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Your Guide to Personal Loans

Taking out any kind of loan can be a bit overwhelming and even sometimes frightening. It can be a big deal because you will have to be prepared to pay it back. In some instances, you may need a co-signer or collateral meaning that you have to put another person or a possession on the line.

It is vital that you go into the borrowing experience with all of the information that you need in order to make the best possible decision that won’t end up making your life harder. A loan should relieve a burden or help with an investment.  It is not prudent to take out personal loans for things like luxury items, an event or a big trip. But, funding an adoption or borrowing money to further your career, for example, might be very good reasons to consider a personal loan.

They come in all shapes and sizes and you will have to find the one that is right for you. This article is meant to guide you that process and help you to better understand the process. But, the most important thing is that you not jump into anything and that you shop around.

What is a Personal Loan?

A loan of any kind is a risk that you and the bank are both taking together. If you cannot pay, they may end up losing money and you will at best be in credit trouble and, at worst, lose your home or other valuables. So, it is vital that you are prepared as you begin to consider a personal loan. You should be sure that the loan payments are something that you can manage and that the banker with whom you are working is trustworthy and responsible. You show that you both trust one another a great deal by making this deal.

A personal loan is loaned directly to you and can be either secured or unsecured.  Many people use these types of loans to consolidate debt. But, they have higher interest rates and will be dependent upon your credit, debt and income. Sometimes, it may even make more sense to get a credit card rather than a loan. But, that will depend a great deal on whether your loan is secured or not.

What is a Secured Loan?

The upside

A secured loan is a loan that gives the bank peace of mind. But, it can also be the type of loan that will keep you up at night. Why? A secured loan will require that you put something up against the loan (collateral – which we will cover in a minute). This is often a person’s home or other extremely valuable possession. That way, if you default on the loan, the bank can get its money back.

The downside

But, it can also mean that you will be under extreme stress about the loan and that you may end up with even less than what you started with. These loans are fine but you should be as sure as humanly possible that you will not default. They will get you lower interest rates and save you money in the long run but that’s not of much comfort when your home is foreclosed on.

 Getting a Personal Loan with Bad Credit

If you have bad credit, the bank will be concerned about your paying them back. They have a right to be, after all. Your bad credit indicates that there are a lot of debts out there with your name on them. So, the first thing you should do is talk to a banker that you trust and be honest and forthright about your financial issues.

Keep in mind that applying for as little as possible will up the likelihood of getting approved. Plus, it will make your payments smaller.  If you need to borrow $10,000 then do not ask to borrow $20,000. Even if you get approved, you will be putting yourself in a bad situation. Having bad credit does not mean that your banker won’t be interested in helping you.  If you can supply pay stubs indicating that your income is high enough to cover the debt that will also help. This is called your debt-to-income ratio.

Is more debt the answer?

Please remember that acquiring more debt once you already have a bad credit score is not always a strategically advantageous move. It can be if you plan to pay it off on time and KNOW that you can handle the monthly fees, etc. But, it will only make a situation worse if you are not in a position to pay back your loan properly.

Co-signers and Collateral

What is a co-signer?

A co-signer would be a person willing to sign the loan with you. They are putting a huge amount of trust in you. If you do not pay, the bank will come looking for them and demand that they pay. This is no small thing to do. It is a huge favor. If your banker asks if you have a co-signer, consider carefully if you have anyone who can help you. But, do not assume that because someone has good credit they will be willing to sign for you. They have good credit for a reason. They do not want you to ruin it.

What is Collateral?

Collateral is a possession that you promise to the bank should you default on your loan. This could be your house, your car, etc. It will need to be something that YOU own and that is worth a substantial amount of money. It is so important to be aware of the fact that the bank can TAKE your possessions as payment for their loan. They can take your home, your car, your boat, etc. and there will be no recourse on your end. So, even if you have collateral, be careful and sure that you want to put the possessions up.

Want to Consolidate Debt?

So you’re ready to start shopping for a loan?

Your next steps:

First things first – create a list of all of your debt – mortgage, credit card, car payment, etch. List the payment as well as the interest for each month.

Then, consider options – secured vs. unsecured:

  • Unsecured loans let you utilize your excellent credit to combine multiple debts into a solitary loan with JUST ONE monthly fee. You may even meet the criteria for an overall lower interest rate – saving money as well as adding convenience.
  • As we have discussed, secured loans let you to borrow against something. These should be entered into with caution and understanding.

