Anybody who has incurred a cash flow problem, suffered an emergency, or needed funds to pay for medical expenses, home improvements or even a college education has likely considered a personal loan. Personal loans are appealing because they allow us to acquire large investments and pursue future goals. However, there are many different kinds of loans and it’s important to consider your needs and financial situation before deciding on which type of personal loan is best for you.
Here's How I Rated the Best Personal Loan Companies
I sat down and compared all the most popular lenders by different factors such as:
- Loan amounts
- Loan terms
- Customer service
Although there's lots to consider when finding the right loan, one of the most important aspects is finding a reliable, trustworthy lender from the range of top personal loan providers. A responsible lender will connect you with a loan that matches your needs, support you through the application and repayment process, and be clear and upfront about their fees and charges.
How to Apply for a Personal Loan with a Reliable Lender
To find a reliable lender, first lay the groundwork so that you can spot a reliable, or untrustworthy, personal lender. Here are the steps you have to take to prepare for applying for a personal loan so that you can identify the best personal loan provider for your needs.
1. Calculate how much you need to borrow
When you take out a personal loan, it can be tempting to borrow a bit more than you need. It’s important to remember that you’ll be paying for every dollar that you borrow, so even an extra $100 could end up costing you a lot more in interest. A trustworthy lender won’t encourage you to borrow more than necessary.
At the same time, you don’t want to borrow too little and find that you don’t quite have enough to cover the purchase you need to make.
2. Research loan providers
Do some research and reviews about the best loan provider for your circumstances. Remember that the best loan provider for your next-door neighbor isn't necessarily the best for you, even if they are a reliable lender. Here are some factors to consider in your research:
- Loan providers that serve borrowers with your credit score. If your credit score is low, look for lenders that specialize in bad credit loans
- Your reasons for the loan—some lenders may have restrictions on your loan purpose
- Whether you want fixed or variable payments
- Whether you want a secured or unsecured personal loan
- The length of the repayment term—do you want a long-term loan, a short-term loan, or a micro-loan for just a few months?
- Whether you can borrow the amount you need—different lenders have different minimum and maximum loan amounts
- Whether you can get support if you need to suspend payments for a short time
As well as finding the best lender for your needs, there are important signs to look for that indicate a trustworthy lender that you can rely on. For a start, never go with a lender that isn’t approved by a regulatory body and complies with all national financial regulations. When you’re choosing an online lender, you should also read customer reviews. You can expect to find the odd negative review, but if the majority of the reviews are unhappy with the lender, or you see the same complaints occurring again and again, be warned. Finally, every responsible online lender should have a high level of security surrounding the application and payment process.
3. Check your credit score
When applying for a personal loan, your credit score is the single most important element. Your credit score affects whether you'll get lower interest rates, if you'll qualify for special financing deals, and whether or not you'll be eligible for a personal loan at all. A reliable lender runs a credit check to verify that you can repay your loan.
Credit scores generally appear like this:
- Excellent: 720+
- Good: 690-719
- Fair or Average: 630-689
- Poor: 300-629
If you have an average or poor credit rating, you might want to take some time to build up your credit score so that you can apply again and qualify for better loan terms.
4. Check your debt-to-income ratio
The other significant factor in qualifying for a personal loan is your debt-to-income ratio. This means how much debt you carry in relation to your income.
To calculate your debt-to-income ratio:
- Add up all of your total monthly debt payments, including mortgage debt, credit card debt, and student loan debt
- Add up your total monthly income, such as your paycheck, dividends, or income from real estate
- Divide your cumulative monthly debt by your monthly income. The result is your debt to income ratio
For example, if you have monthly debt of $2,000 and a monthly income of $8,000, your debt-to-income ratio is 25%. The maximum debt-to-income ratio you should have is 36%, and a debt-to-income ratio of 20% is considered very good.
If you have a high DTI ratio, be very wary of lenders that are willing to offer you a loan. Double check that they aren’t charging you sky-high fees to cover the risk that you may default.
5. Gather the information you’ll need
You’ll speed up your personal loan application if you gather together the documentation you’ll need to provide. It will help you answer questions faster and means that you’ll have everything in one place when it’s time to send in your documents. You’ll generally need to find:
- Proof of identity
- Proof of income
- Proof of employment
- Documentation about your existing debts
- Your mortgage and home ownership papers
A lender that doesn’t ask to see your supporting documents is not to be trusted.
6. Apply for a pre-approved offer
Most lenders allow you to apply for a pre-approved loan offer. This involves a soft credit check, which doesn't affect your credit score, instead of a hard credit check. Although it's not a guarantee of your final loan terms, it will give you a good idea of the rates and terms you'll get from each lender. The process of applying for a pre-approved loan offer also gives you a chance to see if the lender is helpful and supportive during the process.
7. Read the fine print
Before you choose one personal loan lender, take the time to read the fine print. Some lenders have hidden fees, like origination fees, which add to the total cost of your loan. Others have prepayment penalties if you repay the loan early, or one-off loan arrangement fees.
