At the end of 2016, total balances on personal loans exceeded $100 billion for the first time ever, according to TransUnion.
A big part of the reason personal loans are so popular? Personal loans make sense for people who want to reduce the interest they pay on their debt. Personal loans can also simplify the process of repaying debt. For example, if you take one loan to pay off multiple credit cards.
If you’re thinking about taking a personal loan, it’s important to compare your options carefully. This step-by-step guide will help.
Factors to consider when you compare loans
Personal loans can be obtained from banks, credit unions, peer-to-peer lending networks, and online lenders. As you compare loans from different lenders, here are a few key points of comparison to think about.
If convenience and timeliness are important to you, the ease of the application process is one factor to consider when comparing loans.
In most cases, it’s possible to apply online for personal loans. If you’d prefer to apply online, eliminate any lenders who require an in-person visit. If speedy approval matters, avoid applying for loans with lenders who have a long timeline for approving loans. Many financial institutions provide a rough estimate of how long the process will take. The peer-to-peer network Lending Club, for example, indicates it typically takes around a week to get a personal loan approved.
During the application process, it’s common for lenders to give you a pre-approval rate locked in for up to 90-days based on the information you initially provide. However, U.S. News & World Report report indicates rates can change after the final application is submitted. Applicants should ask lenders if the rate could change before the loan application is finalized and whether it is possible for the rate to change after the application has been submitted. Ideally, you can find a lender who isn’t going to change your rate once you have applied.
To make the application process quicker and easier, take some basic steps to get ready to apply for a personal loan. This can include gathering recent pay stubs and income tax returns, making a list of assets and liabilities, and obtaining W-2 forms and 1099 forms showing your wages earned and self-employment income earned in the past two years.
When you compare personal loans, it’s essential to make sure you can actually get approved for the loan you’re interested in. One of the biggest factors in determining if you’ll be approved is your credit score.
“Your credit score is going to be extremely important,” said Clint Hayes, a certified financial planner and founder of NextGen Wealth. “The higher the better.”
Most lenders look for a credit score of at least 600 to approve personal loans, according to U.S. News & World Report. “People who qualify for the best financing terms typically have a FICO credit score in the high 700s or better, supported by a history of timely payments on their past and present financial obligations,” Bruce McClary, spokesperson for the National Foundation for Credit Counseling, told Quicken Loans.
Many banks will not disclose specific score guidelines, but do provide estimates of minimum credit scores required for approval. When comparing loans, find out the minimum credit score necessary and avoid applying to any lender who is likely to turn you down based on your credit.
Secured vs. unsecured personal loans
Another key factor when you compare personal loans is if the personal loan is secured or unsecured.
If the loan is unsecured, you do not need to put up collateral to guarantee the loan. That means there is more risk to the lender if you don’t pay and loans are harder to qualify for.
For secured loans, putting up collateral puts you at risk for loss if you can’t pay; however, loans are easier to qualify for because the lender could always take the collateral. You’ll need to decide if you want to take the risk of a secured loan.
Annual percentage rates
The cost of borrowing is one of the most important factors in determining which personal loan you decide to take.
“A good rule of thumb is, if you can get a personal loan from your bank with an interest rate lower than your other debts, it makes sense to consolidate into a personal loan,” according to Hayes.
To compare the costs of borrowing among different personal loan providers, look at annual percentage rates (APRs). An APR is the total interest rate of a loan over a one year period.
APRs vary depending upon your credit. This chart from ValuePenguin shows APRs in 2017.
The lower the APR, the less the personal loan will cost you. This is often the most important deciding factor when you compare personal loans.
Personal loan lenders often charge origination fees for approved loans. Fees could be as low as one percent but could also go up as high as 6 percent. If you borrowed $5,000 and the origination fee was 1 percent, your fee would be $50. For the same loan, if the origination fee was 6 percent, you would pay $300. High origination fees add to the cost of borrowing, so look for a lender offering low or no origination costs.
One of the big reasons people take personal loans is to make debt repayment simpler. “If you can consolidate three or four higher interest loans into one personal loan, it just makes your life easier,” Hayes said.
While having one payment is convenient, you don’t want to spend more than necessary on repayment of a personal loan. A longer repayment period means you’ll pay more in total interest while a shorter repayment period means you’ll pay off the balance sooner and interest costs will be lower.
If a loan has a longer term but you want to reduce interest costs, you may want to pay off the loan faster. Find out if there are prepayment penalties from any lenders you are considering. If you’re hoping to pay back your loan early, it’s important to make sure you won’t be penalized for doing so.
One of the easiest ways to compare loans is to visit our personal loan marketplace. You can follow these tips to compare personal loans available from this marketplace to see if there is a loan that is right for you.
Interested in a personal loan?Here are the top personal loan lenders of 2018!
|Lender||Rates (APR)||Loan Amount|
|1 Includes AutoPay discount. Important Disclosures for SoFi.
2 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
|7.39% - 29.99%||$1,000 - $50,000||Visit Upstart|
|5.29% - 14.24%1||$5,000 - $100,000||Visit SoFi|
|8.00% - 25.00%||$5,000 - $35,000||Visit Payoff|
|5.99% - 16.24%2||$5,000 - $50,000||Visit Citizens|
|5.99% - 35.89%||$1,000 - $40,000||Visit LendingClub|
|5.25% - 14.24%||$2,000 - $50,000||Visit Earnest|
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