How do I Assess a Personal Loan?

Important tips:

  • Read the fine print!
  • What is the interest rate?
  • What is the APR?
  • What is the origination fee?
  • What is the loan term?
  • Is the interest rate fixed?
  • Is anything else included in this loan?
  • Will I have to pay a fee for prepaying the balance on the loan?
  • What is the late fee for payments?
  • Look for prepayment penalties – a fee for paying off the loan before you have to. Sometimes, this is called an exit fee.
  • Automatic withdrawals? Be sure that you are aware of how the monthly payments will be expected to be paid.
  • The total cost of your loan should be plainly laid out.
  • Are the payments are reported to credit bureaus? Your credit score can benefit!

The best loans are unsecured. Actually, most personal loans are unsecured, and range from $1,000 to more than $50,000. They are paid back in flat monthly payments. They are typically paid back in about 2 years. Great interest rates from a wide variety of bankers will require good credit. Payments are higher and there are fewer choices when your credit is bad.

Getting a Loan Online?

Online lending is becoming more and more common and there are many reputable online lenders to choose from.  The most vital thing is to shop around and do your due diligence.

Shopping Tips

  • Shop around and compare rates, terms, fees, and other options.
  • Check out both online and more traditional banking institutions.
  • Keep an eye on fees and fine print and verify everything. Pay attention to origination, prepayment, late payment and other fees that may not be immediately obvious.
  • Look out for scams and do your due diligence. Do not give personal information, money or trust into a lender until you have sufficiently researched them. Often, scammers will seem to want to give you their money and aggressively come after you. That should be a red flag.

With a number of online lenders challenging credit-card companies and conventional banks, the movement in the direction of a modernized lending procedure and more transparent lending is in full swing. The face of the personal loan has changed.

You can easily and quickly apply for a loan online with many online lenders but the best interest rates and easiest processes will be reserved for people with better credit.

Where to Start?

If possible, start with your local bank that you have been banking with for a while. They will value you as a customer and may give you better rates. Many banks have online applications that do not require a trip to a branch.

Once you’ve selected a lender that matches your needs, you’ll need to officially apply for the loan:

  • Identification
  • Verification of address
  • Proof of income

The lender will run a hard credit check.  If approved for the loan, you’ll typically collect your money within a week or so.

Cautions and Warnings

Loans are generally sort of overwhelming for people, particularly when they do not know much about finance, money, banking or borrowing, in general. But, that is why you need to be able to trust whomever it is that you work with.

The two most vital warnings are really very simple:

  1. Never sign anything that you do not understand
  2. Do your research and ask questions.

Quick Tips:

  • Know the terms of your loan – backward and forward. Do not sign anything that you do not understand. Check the highest sum you can borrow and the time allowed for the loan repayment. Avoid loans that charge for prepayment.
  • Never sign up for a loan if the lender requires that purchase another kind of product with the personal loan. These things are not necessary and will just cost you more money.
  • Using a personal loan to fund a big spend may not be the right way to go. Steer clear of borrowing money to fund big spends like weddings, vacations, or costly purchases. Try and save up for these and pay in cash so that you are not risking financial security or paying interest.
  • Check the lender’s status. They are checking up on you and you should be sure to do the same.

When Not to Use a Personal Loan

Before you get a personal loan, there may be other options to explore. It’s not judicious to use a personal loan for an optional, “fun” purchase because of the potentially astronomical interest rates. Using a personal loan for a new outfit, new boat or big party may seem smart at the time but it will likely come back to bite you.

However, you may be a small business owner who needs to cover something just for a few months until you receive a payment or an individual looking to consolidate and get your debt under control.  Or, you might be looking for a loan so that you can cover a home repair. Those are good reasons to take out a personal loan.

Best Personal Loans Reviews

It can be a good idea to assess your options from a list that is reputable rather than just beginning your search blindly on Google. But, that does not mean that everything that you need to know is below.  These reviews are meant as guidance but not as absolutes for you to follow. What follows is some basic information about 10 reputable lenders that would be good places to start when beginning your loan search. But, there are certainly many more.