10 Red Flags When Looking for a Reliable Loan Provider
Unfortunately, not all lenders are reliable or trustworthy. Keep an eye open for any of these red flags—if you notice one or more, it’s a clear sign to stay away:
- Unreasonably high interest rates. If you compare a few lenders for the same loan amount and repayment term, you'll notice if one set of interest rates is markedly higher than the others.
- Unexpectedly low interest rates. It might sound odd, but very low rates can also be a warning sign. If the interest rates quoted don't seem to match the general average, it could be a sign that the lender makes up the difference with high hidden fees.
- Opaque loan costs. If the lender isn’t transparent about the cost of the loan, it’s a sign that they are hiding something.
- No checks on your ability to repay the loan. If the lender doesn’t run a credit check and verify that you can repay the loan, it’s a clue that they intend to cover their risk with very high fees and rates.
- Poor customer reviews or past customer complaints. If there are a number of complaints about the same issue, it’s a warning sign.
- High-pressure sales. This is where the lender pressures you to borrow more than you originally intended.
- Interest rates that are not monthly. Lenders that charge high rates and fees often try to hide them by quoting interest rates per week or per day, instead of per month so that the rates appear to be lower than they really are.
- Demanding access to your bank account. Many lenders offer you the option of connecting your bank account so that you can make automatic payments. But a predatory lender could insist that you provide access to your account, and then make extra withdrawals that force you to pay overdraft fees.
- They aren’t licensed in your state. Reputable lenders tell you which states they’re licensed in, and never offer loans to people in states where they aren’t licensed. Reputable lenders don’t hide this sort of information, but if you’re unsure, there’s another way to find out. Most states register lenders through the attorney general’s office.
- Unconventional adverts or promotions. Legitimate lenders reach borrowers through the internet or ads in mainstream media. If a lender contacts you in a way that seems fishy, then it probably is fishy. Legitimate lenders don’t offer loans by SMS or through the mail, and they certainly don’t turn up at your door unannounced.
Secured vs. Unsecured Loans: What Are the Differences?
The Benefits: With a secured loan, you offer an asset to the bank as collateral. This means that if you fail to pay back the loan, the bank can seize the property that you offered. Because the bank knows that it has that option, it views a secured loan as a safe investment, making secured loans easier to obtain and making them available with lower interest rates than unsecured loans. The major drawback, however, is the risk that occurs in the event that you can’t pay back the loan, you will lose the property that you offered as collateral.
The Drawbacks: Secure loans can be used for lump-sum payments, such as a home equity loan, or for loans involving smaller payments over time, such as a mortgage or when refinancing. In addition to having lower interest rates, secured loans often have longer repayment time-frames and higher borrowing limits than unsecured ones.
The Benefits: An unsecured loan is a loan for which you don’t offer something you own as backup that the bank can seize if you don’t pay them back. Unsecured loans may be used for a variety of purposes, including student loans and personal expenses. This type of loan often appeals to borrowers who don’t own sizeable assets, such as a home or a car, that they can offer as collateral.
The Drawbacks: Because this type of loan is riskier for the banks, an unsecured loan often comes with a higher interest rate, as well as a lower borrowing ceiling and a smaller repayment time-frame. When considering you for such a loan, the banks will assess your personal credit-worthiness to see if you qualify, so get ready to show your credit score.
Personal Loans vs. Credit Cards: Which Is Better?
Like most consumer finance decisions, there is no correct answer to this question. Both personal loans and credit cards offer strong advantages and disadvantages, namely cost vs convenience. If the convenience of swiping a card and having a product magically appear at your doorstep is what’s most important to you, then a credit card is your best friend. But if you want protection against overspending a personal loan is the superior option. Personal loans usually come with significantly lower interest rates than credit cards, so they can be a very wise method for small shopping expenses that you know you can pay off quickly. The average personal loan rate is around 10% but can drop to 3-4% for borrowers with strong credit. By contrast, the average credit card has 19% interest for new customers, and 15% is considered a good rate.
Whether you choose a personal loan or credit, remember: always compare a few providers before signing up. Everyone knows comparison shopping is the best way to find great deals from retailers during the holidays. The same goes for personal loans and credit cards: comparison shopping is the best way to find low rates, flexible repayment terms, and great introductory offers.
Personal Loans FAQs
How is a credit score calculated?
Your credit score is calculated based on your loan repayment history, credit card usage, and other financial markers that can give lenders a rough guide of how responsible you are with money and how much of a default risk you are. No matter what your credit score is, you will be able to find a lender that will offer you a loan.
How do interest rates work?
The interest rate is how much the lender charges a borrower for a loan and is expressed as a percentage of the amount borrowed. For example, if you take out a loan 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. If you’re consolidating debt and the interest rate is still lower than your earlier loan, then you’re in good shape.
What is an APR?
APR is an acronym for annual percentage rate. It combines the charges, fees, and payments to tell you the grand total of what your loan will cost you per year. The lower the APR, the less you are going to pay in the long run.
