Personal Loans

A personal loan is a catch-all term for any non-specialized loan. You've probably heard of mortgages, car loans, and the like. These loans have specific functions (buying a home and a car, respectively). A personal loan, on the other hand, is a generic loan where you get money from a lender and pay it back piece-meal. Personal loans can be used for a number of personal uses from wedding expenses to consolidating debt.

Since personal loans are applicable to an almost limitless variety of circumstances, the rates on personal loans vary greatly, with annual percentage rates (APRs) from 4.83% to 36%. Rates for personal loans are usually fixed, which means that the rate stays the same regardless of market fluctuations. Generally, rates for personal loans tend to be higher than loans with a specific function, such as student loans, because there is a higher risk that the money will be spent irresponsibly or will not be recuperated by the lender. For personal loans, as with many kinds of loans, APRs are higher if you have a low credit score.

Secured personal loans (loans with collateral) have lower APRs than unsecured personal loans (loans without collateral) since the lender can recover some of their losses if the loan is in default.

Lenders place a lot of emphasis on credit scores for personal loans. Borrowers with the highest approval rates typically have credit scores of at least 700. However, scores of at least 640 lead to approvals in most states. 

In addition to credit requirements, most personal loans require applicants to have a steady employment history and a debt to income ratio (the percentage of your monthly income which goes to minimum debt payments) of 45% or less.

Having a bad credit score can be a real barrier to good financing, and, frustratingly, it’s difficult to improve your credit if you can’t get loans to pay down. While almost all legitimate personal loans have some credit requirements, there are several options for those without great credit. 

A minimum score of 580 is required for any chance of qualifying for a personal loan. However, these are only typically only available in the following states: Alabama, California, Delaware, Florida, Georgia, Illinois, Missouri, New Mexico, Ohio, Oregon, South Carolina, South Dakota, Utah, and Washington.

Borrowers must have a minimum annual income of $20,000. However, the average annual income for approvals is around $45,000.

Another option is to have a loved one with a higher credit score act as a co-signer. The lender will then factor in both your credit score and the credit score of the co-signer. If you do get a co-signer, be aware that their credit score is now linked with this loan, so if you are late for a payment you will negatively affect not only your credit score but theirs, too. 

For more information on rebuilding your credit, you can check out our guide here.

Legally, the minimum age to get a personal loan is 18 years old. However, most approved borrowers are at least 25 years old. This is because the length of your credit history is a major factor of your credit score. A longer credit history leads to a higher credit score.

John and Jane Doe are getting married but as the date approaches, they realize they need a personal loan because their wedding has gone way over budget. In fact, it went over budget by $7,500! 

Thankfully, they both have good credit and are likely to be approved for a personal loan. 

Let’s suppose they are able to borrow $7,500 at a 9% APR on a 3-year term. Their monthly payments will be $238.50 for 36 months, totaling $8,585.93. This means it will cost Mr. and Mrs. Doe a total of $1,085.93 in interest.

The Annual Percentage Rate is the rate at which your loan accrues interest. It is based upon the amount of your loan, cost of the loan, term of the loan, repayment amounts and timing of payments and payoff. By law, the lender and partner must show you the APR before you enter into the loan. States have laws limiting the APR that the lender or partner can charge you. Rates will vary based on your credit, loan size and whether collateral is provided, with the lowest rates available to customers with good credit on larger, secured loans. Minimum and maximum loan amounts and APR may vary according to state law and lender or partners. We recommend you read the lender’s and partner’s personal terms and conditions in full before proceeding for a personal loan.

Before you apply for a personal loan, the first thing you should do is consider whether a personal loan works for your needs. If you have a specific purpose in mind for your loan then a specialized loan might be a better choice. 

For example, if you’re thinking of getting a personal loan to do some renovations on your house, it might be more cost effective to get an FHA 404k renovation loan. Once you decide that a personal loan is what you want, you’ll need to find out what your credit score is. Each of the three major credit checking agencies offers one free credit check a year. After you get your credit report, read it over to make sure everything is accurate, and if there are errors challenge them to get your score to where it should be. You should now look into what loans you qualify for and start comparing options. 

If the only options available to you are high-cost loans, then it might be worthwhile rebuilding your credit for a period before committing to a personal loan. If you find a loan which suits your needs, and the rates seem appropriate and manageable, apply for it! 

Personal loans involve less paperwork than a lot of other loans, so applications are quick and straightforward. If you’re approved, you will get your funds straight away. Personal loans give you great flexibility with only a mild increase in price. 

If there is a loan specialized for your purpose, then that loan is likely a better fit, but if there isn’t, or if you plan to use the money for several purposes, a personal loan might be the best choice for you.