Top 10:

  • Lending Club
  • Wells Fargo
  • Prosper
  • LightStream
  • Sofi
  • Earnest
  • com
  • Peerform
  • Avant
  • Vouch

Best personal loans:

  • Lending Club
  • Wells Fargo
  • Prosper

Best personal loans for good credit:

  • Sofi
  • Avant
  • LightStream
  • Earnest

Best personal loans for not-as-good credit:

  • PersonalLoans.com
  • Peerform
  • Vouch

Lending Club

This is a peer-to-peer lender that has been around for a while and has built a solid reputation. One of the two biggest peer-to-peer lenders, Lending Club does business in 48 states. It makes loans up to $40,000 and is a bit more lenient with credit scores but has more stringent debt-to-income ratio requirements. Terms are three or five years.

Prosper

Prosper, operating in 47 states, is a little more moderate with its lending criterion than its chief competitors. It requires a minimum Experian credit score of 640, and you can borrow from $2,000 to $35,000.  Interest rates and fees are easy to find and evaluate, making them very transparent which is important to many consumers today. They only offer three and five-year terms.

LightStream

LightStream offers excellent rates for creditworthy borrowers for non-home and auto-related personal loans with no fees for loan origination, prepayment, etc.  With this lender, your credit score will have to be good, you will need a solid savings history and you will be asked to prove that you have income to pat back the loan.   Loans of $5,000 to $100,000 are available with repayment terms from 2 years to 7 years months. If you need money fast, LightStream can have your money to you in as little as 24 hours.

SoFi

Sofi offers particularly competitive personal loans from $5,000, without any fees for loan origination or anything else. They may be most recognized for student loan refinancing, but they are making a name for themselves with great interest rates and unemployment protection program. Loans are offered in 47 states but do have high standards for credit ratings.

Earnest

This online lender offers especially low rates, and digs further than your credit score to assess other criterion including schooling, education, savings, career, vocation, occupation, and investments.  They will, however, require that you show that you have a hearty savings account and income.

Vouch

You can get friends or family to promise a certain amount of money in case you don’t pay back your loan, lessening the lender’s risk. This can also lead to a lower interest rate. This takes the traditional idea of co-signing and modernizes it.

PersonalLoans.com

You cannot actually get a loan from PersonalLoans.com.  It is different from the other companies mentioned here in that it is not a lender. PersonalLoans.com is only a referral site but is a great alternative for borrowers looking for a rapid turnaround and lightning fast application process. You can have approval in minutes but it can be tough to keep track of rates and other details via the site. However, it is a user-friendly resource that can find you various offers very fast.

Peerform

Peerform is an option for borrowers with credit scores as low as 60 with competitive rates and transparent fees and procedures. , and its fees are clearly disclosed. Offering loans in only 37 states, and it can take up to two weeks to get the cash. They charge several fees: origination, fee collection fee and service charge. The site lends up to $25,000 but requires a three-year term with no other terms offered.

Wells Fargo

Wells Fargo makes loans from $3,000 to $100,000, and repayment terms can range from 12 to 60 months.

There are no prepayment or origination fees but you cannot apply online unless you’re already a Wells Fargo customer.  This is ideal for people who are more comfortable with traditional banking practices but will add time and steps to the process.

Avant

Avant is available in 47 states and the District of Columbia with loan offerings of as much as $35,000. However, these loans will be difficult to get without almost perfect credit.  Look into this lender if you need a lot of money, relatively quickly, and have good credit.

 

You’ll want a competitive rate from your unsecured loan, but you’ll also want the flexibility to pick a term that works for you, low or no extra fees, and a lender with whom you’re comfortable doing business. Here are the factors I considered when picking the best unsecured loans:

Final Thoughts

This is a very basic outline of what you need to know to get started shopping for and considering a personal loan. These are not exhaustive guidelines. It is essential that anyone lending or borrowing money at any time be completely aware of what they are doing and who they are working with. If you are considering a personal loan, the first question is whether you are making a sound decision based on a need, rather than a whim or luxury. It is very easy to bury oneself in debt by taking out loans for things that are not necessary. Drowning in debt is a miserable experience and should be avoided as much as possible.

Be sure that the person with whom you deal at the bank or institution is trustworthy and seems to have your best interest at heart. They have a fiduciary responsibility to you which means that they should not act outside of your best interest or attempt to trick you. You want a transparent loan that you know that you can pay back without a great deal of trouble.