Need just a little cash? Some things to know about small personal loans

A man opens mail in his home office, hoping to hear back about a small personal loan.Image: A man opens mail in his home office, hoping to hear back about a small personal loan.

In a Nutshell

Sometimes, you just need a little extra cash. Before turning to high-interest borrowing options, consider a personal loan if you have modest, but pressing, needs. A small personal loan might be difficult to get but could cost you less in the long run than other options.

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A small expense can become a big problem if it’s unexpected and you don’t have cash on hand to cover the cost.

We’ve all been there — a surprise vet bill, an auto repair or a busted pipe. It might not require a large sum of cash to fix, but if it’s more than you have on hand, you could be looking to borrow money to make up the shortfall. In fact, 40% of adults say they would not be able to cover the cost or would need to sell something or borrow money in order to cover an unforeseen expense of just $400, according to a 2018 Federal Reserve report.

It’s not always possible to save up for emergencies. When you need to borrow to cover a small unforeseen expense, you might wonder whether it’s better to use your credit card, get a payday loan or take out a small personal loan.

You might assume personal loans are only for big purposes. And you can definitely use them for big-ticket expenses like making home renovations and paying off high-interest credit card debt. But it’s also possible to find personal loans for smaller purchases.

We’ll cover shopping around for a small personal loan if you need one, and why they could be better than some other options.

How do small personal loans work?

There’s no official definition of “small personal loan,” but generally the term refers to sums of roughly $3,000 or less. Many lenders set minimum borrowing limits, and those sums may be more than you actually need. For example, the online lender SoFi doesn’t offer personal loans for less than $5,000. (Though you may see different terms if you apply through Credit Karma.) Wells Fargo only makes personal loans of $3,000 and up.

But it’s possible to find lenders who make loans for $1,000 or less. For example, LendingClub, Upstart and Upgrade and offer personal loans starting at $1,000 for eligible applicants. (Upstart may offer different terms on Credit Karma.) Loan terms, APR and monthly payment can vary based on many factors, including your credit scores, credit usage and loan term.

Each lender is different and can have its own policies on loan terms, interest rates and fees. It’s best to shop around and compare several personal loan lenders before deciding which one to apply with, rather than jumping at the first loan you see.

How do I apply for a small personal loan?

Luckily, applying for a small personal loan can be just as easy as applying for a regular personal loan. Again, each lender will differ in what it requires to apply. Lenders will likely request some sort of proof of income, a credit check and your bank account information.

Many credit unions are willing to work with members who need a small personal loan. Some credit unions even offer payday loan alternatives to members. Banks also offer personal loans, but they may be less willing to offer small personal loans.

Before you choose a lender, check whether it charges prepayment penalties for paying off your loan early. If there is a prepayment penalty, it should say so in the contract.

Are there other types of small loans?

No one likes taking on more debt. But even for small amounts of cash, some options are definitely more expensive than others.

It might be tempting to walk into a payday loan shop if you just need a little bit of money. But these types of loans typically come with high APRs and fees. According to the Consumer Financial Protection Bureau, a typical two-week payday loan can have an APR of nearly 400%.

These fees can cause people to become trapped into taking out new loans to pay off the original loans. According to a 2014 study by the Consumer Financial Protection Bureau, the majority of all payday loans are made to borrowers who renew their loans so many times that they end up owing more in fees than the original loan amount.

Credit cards might also be a tempting solution. After all, you probably already use credit cards to make purchases — what’s one more? But once you’re in credit card debt, it can be very difficult to get out of it. One exception is if you use a card with a 0% intro APR, say for purchases or balance transfers. In this case, you won’t pay interest on the purchases or balance transfer — as long as you pay your balance off before the introductory 0% APR period expires.

It’s crucial to understand the terms of your credit card agreement after the promotional period ends. If your card terms state interest is deferred, you could end up owing interest on the balance you owed for each month of the intro period.

Personal loans, on the other hand, typically come with lower interest rates than a credit card and can offer set, easy-to-remember payment schedules. Additionally, taking out a personal loan could help diversify your credit mix, which may positively impact your credit in the long run as long as you make all of your payments on time.

Bottom line

Taking out more debt should always be a last-ditch option, even if you only need a small amount. Before you borrow to cover an expense, consider alternatives like saving a little bit each month toward the expense or taking on a side job until you can earn the amount you need. If you require money immediately, selling something you don’t need to raise the cash could be another option.

But if you do need to borrow money, a small personal loan might be a good option. If your credit is healthy, you may find a small personal loan with an APR and fees that are lower than other credit products like payday loans or credit cards.

About the author: Lindsay VanSomeren is a freelance writer living in Kirkland, Washington. She has been a professional dogsled racer, a wildlife researcher, and a participant in the National Spelling Bee.… Read more.