The APR calculation on personal loans will vary depending on your lender, but it will typically be lower than what you would receive from a payday or short-term loan—usually starting at 10% and capping at 35.99%. It is not ideal to owe any money, but if you require a loan, then a personal loan could certainly be a viable option.
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.
How much can I get approved for?
There isn’t a clear right or wrong answer to this question—it all depends on your needs, your income and your abilities. You need to make sure that the monthly payments aren’t too heavy for you to keep up with. After all, there’s no sense taking out a loan only to find yourself unable to keep up with the payments.
What loan term should I take?
This is a pretty simple calculation, but what works for you can be anything but simple. If you decide to go for a lender that offers short term loans you will have higher monthly payments but will pay less interest over the life of the loan. If you spread it out over a longer loan term, your monthly payments will be lower, but the overall interest you pay will be higher.
* Credible Terms and Conditions:
Credible is so confident in the personal loan rates you’ll find on Credible, we’ll give you $200 if you find and close with a better rate elsewhere. See full terms and conditions.
** LendingClub Terms and Conditions:
All loans made by WebBank, Member FDIC. Your actual rate depends upon credit score, loan amount, loan term, and credit usage & history. The APR ranges from 6.95% to 35.89%. The origination fee ranges from 1% to 6% of the original principal balance and is deducted from your loan proceeds. For example, you could receive a loan of $6,000 with an interest rate of 7.99% and a 5.00% origination fee of $300 for an APR of 11.51%. In this example, you will receive $5,700 and will make 36 monthly payments of $187.99. The total amount repayable will be $6,767.64. Your APR will be determined based on your credit at the time of application. The average origination fee is 5.49% as of Q1 2017. In Georgia, the minimum loan amount is $3,025. In Massachusetts, the minimum loan amount is $6,025 if your APR is greater than 12%. There is no down payment and there is never a prepayment penalty. Closing of your loan is contingent upon your agreement of all the required agreements and disclosures on the www.lendingclub.com website. All loans via LendingClub have a minimum repayment term of 36 months. Borrower must be a U.S. citizen, permanent resident or be in the United States on a valid long term visa and at least 18 years old. Valid bank account and Social Security number are required. Equal Housing Lender. All loans are subject to credit approval. LendingClub’s physical address is: LendingClub, 71 Stevenson Street, Suite 1000, San Francisco, CA 9410
*** Marcus By Goldman Sachs® Offer Terms and Conditions:
Only the most creditworthy applications qualify for the largest loan amounts and lowest rates. Your loan terms are not guaranteed and are subject to our verification of your identity and credit information. To obtain a loan, you must submit additional documentation including an application that may affect your credit score. Rates will vary based on many factors, such as your creditworthiness (for example, credit score and credit history) and the length of your loan (for example, rates for 36 month loans are generally lower than rates for 72 month loans). Your maximum loan amount may vary depending on your loan purpose, income and creditworthiness. Your verifiable income must support your ability to repay your loan. Marcus by Goldman Sachs is a brand of Goldman Sachs Bank USA and all loans are issued by Goldman Sachs Bank USA, Salt Lake City Branch. Applications are subject to additional terms and conditions.
****OneMain Financial Terms and Conditions:
*Example Loan: If you borrowed $6,000 with a 24.99% APR and 60 month term, your payments would be $176.07 per month. This example is based on an average customer with good credit.
Terms & Conditions: Not all applicants will qualify for larger loan amounts or most favorable loan terms. Loan approval and actual loan terms depend on your ability to meet our credit standards (including a responsible credit history, sufficient income after monthly expenses, and availability of collateral). Larger loan amounts require a first lien on a motor vehicle no more than ten years old, that meets our value requirements, titled in your name with valid insurance. Maximum annual percentage rate (APR) is 35.99%, subject to state restrictions. APRs are generally higher on loans not secured by a vehicle. Depending on the state where you open your loan, the origination fee may be either a flat amount or a percentage of your loan amount. Flat fee amounts vary by state, ranging from $25 to $400. Percentage-based fees vary by state ranging from 1% to 10% of your loan amount subject to certain state limits on the fee amount. Active duty military, their spouse or dependents covered under the Military Lending Act may not pledge any vehicle as collateral for a loan. OneMain loan proceeds cannot be used for postsecondary educational expenses as defined by the CFPB’s Regulation Z, such as college, university or vocational expenses; for any business or commercial purpose; to purchase securities; or for gambling or illegal purposes.
Borrowers in these states are subject to these minimum loan sizes: Alabama: $2,100. California: $3,000. Georgia: Unless you are a present customer, $3,100 minimum loan amount. Ohio: $2,000. Virginia: $2,600.
Borrowers (other than present customers) in these states are subject to these maximum unsecured loan sizes: Florida: $8,000. Iowa: $8,500. Maine: $7,000. Mississippi: $7,500. North Carolina: $7,500. New York: $20,000. Texas: $8,000. West Virginia: $14,000. An unsecured loan is a loan which does not require you to provide collateral (such as a motor vehicle) to the lender.