Personal Loan Guide

Originally published on Wise Piggy. NOTE: This article was published in 2016 so information about the loans and banks may have changed. 

Personal loans can be a powerful tool to help pay down credit card debt, secure cash for emergencies, or help with a major home project. Benefits include:

• Interest rates that are usually lower than credit cards.
• A fixed APR so payments remain the same for the life of the loan.
• Potentially positive impact on your credit score.
• Unsecured debt, so there is no need to put up collateral, such as a house or other property.

Personal loans are also a booming corner of the lending marketplace, via banks, credit unions or finance companies. TransUnion reports that unsecured personal loan balances reached $92 billion in the first three months of 2016, doubling from the same period in 2012.

Personal Loan Basics

Personal loans are used for a number of reasons:

• Debt consolidation
• Credit card bills
• Wedding
• Home project (especially if you don’t have enough equity in your home)
• Healthcare expenses
• Vacations
• Car purchase and repairs

How is a personal loan different from other options?

A personal loan is usually unsecured, which means that you don’t have to put up collateral, such as your house, which is the case for secured loans, such as home equity loans and mortgages.

The major benefit of an unsecured loan is you have peace of mind that you won’t have your home taken away if you fail to pay it off. The downside of an unsecured loan is you will likely pay higher rates than a secured loan because the lender is taking a bigger risk.

Benefits of Unsecured Loans

• No collateral
• Quicker approval process
• Interest rate does not change

Drawbacks of unsecured loan

• Higher rates
• Need better credit history than a secured loan
• Lower loan limits than a secured loan

What kind of credit score do you need? 

You can see by the above chart that most lenders expect at least a 600 credit score, but there are others that have no minimum credit score.

You will have a harder time getting an unsecured personal loan than a secured loan, such as a mortgage or car loan if you have bad credit. The reason is a borrower puts up collateral for a secured loan. The lender is taking a bigger risk loaning money when no collateral is involved so the rates are higher for unsecured loans.

Getting a great rate

Make sure that before you apply for a personal loan that you do all you can to maximize your credit score. This can save you thousands over the course of paying off a personal loan.

Why? A lender will give a borrower with a higher credit score a better, lower rate.

So, if you have a credit score of 600 or less, it’s best to spend some time working on that score. Here are three ways you can improve your credit score before applying for a personal loan:

• Reduce credit card use.
• Pay down your balances as much as you can.
• Don’t get a new credit card in the months leading up to your personal loan application.

How much can a higher credit score save you?

Here is an example to show exactly how a higher credit score is a major advantage in the loan market. It means you pay less in interest over the life of a loan and can have lower monthly payments at the same time.

	Personal Loan at 600 FICO	Personal Loan at 700 FICO
Amount Borrowed	$20,000	$20,000
Interest Rate	20%	12%
Monthly Payment	$743.28	$664.29
Total Interest Paid	$6,757.66	$3,914.30
Total Amount Paid	$26,757.66	$23,914.30
Payoff Time	3 Yrs	3 Yrs

How a personal loan may improve your credit score

Getting a personal loan to consolidate your credit cards will increase your credit score in the long term – as long as you make regular payments, don’t open new accounts and don’t fall back into the credit card trap again.

But a word of caution: When you first get a personal loan, your credit score will likely drop. This is normal. It’s because a new loan is seen an additional risk.

The good news is that consolidating credit card debt into a personal loan could help your credit score:

• By paying your personal loan on time, not opening new accounts and not using your cards recklessly again, your debt-to-credit ratio will increase on your credit cards. About 30 percent of your credit score is based on the debt-to-credit ratio, or how much credit is available on your cards. Only your payment history makes up a larger percentage of your credit score. A better debt-to-credit ratio will mean a better credit score.
• A personal loan is seen as a different type of credit than credit cards – installment vs. revolving. Having a greater diversity of types of credit, such as loans and mortgages, is better for your score than having just credit cards.

Here’s an important caveat – think of your personal loan as a do-over if you need to consolidate credit card debt. Take what you learned from getting into your credit card situation and make sure it doesn’t happen again.

You shouldn’t see the zero balances on your credit cards as a chance for a spending spree.

