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Personal loans offer low interest rates for consumers with good credit, and they can come in smaller amounts than other types of loans.
But they aren’t necessarily the best solution for everyone. If you’re thinking about getting a personal loan, here are six things you should know.
Personal loans are a type of installment loan. That means you borrow a fixed amount of money and pay it back with interest in monthly payments over the life of the loan. Once you’ve paid your loan in full, your account is closed. If you need more money, you have to apply for a new loan.
Loan amounts vary from lender to lender. The amount you qualify for is based on your credit.
There are two types of personal loans — secured and unsecured.
- Unsecured personal loans aren’t backed by collateral. The lender decides whether you qualify based on your financial history.
- Secured personal loans are backed by collateral, such as a savings account or CD. If you’re unable to make your payments, your lender typically has the right to claim your asset as payment for the loan.
Banks aren’t the only type of financial institution that offers personal loans.
Credit unions, consumer finance companies, online lenders and peer-to-peer lenders also offer loans to people who qualify.
4. Interest rates and other fees
Interest rates and fees can make a big difference in how much you pay over the life of a loan, and they vary widely from lender to lender. Here are some things to consider.
- Interest rates: Rates typically range from around 5% to 36%. In general, the better your credit, the lower your interest rate will be. And the longer your loan term, the more interest you’re likely to pay.
- Origination fees: Some lenders charge a fee to cover the cost of processing the loan. Origination fees typically range from 1% to 6% of the loan amount.
- Prepayment penalties: Some lenders charge a fee if you pay off your loan early.
5. Personal loans vs. other lending options
While personal loans can provide the cash you need for a variety of situations, they may not be your best choice.
If you have good credit, you may qualify for a balance transfer credit card with a 0% introductory APR. If you can pay off the balance before the interest rate goes up, a credit card may be a better option.
If you’re a homeowner, you might consider a home equity loan or line of credit, sometimes called HELs or HELOCs. These type of loans could provide the financing you need for larger loan amounts at low rates. But beware: If you default, your lender usually has the right to foreclose on your home as payment for the loan.
6. Impact on your credit scores
When you apply for a loan, the lender will pull your credit as part of the application process. This is known as a hard inquiry and will usually lower your credit scores by a few points.
Consider checking your rates with lenders that will do soft pulls, which won’t impact your scores.
While a personal loan may be a good option if you need extra cash for a specific purpose, there are many factors to consider before deciding what type of credit is best for your situation.
Before signing on the dotted line, consider adding up all the costs associated with the loan to determine the total amount of money you’ll be responsible for repaying.