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What is a Personal Loan & Should You Get One?

Two good questions for the financially-astute. To begin with, a personal loan, often referred to as an unsecured loan, is an amount of money loaned to an individual by a lender that requires no collateral. This is as opposed to other types of loans such as a mortgage or car loans that use the item in question to secure the loan repayments.

Once a last resort for those in desperate straits, personal loans have been slowly making a comeback. Today, millions of people take out personal loans because the terms are better, the rates are competitive, the options are numerous, and surprisingly enough, personal loans often help borrowers improve their credit ratings. Lenders and other financial institutions will frequently look at your credit history to gauge whether or not you are a good investment. Someone with no credit history actually looks worse than someone who has borrowed money and paid it off responsibly. Paying off debt in a timely fashion can show investors that you are responsible when it comes to your handling of money, actually increasing your credit status. So, the modern day borrower’s question is no longer, do I have any other option, but rather, is a personal loan a good option for me.

Here are a few things to take into consideration when making a comparison between personal loan providers.

Personal Loan APR

The APR calculation on personal loans will vary depending on your lender but the APR* on these loans is lower than what you would typically receive from a payday or short-term loan – usually starting at 10% and capping at 36%. These loans can be a good alternative to payday loans because they are less expensive than credit cards and as mentioned previously, the APR is lower than it is on payday loans. It is not ideal to owe any money but if you require a loan, then a personal loan could certainly be a viable option.

 

* APR rates mentioned include associated fees.

* Full repayment for the loans displayed range between 60 days to 180 months.

 

Representative example: assuming a loan of $10,000 over 60 months at a fixed rate of 3.1% per annum and fees of $60.00. This would result in a representative rate of 3.3% APR, with monthly repayments of $180.80, for a total amount paid of $10,848.00.

 

APR Disclosure:

*Your APR may differ based on loan purpose, amount, term, and your credit profile. Rate is quoted with AutoPay discount, which is only available when you select AutoPay prior to loan funding. Rates under the invoicing option are 0.50% higher. Subject to credit approval. Conditions and limitations apply. Advertised rates and terms are subject to change without notice.

Payment example: Monthly payments for a $10,000 loan at 4.99% APR with a term of 3 years would result in 36 monthly payments of $299.66.

 

Same-Day Funding Disclosure:

You can fund your loan today if today is a banking business day, your application is approved, and you complete the following steps by 2:30 p.m. Eastern time: (1) review and electronically sign your loan agreement; (2) provide us with your funding preferences and relevant banking information; and (3) complete the final verification process.

Secured vs. Unsecured Loans – What’s the Difference?

If you’ve been looking into personal loans, you’ve likely come across the terms unsecured and secured loans.

The difference is simple: secured loans require some form of collateral to secure the loan, while unsecured loans do not. As with the example given above, when you take out a mortgage loan, the house you are buying serves as the collateral for your loan. If you can’t make the payments (and are unable to work something out with the lender in control of your loan), then the lender has the right to foreclose on the house, taking that in lieu of the monthly payment you owe.

Alternatively, unsecured loans require no such deposit. While there will be consequences for not paying your monthly required debt amount, nobody is going to come collect your wedding dress or purchased items because you missed a payment. While you will, on occasion, find the rare secured option, the vast majority of personal loans are unsecured loans.

Common Types of Personal Loans

While personal loans is a general category, there are actually several different types of financial options that fall under this larger umbrella term. A personal loan can range from a mere $500 that you need just to get through a tight spot one month, up to $100,000 for major expenses. Regardless of how large or small the amount is, they all fall under this general categorization. Some of the more traditional types of personal loans people take out include:

  • Fixed rate loans - This is a loan in which the interest rate stays constant throughout the life of the loan, allowing the borrower to predict the amount of their future payments.
  • Variable rate loans - Unlike a fixed rate loan, the interest rate on a variable rate loan fluctuates in accordance with the market. You may get a lower initial rate than you would with a fixed rate loan, but there is some risk involved, as the market can be unpredictable, and you can't know with complete certainty what the amount of your future payments will be.
  • Peer-to-peer - Overhead and bureaucracy are reduced with this type of lending in which individuals seeking loans are linked directly with lenders through online services such as LendingClub.