It’s OK to use your credit cards occasionally so your card isn’t closed because of inactivity. In fact, it’s good for your credit score to occasionally use your cards for a regular purchase like groceries. But make sure you pay off your bill and don’t use your cards for unnecessary purchases or things you can’t afford.

Another important credit score-related note: You may want to close your credit cards, but this can have a negative impact on your credit score. Instead, use your credit cards wisely and pay them off monthly.

Applying for a Personal Loan

Many lenders will ask you why you are applying for a loan. Some lenders may even limit how personal loan money is used. For instance, one lender might only allow you to consolidate credit while another might forbid you to pay off your college tuition with a loan.

The APR may also vary depending on the reason for your loan.

For these reasons, it’s important to let the lender know why you need a loan.

Prepayment penalties

If you hope to pay off your loan early, check to see if there is a pre-payment penalty. You don’t want to be penalized if you are able to pay off the loan quicker than your loan terms. If you do encounter a pre-payment penalty think twice about taking out that loan.

There’s more than APR

Don’t just choose a lender for one thing, such as a low APR, though this is the most critical factor. You’ll want to take everything into account.

As you will see on the above chart, you’ll want to compare APR, loan amounts offered, loan terms and origination fee. If you need the money quickly, the turnaround after approval may be critical for you. If having face-to-face interaction is important, you will likely want to find a lender with a local branch or superior customer service.

What’s an origination fee?

A term you might not recognize is origination fee, which is added to the loan amount that serves as a processing fee. It can also be called an activation fee.

For instance, let’s say your $20,000 loan includes a 5% origination fee. That will add $1,000 to your loan amount. This might not mean much if you get a great APR, but it’s important to consider.

Hard pull versus soft pull

You’ll want to consider whether the lender requires a hard pull of your credit history to apply for a loan or to find out rates. A hard pull of your credit history will likely affect your credit score. This might not concern you, but it’s something to think about if you will need the highest credit score possible in the near future.

If you get declined by a lender who performs a hard pull, your score will be lower if you apply for a personal loan with another company. Don’t apply for a personal loan unless you really need one.

How do you apply?

The good news for prospective borrowers is it’s never been easier to apply for personal loans. Many companies now allow you to apply by providing only minimal information, but others might require more information, such as:

• Identification
• Past income
• Debt obligations
• Social Security number

One important piece to note about applying for a loan. Some lenders may require an in-person visit to a local branch in order to get a loan approved. You’ll want to find this out before starting the process.

One last piece of advice

Be careful with what you borrow. Just because a lender offers up to $25,000 doesn’t mean you need to borrow that much. Know what you need, don’t ask for more and then make sure you pay each month.

Best Personal Loans

Choosing the right lender for a personal loan can be a complicated and confusing process. What makes it even more difficult is some lenders are better than others in specific areas.

We researched which lenders stand out in different categories. We’ve included two lenders for each category to give you variety and also because most lenders don’t offer loans in all states.

Best Lenders for Excellent Credit

Earnest

About: The San Francisco-based company is a great bet for a borrower with good credit who wants to pay off the loan as soon as possible.

Earnest’s APR is one of the best APR ranges in the personal loan marketplace. Though there is no minimum credit limit to apply for an Earnest personal loan, the company’s loans are geared for those with good credit.

Loan terms are between 12 months and 36 months and there is no origination fee.  There are no penalties for making extra or early payments.

Earnest loans are available in 36 states.

You should be aware that the company performs a hard pull of your credit record when you apply so your credit score may be impacted.

In order to get approved, you need to be employed, possess savings enough to cover at least a month of “normal expenses,” have a good credit history, carry a positive bank account balance and make enough money to support paying back the loan in addition to your normal living expenses.

Earnest isn’t for those with little or poor credit but could be the right choice if you have a good credit history.

Penfed Credit Union

About: Established in 1935 and one of the largest credit unions, PenFed Credit Union is a great option for those with good credit – especially for borrowers who need time to repay the loan.

Penfed’s loan terms stretch all the way to 60 months so you have the flexibility to pay the loan in five years if needed.

The credit union expects a minimum 700 credit score so you need to have good credit to expect to get approved.

