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What is a Personal Loan?
A personal loan is a type of installment loan that is unsecured by collateral and can be used for almost any personal purpose. The most common use is to consolidate debt into a short term loan with a fixed payment at a lower APR.
Paying off your credit cards with a personal loan can help rebuild your credit by lowering your monthly payments and paying down your principal balance sooner.
Personal loans are different than secured loans like mortgages and auto loans that are secured by collateral. In addition, secured loans have specific functions like buying a home or a car. Conversely, a personal loan is a generic loan where you get money from a lender and pay it back piece-meal for almost any personal purpose like wedding expenses, emergency expenses, and consolidating debt.
Table of Contents
- Credit Requirements
- For Bad Credit
- How Old Do You Have to be to Get a Personal Loan?
- Personal Guarantee
- Payment Term Example
- APR Disclosure
- How to get a Personal Loan
Since personal loans are applicable to an almost limitless variety of circumstances, the rates 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 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 loans (loans without collateral) since the lender can recover some of their losses if the loan is in default.
A personal loan origination fee is a charge by the lender based on a percentage of the loan amount to cover underwriting and servicing costs for the loan. The loan’s APR includes the origination fee so you can compare costs more easily.
Personal Loans with No Origination Fee
There are four reputable personal loan companies that do not charge origination fees.
- Marcus by Goldman Sachs
Origination Fees by Lender
|Avant||0.95% to 4.75%|
|Best Egg||0.99% to 5.99%|
|FreedomPlus||0% to 5%|
|Lending Club||1% to 6%|
|Lending Point||0% to 6%|
|OneMain Financial||Varies by state|
|Payoff||0% to 5%|
|Prosper||2.4% to 5%|
|Upstart||0% to 8%|
Lenders place a lot of emphasis on credit scores. 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 steady employment and a debt to income ratio (the percentage of your monthly income which goes to minimum debt payments) of 45% or less.
For Bad Credit
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 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.
Payment Term Example
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.
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.
Personal Loan Reviews
|Avant||Best Egg||Fig Loans|