Peer-to-Peer (P2P) Loans

In recent years, peer-to-peer (P2P) loans have become one of the most popular options for people looking to take out small loans with friendly interest rates. Often called “social lending” or “crowd lending,” P2P sidesteps the banks and puts borrowers directly in touch with investors.

Like with home improvement loans, for the most part borrowers who use P2P lending are looking for small unsecured loans up to around $40,000, often to pay for small purchases. Lenders usually have a small amount of money to invest in the P2P market, and spread a few thousand dollars across a number of different lenders in order to offset their default risk.

There tend to be fees involved with P2P loans, including origination fees which can range from 0.5% to 5% of the loan. Late fees can also be expensive if you don’t make your payments on time. In addition, because they are unsecured loans, you can often face high interest rates of around 15% or so.

P2P loans are a good option if you are unable to get a loan from a financial institution because you have less than great credit, or lack any home equity or collateral to put down for a secure loan. P2P loans are approved and sent out quickly, and are a very smart option if you’re looking to take out a small loan and want to (or have to) sidestep the banks.

What’s the Deal With Interest Rates?

Probably the most important factor when looking into loans is how much interest the lender is charging. Interest adds a significant amount to your overall repayment terms, and every percentage increase changes the outcome dramatically. For example, if you choose to take a loan out for $10,000 with an interest rate of 5%, you’ll end up paying $10,500 over time. If you get an interest rate of 10% though, you’ll be paying $11,000. And, the amount increases as you go. So, when you look into personal loans, be sure to pay close attention to the interest rates being offered.

Factors that Influence Your Interest Rate

Lenders give interest rates based on both loan type, and the level of risk that the borrower presents. For instance, a variable rate loan, in which your interest rate can fluctuate as the market changes, will often come with lower interest rates than a fixed loan rate, which remains consistent throughout the life of the loan. The repayment term will also influence interest rates, as will the amount being borrowed.

However, interests rates are more strongly influenced by the prospective borrower’s financial situation and history. Those with a good credit score and history will get more favorable interest rates in most instances. Other aspects of a borrower’s financial situation, such as salary and debt, also contribute to interest rate.

How Using Autopay Can Help You Reduce APR

Before we explain how autopay can help you reduce your APR, let’s define both those terms. Autopay is a payment system that you can set up so that your monthly loan installments are paid automatically. Most people will tie their monthly loan payments to a bank account, so the payment instantly goes out on the pre-defined repayment day each month. Neat and simple.

APR is an acronym for annual percentage rate. It is the sum total of charges, fees, and payments you’ll make on your loan each year. The APR represents how much you are going to pay each year, so the lower the APR, the less you are going to pay in the long run. Lenders will generally list their APR for your prospective loan next to other loan terms like interest rates, loan repayment contract length, amongst other details.

Following so far?

Ok, now that you understand both terms, what does autopay have to do with APRs? This is the part you are going to like. Many lenders will offer borrowers a lower APR just for signing up with autopay. Why? Because autopay ensures that you won’t miss a payment or be late for your monthly expense simply because you were negligent or didn’t realize what day of the month it was. It’s sort of a guarantee that the lender will get paid back in a more timely, efficient manner. And, for this type of responsibility and efficiency, lenders are willing to reward you, so take advantage of the benefits.

How to Choose a Personal Loan Provider

In order to choose the best personal loan provider for you, you must first determine what your needs are as a borrower and then see which lender can fulfil those needs at the best rate possible.

Some of the key criteria that you should check when comparing loan providers are:

  • Maximum Loan Amount: Some online loan providers offer loans up to $20,000, while others will offer loans as high as $100,000.
  • APR: This is the yearly amount that the loan will cost you when you take into account interest rate and all other fees. Different lenders will give you differing APRs.
  • Loan Term: How quickly can you afford to pay back your loan, and will you simply be tacking on more interest if the term of your loan is longer? Loan terms vary from months to years, so it is advisable to check with your lender when your loan must be paid off.
  • Qualifications: Some lenders will require you to have an excellent credit score in order to get a loan, while others will be more forgiving. You may be required to provide proof of employment or income as well. It is advisable not to waste your time applying for a loan before you check the lender’s basic requirements.
  • Simplicity and Speed: A major advantage that online lenders have over banks is that they generally cut out a lot of the bureaucracy from the process. This means an easier and quicker process for the borrower. Some lenders can transfer funds to you in as a little as a few days.