APR is competitive and loan terms are either 36 months, 48 months or 60 months. The APR is higher for the longer loans. There is no origination fee or pre-payment fee so you won’t get charged a penalty if you pay it off sooner.

Penfed, which offers personal loans in all 50 states, takes a day to fund approved loans.

You will need to join the credit union, but you can do that during the application process.

Best Lenders to Get Money Quickly

OneMain Financial

About: If your personal loan gets approved by noon, you can get your money the same day from OneMain Financial.

OneMain Financial, which was founded in 1912 and owned by CitiBank, offers loans in 43 states. It has branches across the country so OneMain Financial is good if you want face-to-face interaction.

OneMain Financial’s APR ranges are on the high side. You can loan as little as $300 or as much as $15,000. Loan terms are limited to 36 months and 60 months.

There is no origination fee and no prepayment penalties, which means you can pay off your loan early without any fees if your financial situation improves.

Best Lenders for Low APR

SoFi

About: SoFi has one of the lowest APRs in the personal loan marketplace and is a great alternative to consolidate credit cards and pay a lower rate.

SoFi’s APR is low and loan terms are 36 months, 60 months or 84 months and you can pay off the loan early and not get penalized. There is no origination fee and the loans are available in 47 states.

Loans range from $5,000 to $100,000.

The San Francisco company, which has funded more than $4 billion in loans, reviews more than credit score when deciding on loans. SoFi also looks at career experience, monthly income versus expenses, financial history and education.

One plus is SoFi offers unemployment insurance so you are able to miss a limited number of payments if you lose employment.

Wells Fargo

About: If you want the peace of mind of a well-established financial institution, Wells Fargo could be the right choice for your personal loan – but you’ll have to be a Wells Fargo customer to apply.

Unlike the newer online lenders, Wells Fargo has been around since 1852 and offers banking, insurance, investments, mortgage and consumer and commercial finance.

Wells Fargo offers personal loans with no origination or prepayment fees. It has competitive APR and loans up to $100,000. The lender also has loan terms that range from 12 to 60 months so it suits nearly every borrower.

The lender says you can have a decision about a personal loan within 15 minutes and you can get funding within the same day. Established name, quick turnaround for funds, flexibility in terms and no fees make Wells Fargo a strong choice in the personal loan market.

Best Lenders for Millennials

Pave

About: Geared to young borrowers, Pave offers low APR to help young people “further their education, relocate for their dream career or get their finances back on track.”

Based in New York City, the company allows you to chat online with the Pave team.

The company analyzes a prospective borrower’s credit score and history and takes into account a person’s work history, current employment, education and future earning potential.

Pave offers loans between $3,000 and $25,000 with loan terms of only 24 months or 36 months.

Personal loans are available in 35 states and you can get money within a few business days if approved.

There is an origination fee of between 1% and 2%, but there is no prepayment penalty so you won’t be charged if you’re able to pay off the loan quicker.

Upstart

About: If you have a great credit history, Upstart could give you a personal loan with a low APR. If your credit isn’t so good, you might wind up paying much higher rates.

The company promotes its easy loan application process that allows prospective borrowers to apply in minutes. An added benefit is that there is no hard pull to apply so you don’t have to worry about your credit score taking a hit when you apply.

Upstart’s personal loans are limited to 36 months, but there’s no prepayment fee so you can pay off before the three-year timeframe.

Upstart gives loans between $3,000 and $35,000. It only takes a day to get money after a loan approval.

On the downside, there is an origination fee of between 1% and 6% so you’ll want to keep that in mind and calculate that cost coupled with a possible low APR.

Best Lender for No Fees

Discover

About: You may know Discover from their credit cards, but the company also offers personal loans that have great APR and no fees.

Discover provides varied loan terms, low APR, quickness in payment and no origination or prepayment fees.

Discover’s loan approval process may take a day depending on circumstances. Funds are available as early as the next business day once the borrower accepts the terms.

A real benefit of Discover is the lack of fees. There are no origination, prepayment or closing fees.

The lack of a prepayment penalty means you can take out a loan for a longer period of time, but pay it off early if your finances improve.