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What is a Personal Loan?

A personal loan is an amount of money loaned to a borrower by a lender and is usually unsecured, which means that you can take out a loan without offering collateral or a down payment. 

Personal loans are a good option if you have outstanding credit debt and offer more competitive interest rates and better terms than credit cards. People take out personal loans from a number of different purposes, such as debt consolidation, making home improvements and covering medical expenses.

Types of Personal Loans

  • Unsecured vs. secured loans 

The main difference between an unsecured and secured loan is that an unsecured one doesn’t require you to put up any collateral. That’s the good news. The bad news is that because the loan is “unsecured” (no collateral), the lender is taking a bigger risk on you, and typically will assign you a higher interest rate. Lenders will also give you a lower ceiling on the loan, as well as a shorter repayment term. 

These loans typically appeal to borrowers who don’t have assets like a car or a house, but still want some financial assistance. 

A secured loan requires the borrower to put up some form of collateral. While it’s more risky for you in that you have to put up an asset that the bank can seize if you default on the debt, you stand to enjoy an easier interest rate, a higher borrowing ceiling, and a longer repayment period.


  • P2P loans 

Peer-to-Peer lending has become a major industry in recent years, and provides all types of opportunities for borrowers who may have had less options in the past. Often called “social lending” or “crowd lending,” P2P sidesteps the banks and connects borrowers and lenders directly with one another online. It’s a solid option if you have less than great credit or lack assets to put down as collateral. That said, there are some costs, 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, as unsecured loans, the interest rates tend to be around 15% or so. 

    

  • Fixed rate vs. variable rate loans 

With a fixed rate loan the interest rate stays constant throughout the life of the loan, which will help you budget every month and stay on top of your payments. With variable rate loans, the interest rate fluctuates in accordance with the market. You may get a lower initial rate than you would with a fixed rate loan, but because the market can be unpredictable, it can be harder to know for certain what your future payments will be. 


  • Lines of credit

These are loans that are given as a line of credit that you can use for any purpose. They are typically unsecured, so the interest rates tend to be high, though not as high as a credit card. Also, these loans give you the freedom to draw from the credit line as needed, so you only owe what you spend. 


  • Signature loans

These are sometimes called character loans or good faith loans. This is an unsecured loan that only requires you to put down your signature. Because there is no collateral and the lender is taking a risk, these loans come with higher interest. 


  • Cash advances and balance transfers

A cash advance is taken against the credit line on your credit card, and typically comes with fees in addition to the interest on repaying the money. With a credit card balance transfer you move the money you owe on one card to another credit card with a lower interest rate. This typically includes a fee.


  • Installment loans

This is just a term to refer to a loan that is repaid over a set period of time with set payments. A mortgage and a car loan are good examples of installment loans.


What to Know Before Applying For a Personal Loan

What’s my credit score?

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.

APR rates mentioned include associated fees.

Full repayment for the loans displayed range between 61 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.

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. 

The Stages of a Personal Loan Application

The best online lenders usually have an easier loan application process than banks. Here are its 3 stages: 

  • Stage 1: This generally consists of an online questionnaire where you are asked to provide information including the amount of the loan, the purpose of the loan, and your personal information. You will also probably be asked to provide your income level and housing status. 


  • Stage 2: This involves a soft credit pull, which won’t affect your credit rating like a hard credit pull. Based on the credit score and other details you provided the lender, they will determine how much to loan you and under what terms and interest rate. 


  • Stage 3: Once your application has been pre-approved, most online lenders will then put you directly in touch with the lender, and you will finish applying directly with them. You should have all relevant paperwork on hand and ready to send, including your driver’s license or passport, proof of residence (utility bills, rent contract, etc), and pay stubs from your place of work. 


How to Choose a Personal Loan Lender

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

APR

Different lenders will give you differing APRs so it’s important to find rates that you know you will be able to keep up with.

Loan Term

These 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. It’s best 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.





*  LightStream Terms and Conditions:

Your loan terms, including APR, may differ based on loan purpose, amount, term length, and your credit profile. Rate is quoted with AutoPay discount. AutoPay discount is only available prior to loan funding. Rates without AutoPay may be higher. If your application is approved, your credit profile will determine whether your loan will be unsecured or secured. 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.

SunTrust and LightStream are trademarks of SunTrust Banks, Inc.

Lending services provided by SunTrust Bank.

**  Marcus By Goldman Sachs® Offer Terms and Conditions:

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.

*** 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 94105

**** Eloan Terms and Conditions:
Rates from 7.99% up to 19.49% APR. Your APR will be determined based or your risk score and credit history. Loans start from $2,000 up to $35,000. The loan amount will be subject to credit approval. Eloan is a Division of Banco Popular de Puerto Rico. Subject to credit approval and meeting the parameters set forth by Banco Popular de Puerto Rico (“Banco Popular”). This offer applies to personal loans without collateral. Offer subject to presenting evidence and verification of acceptable income to Banco Popular. Banco Popular may deny your application if you do not meet the parameters and the established conditions. Other terms and conditions may apply.


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