For those with excellent credit, there is some good news on the personal loan front: APRs for the week of October 4 were down slightly from 14.20% for a three-year loan to 14.97 % for a five-year loan the previous week, at 13.68% and 14.22%, respectively, according to data released this week by Bankrate. And you might get a much lower than average rate because a number of issuers offering rates from around 5%, for qualified borrowers. But for those with only fair credit, APRs actually increased slightly, reaching 27% for a three-year loan and 20.61% for a five-year loan, from 26.69% and 26.26%, respectively. (You can see all the latest rates, broken down by credit score, in the table below.)
|3 years, fixed rate||5 years, fixed rate|
What is a personal loan?
A personal loan is a loan from an online lender, bank, or credit union, usually for amounts between about $1,000 and $100,000. You often repay personal loans at regular intervals, such as monthly, over a period of one to seven years. You can often get these loans quickly, sometimes in as little as a day or two, and they sometimes carry lower interest rates than credit cards, but usually carry higher interest rates than things like home equity loans or home equity lines of credit.
Who could benefit from a personal loan?
If you need a loan fast, this might be a good option for you, assuming of course you can pay it back and get a good rate. “Getting a personal loan often allows you to accomplish something sooner by giving you funds up front rather than waiting to save up for it,” says Lauren Anastasio, Certified Financial Planner at SoFi. And Ted Rossman, senior industry analyst at CreditCards.com, notes that in addition to quick funding, these loans are often easier to obtain than other types of funding like business loans, especially if you’re just starting out and that you don’t have much, if any, income from the business.
“Personal loans can be very useful tools depending on what you use them for,” adds Anastasio. Indeed, you could use a personal loan to consolidate your debts and potentially save money if you got a lower interest rate on the personal loan than on your debt. Another advantage? When transferring credit card balances to a personal loan, shifting revolving debt to an installment loan can significantly improve one’s credit, says Matt Schulz, chief credit analyst at LendingTree. Your credit makeup, or the variety of loan types on your credit report, is an important factor in FICO credit scoring formulas,” he explains.
Personal loans also work well for home improvement projects you want to get started quickly, like repairing a roof, because you can typically go from application to financing in a week or less, experts say. They may also be an alternative to consider for small business loans, and if you have good credit, they may come with lower interest rates than business and personal credit cards.
But experts say you shouldn’t use personal loans to cover discretionary purchases like vacations and retail splurges. “Personal loans are a big commitment for short-term discretionary purchases. Everyone is eager to get out and travel these days, but even the smallest personal loans often have repayment schedules of a year or more,” says Annie Millerbernd, personal loan expert at NerdWallet.
What are the advantages and disadvantages of personal loans?
In addition to quick funding, these loans also have other advantages. “Not only do you avoid putting your house or car on the line, but you also avoid giving up the equity in your business,” says Rossman; this is because most of these loans are unsecured, meaning the borrower does not have to provide collateral to secure the loan.
However, their interest rates can be higher than other types of loans like home equity loans and HELOCs. And you have to pay attention to the fees. Millerbernd warns borrowers to watch out for origination fees. “Lenders who charge origination fees often take a percentage of the amount you borrow from the loan before it reaches your account, which is something to consider if you’re trying to borrow a specific amount, because with origination fees, you could find yourself short a few hundred to a few thousand dollars,” says Millerbernd. And she adds, “Personal loans also have the potential to speed up expenses, giving you the flexibility to pay a significant expense without having to save for it.”
What do personal lenders look for in a borrower?
Rossman says every lender is different, but generally they don’t care too much about what your personal loan is for. “Generally, they’re much more concerned about your credit score, income, debt-to-equity ratio, and other factors that affect the likelihood of you paying them back,” Rossman says. The debt-to-income ratio can be calculated by adding up all your monthly debt payments and dividing them by your gross monthly income; many lenders are looking for a DTI of 35-40% or less, although many lend to people with a higher ratio.
How to get a personal loan if you have a lower credit score
In general, the lower your credit score, the more interest you will pay for a personal loan. And some borrowers may not qualify at all. That said, there are a few things you can do that could take you from rejection to acceptance with a lender. “If you’re close to the threshold, making a large payment on a revolving balance or using something like Experian Boost could get you over the bar pretty quickly,” McBride says. Additionally, “if you make all your debt and bill payments on time and repay all revolving debts, time will heal the wounds,” he adds. Remember that you must repay a personal loan in full and on time to ensure that it does not affect your credit score later.