LendingTree​, a popular loan marketplace that helps pair up lenders with borrowers that fit their criteria, says it best with its catchphrase: “When banks compete, you win.” The idea behind this catchy slogan is simple: competition is good for consumers because it drives down the baseline price. Just like if you have 3 stores vying for your business, they will each try to undersell the other, so you walk away with the best price for the item you are shopping for. Lenders are the same. With so much competition out there today, investors are actually making it easier than ever for borrowers to secure personal loans with excellent terms. And, there’s plenty of competition out there, so shop around and compare for the best rates possible.

How to Apply for a Personal Loan

In contrast to banks, online lenders generally have a simple and quick application process. Prospective borrowers will first have to fill out an online application, providing information such as:

  • How much is the loan request for?
  • What is the loan for?
  • Personal information, including email and phone number

After this, the lender will run a soft credit pull in most cases. This means that the lender will check your credit in a way that will not affect your credit score. Based on your credit score and other data, the lender will decide what loan amount you qualify for, at what terms, and at what interest rate. You may also have to provide information, such as income level and housing status.

Loan aggregators, such as LendingTree, make prospective borrowers fill out a single application that pre-qualifies them for a number of loans from different lenders.  Once you have been approved, which takes a few minutes in most cases, you will be shown a number of options that match your creditworthiness and loan amount requirements. After choosing the best option, you will finish applying directly with the lender selected.

At some point during the application process you may have to provide certain paperwork, such as:

  • Identification: driver's license, passport
  • Proof of residence: rental agreement, utility bills
  • Recent bank statements
  • Pay stubs

With most online lenders the entire process will take a matter of days, or weeks at the most.

Top Personal Loan Providers

Personal loans are changing the lives of millions of people every day, opening new windows of opportunity and financial relief where none existed before. Now that you know the basics of this fundamental financial resource, you are ready for a comparison of the leading loan providers. Here are some of the best names in the industry for securing a personal loan for yourself.

SoFi

​SoFi stands for Social Finance and it began by helping students drowning in debt get loans. The institution has since expanded, offering mortgages, personal loans to pay off expenses—such as credit card debt—and wealth management services. The following are some of the key points about SoFi that can help you determine if they fit your needs:

  • SoFi offers loans ranging from $5,000 to $100,000.
  • It’s geared to those with good credit, requiring a minimum score of 660, as well as proof of income.
  • SoFi offers both fixed and variable interest rates, with APRs ranging from 5.49 to 14.49 percent. The rates are lower if you opt for automatic payments, and there are no origination fees or hidden fees.

Visit the unabridged SoFi review to learn more about this top notch loan provider.

LendingTree

​LendingTree is not a direct lender, it is a whole marketplace of reliable lenders competing for your business by offering you the best rates possible. Potential borrowers fill out a pre-approval form for Lending Tree, which then sends them a list of lenders that fit their needs. As a borrower, you can choose the lender with the most beneficial loan terms. Here are some of the highlights of LendingTree:

  • LendingTree can connect you with lenders that offer loans ranging between $1,000 and $35,000. A lower credit score does not mean that you will be denied a loan, although it might result in higher interest rates.
  • Because LendingTree is a platform for various lenders, APRs can range widely, from 5.99 to 35 percent. LendingTree allows borrowers to avoid the complicated process of applying for several loans separately. Instead, LendingTree handles all the heavy lifting by delivering a list of lenders that are likely to approve you for a loan.

Visit the full LendingTree review to learn more about this notable loan provider.

Lending Club

For over a decade, Lending Club has run a customer-focused peer lending system, devoted to helping customers receive low interest loans. The company is run completely online, and has won multiple awards and the praise of industry analysts. Lending Club facilitates personal and business loans from third parties, and the loans can be used for anything from debt consolidation to home improvement.

  • Customers can receive loans from $1,000 to $40,000 loans, payable over 36 or 60 month terms.
  • APR rates range from 5.99% to 35.89%, with an average of 14.6%
  • Loans are approved within minutes
  • Lending Club offers no hidden fees for signing up or processing loans

 

Visit the extended Lending Club review to learn more about this leading loan provider.