured option is the most common.
Personal loans work differently than a credit card. Rather than a minimum monthly payment, you’ll pay principal and interest each month. Personal loans have a fixed term (number of months you have to repay the debt) and you pay more interest at the start of the loan and less as you near the end of the term.
How can I Apply for a Personal Loan?
Like any other loan, you must apply for a personal loan with the best personal loan lenders using these steps:
- Complete an application. You’ll answer questions about yourself (name, address, birth date, and social security number). You’ll also disclose your income, assets, and liabilities. The application is how the lender gets to know you and your financial habits.
- Give the lender permission to pull your credit. All lenders pull credit before they decide if they’ll approve your application. Personal loan lenders, however, only do a ‘soft pull’ when you apply. A soft pull doesn’t affect your credit score. Lenders use this information to determine if you qualify. If you do, they’ll determine the loan amount and personal loan APR (interest rate) based on your credit score, income, and current debts.
- Accepting or declining the offer. Once you receive your offer(s), you decide what happens next. If you like the terms, you can accept the offer and move onto the next step. If you don’t, you can decline the offer and your credit remains unaffected.
- Moving forward with the lender. If you accept, the lender will do a ‘hard pull’ on your credit report, which is a more official credit pull. This means the lender intends to lend you money. Your credit score gets hit 5 points or so for the inquiry and the lender processes your application.
- Provide documentation. The lender will ask for documentation that proves your income, assets, liabilities, and employment. If you have any ‘odd’ circumstances, such as collections, a gap in employment, or other unique issues, the underwriter may also ask for an explanation.
- Get the funds. Once the underwriter clears your conditions, which usually takes just a day or two, you’ll sign paperwork and the lender funds your loan.
How Much can I Borrow?
Personal loan lenders vary their requirements, but on average, lenders offer loans between $1,000 - $50,000. You may find the occasional personal loan lender that loans more than $50,000, but you’ll need great credit and a low debt ratio to qualify.
How can I Get a Personal Loan with No Credit or Bad Credit?
Your credit score is the largest factor lenders look at, but if you have no credit or bad credit, you may still have options.
If you need a personal loan with no credit, you’ll need to prove alternative forms of credit. Personal loan lenders want to see that you responsibly handle your finances. Any bill you pay consistently may count as an alternative tradeline, including:
- Utility bills
- Cable bill
- Insurance bill
- Tuition bill
If you have credit, but your score is less than 620, you may need a personal loan for poor credit. While most lenders want great or at least average credit, there are options available. Lenders charge higher interest rates, so make sure you read the fine print. You may see interest rates well over 30%.
If you have poor credit, you may also try a cosigner. If a family member or someone else you’re close to has good credit, they may be willing to go on the loan with you. The ‘better’ credit may help you get approved.
Do this with caution, though. The cosigner is responsible for the debt if you don’t make your payments. Make sure you’re taking on a loan you can afford and have a way to make the payments no matter what happens.
What is a Good Personal Loan APR?
All lenders charge interest on personal loans. It’s how they make money. If you have great qualifying factors, you have a better chance of securing a lower rate than if you have ‘poor’ qualifying factors.
The interest rate is quoted as a percentage. For example, you may get a quote for a loan with a 10.0% interest rate.
But, your loan may also incur fees. The loan’s APR includes the interest rate and fees you pay over the loan’s term. It’s an easy way to compare loans, so you can get a personal loan with the best APR.
Since most personal loans are unsecured, lenders charge between 10% - 35% APRs. The better your credit and the better your qualifying factors, the lower the personal loan APR you’ll pay.
What is the difference between Secured vs Unsecured Personal Loans?
You may come across personal loan lenders who offer secured and unsecured personal loans. The main difference between the two is the collateral. Secured loans require collateral, such as a car or other property. If you default on your loan, the lender keeps the collateral and liquidates it to get the funds back.
Unsecured loans don’t require collateral, but they have higher interest rates and APRs to make up for the risk. Lenders don’t have anything to fall back on if you default, which means they’re out of luck if you stop making your payments. While putting up collateral is risky, it could save you thousands of dollars over the loan’s term with its lower interest rate.
Can a Personal Loan Hurt your Credit?
Unlike a credit card, a personal loan (or installment loan) may help your credit rather than hurt it. When you have credit card debt, it’s a liability. Your credit score considers the amount of debt you have outstanding compared to your total credit limit. If it’s too much (more than 30%), it hurts your credit score.
Personal loans, on the other hand, aren’t revolving debt. You make fixed payments over a finite period. The installment debt may help your credit mix, making you look ‘less risky’ and may even improve your credit score.
Should I Use a Personal Loan to Pay off Credit Card Debt?
Using a personal loan to pay off high interest debt is one of the most common uses of the personal loan.
If you qualify for one of the best personal loans interest rates, you may save a significant amount of money over the life of the loan. Credit card interest rates average 19.99% or higher and most personal loan lenders offer loans at rates well below that, especially if you have great credit.
With the fixed payment amounts and shorter terms, many consumers save thousands of dollars on credit card debt when they consolidate it with a personal loan.
Can I Pay off a Personal Loan Early?
Read the fine print on your personal loan. Most personal loan lenders don’t charge prepayment penalties but make sure you check. If there is a penalty, you may pay a small fee for paying the loan off within the first couple of years. This is how lenders make sure they make enough money collecting interest rather than allowing you to pay the loan off early.
Look for the Best Personal Loan Lenders for the Best Deals
Today there are hundreds of personal loan lenders competing for your business. Know what you need and make sure you understand the loan’s terms. Everyone pays interest, but what rate of interest are you paying? Also, look at the fees as they affect the overall cost of the loan. Find the loan that fits your budget and costs you the least amount in interest and fees before securing your personal loan.