What would you do with extra money each month? Pay down your debt? Plan a vacation? Joining the more than 44 million Americans who have side hustles could provide you with a way to reach your financial goals. But how do you get started?
“Some side hustles require an upfront investment,” said Gerri Detweiler, education director at business credit and financing company Nav. “While it’s ideal to start a business debt-free, that’s not always realistic.”
Detweiler said applying for low-interest personal loans could be one way to get your business funding off the ground.
What are personal loans?
Personal loans are unsecured, meaning you don’t need collateral to qualify. They come in different forms. You can get low-interest personal loans from:
- Banks or credit unions
- Peer-to-peer lenders
- Fintech companies that specialize in personal loans
When you get creative, you might be surprised at the options you have for getting a personal loan for your business startup.
The interest rate on a personal loan to start a business can vary depending on the company and your credit. WenFang Bruchett, who teaches entrepreneurs how to fund their startups at BlissFinance, pointed out that you have to be careful about where you get your personal loan funding. Fast finance companies that make it easy to get a loan might charge higher interest rates.
“It’s easy to get that kind of loan, and you don’t need to have great credit,” said Bruchett. “But the interest rate is very expensive, often in the double digits.”
When you’re starting a business, it’s better to qualify for a small low-interest personal loan, said Detweiler. Payments are more manageable, and as the business grows, it’s easier to pay off a loan with a lower interest rate.
Advantages of low-interest personal loans
“Personal loans are a lot easier to get than small-business loans, which can be hard to get as a startup,” said Detweiler.
Not only is it possible to get the funding you need faster, but you also can rely on your personal credit score. If you have good credit, you should be able to get a decent interest rate.
Lou Haverty has been involved in buying and selling websites as a side hustle and is the founder of financial education website Financial Analyst Insider. He likes using peer-to-peer sites, such as LendingClub, to fund business ideas.
Haverty pointed out that you don’t need collateral for personal loans, so you aren’t putting a valuable asset, such as your home or savings account, at risk.
“You also get access to small loans at a relatively competitive interest rate, especially compared to credit cards,” Haverty said.
On top of that, a personal loan for a business startup is less likely to have a big, damaging impact on your credit score, provided you use it carefully.
“High balances on personal credit cards can result in high credit utilization, which can lower your scores,” said Detweiler. “That’s usually not an issue with personal loans, which are installment loans, because usage isn’t a factor the way it is with credit cards.”
Disadvantages of using personal loans to fund a side hustle
Detweiler said using personal loans to fund your side hustle can be a double-edged sword. Even though you can use your personal credit to get faster funding and a good rate, you’re also putting your rating at risk.
While you don’t need to worry much about your credit utilization ratio, you do need to make sure you pay on time. Missed payments on your personal loans can be a huge drag on your credit score.
“Another downside is that if your business fails, your loan payments may be a painful and expensive reminder,” said Detweiler. “Keep borrowing to a minimum if possible — at least until you have [proved] your business concept.”
If you don’t have good credit, using a personal loan to fund your side hustle might not make a lot of sense. There are personal business loans for bad credit, but they might not be beneficial. Without the low rate that comes with excellent credit, you could be stuck paying high interest, said Bruchett, and your payments could become unaffordable.
Use collateral without putting your house at risk
If you can’t get your best rates on personal loans, Bruchett suggested looking at ways to get funding using collateral. You don’t have to turn to a home equity loan, though.
Some banks and credit unions will provide you with low-interest funding if you have a savings account or certificate of deposit (CD). “Pledge the funds as collateral, and the entire process can take less than an hour,” said Bruchett. “The interest rate can be as low as 2.00% above your CD or savings rate.”
Bruchett also pointed out that some lenders will let you use your brokerage account as collateral. “You can continue to trade and make money without depleting your portfolio,” she said.
However, the major downside to using collateral is that you could lose it if something goes wrong and you can’t make payments on your loan. As a result, said Haverty, it’s preferable to use unsecured personal loans to fund your side hustle whenever it’s practical.
How to get a personal loan for your side hustle
If you decide low-interest personal loans are a good fit for you, here’s how to get started:
- Know your credit. The first step is to check your credit score. You can use a consumer credit site to see where you stand or look at your most recent credit card statement. Don’t forget to go to AnnualCreditReport.com and look through your credit report for errors. If you find mistakes, contact the credit reporting agency and creditor to have them fixed. You don’t want to be denied a low-cost loan because of an inaccuracy in your history.
- Compare personal loan options. Look at personal loan terms from different lenders. Consider interest rates and repayment options to find a loan that works best for your situation.
- Prepare your documentation. Most lenders require the same information. That means you’ll need your Social Security number, personal details (name, address, birthdate), driver’s license number, and proof of income (usually pay stubs or tax returns).
- Fill out the personal loan application. Technology makes it easy to fill out applications online. You usually can upload PDFs of your income documentation and scanned images of your driver’s license. You might not even need to go anywhere to sign the paperwork. As long as the lender has your banking information, it can deposit the money into your account — sometimes in a few business days.
After you have your loan
Once you have your personal loan, it’s important that you pay on time and work hard to make your business profitable as quickly as possible.
“After you’ve established your business, you can then apply for a business credit card or business loan,” said Detweiler. “These won’t affect your personal credit scores.”
In the end, low-interest personal loans are great for helping you get started, but the long-term goal is to build a business or side hustle that stands on its own two feet.
Interested in a personal loan?Here are the top personal loan lenders of 2020!
|Lender||APR Range||Loan Amount|
|5.99% – 19.16%1||$5,000 - $100,000|
|7.98% – 35.99%||$1,000 - $50,000|
|7.99% – 35.97%*||$1,000 - $35,000|
|99.00% – 199.00%2||$500 - $4,000|
|5.99% – 24.99%3||$5,000 - $35,000|
|7.99% – 29.99%4||$7,500 - $40,000|
|7.99% – 20.88%5||$5,000 - $50,000|
|15.49% – 35.99%6||$2,000 - $25,000|
|10.68% – 35.89%7||$1,000 - $40,000|
|9.95% – 35.99%8||$2,000 - $35,000|
|1 Includes AutoPay discount. Important Disclosures for SoFi. |
2 Includes AutoPay discount. Important Disclosures for Opploans.
Direct Deposit required for payroll.
Opploans currently operates in these states: . *Approval may take longer if additional verification documents are requested. Not all loan requests are approved. Approval and loan terms vary based on credit determination and state law. Applications processed and approved before 7:30 p.m. ET Monday-Friday are typically funded the next business day.
3 Includes AutoPay discount. Important Disclosures for Payoff.
4 Important Disclosures for FreedomPlus.
5 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
6 Important Disclosures for LendingPoint.
7 Important Disclosures for LendingClub.
All loans made by WebBank, Member FDIC. Your actual rate depends upon credit score, loan amount, loan term, and credit usage and history. The APR ranges from 10.68% to 35.89%. For example, you could receive a loan of $6,000 with an interest rate of 9.56% and a 5.00% origination fee of $300 for an APR of 13.11%. In this example, you will receive $5,700 and will make 36 monthly payments of $192.37. The total amount repayable will be $6,925.32. Your APR will be determined based on your credit at time of application. The origination fee ranges from 2% to 6% (average is 4.86% as of 7/1/2019 – 9/30/2019). In Georgia, the minimum loan amount is $3,025. In Massachusetts, the minimum loan amount is $6,001 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 or longer.
8 Important Disclosures for Avant.
*If approved, the actual loan terms that a customer qualifies for may vary based on credit determination, state law, and other factors. Minimum loan amounts vary by state.
**Example: A $5,700 loan with an administration fee of 4.75% and an amount financed of $5,429.25, repayable in 36 monthly installments, would have an APR of 29.95% and monthly payments of $230.33.
Based on the responses from 7,302 customers in a survey of 140,258 newly funded customers, conducted from August 1, 2018 – August 1, 2019, 95.11% of customers stated that they were either extremely satisfied or satisfied with Avant. 4/5 Customers would recommend us. Avant branded credit products are issued by WebBank, member FDIC.
* Important Disclosures for Upgrade Bank.
Upgrade Bank Disclosures
Personal loans made through Upgrade feature APRs of 7.99%-35.97%. All personal loans have a 2.9% to 8% origination fee, which is deducted from the loan proceeds. Lowest rates require Autopay and paying off a portion of existing debt directly. For example, if you receive a $10,000 loan with a 36-month term and a 17.98% APR (which includes a 14.32% yearly interest rate and a 5% one-time origination fee), you would receive $9,500 in your account and would have a required monthly payment of $343.33. Over the life of the loan, your payments would total $12,359.97. The APR on your loan may be higher or lower and your loan offers may not have multiple term lengths available. Actual rate depends on credit score, credit usage history, loan term, and other factors. Late payments or subsequent charges and fees may increase the cost of your fixed rate loan. There is no fee or penalty for repaying a loan early. Accept your loan offer and your funds will be sent to your bank or designated account within one (1) business day of clearing necessary verifications. Availability of the funds is dependent on how quickly your bank processes the transaction. From the time of approval, funds should be available within four (4) business days. Funds sent directly to pay off your creditors may take up to 2 weeks to clear, depending on the creditor. Personal loans issued by Upgrade’s lending partners. Information on Upgrade’s lending partners can be found at https://www.upgrade.com/lending-partners/.