Personal loans are installment loans that are not secured with any time of collateral. Other types of loans, such as mortgages and auto loans, allow lenders to seize your house or car if you don’t make your payments.
You can use personal loans for nearly any purpose. However, be prepared to tell the lender why you need the loan.
Common reasons for borrowing money through personal loans:
- Debt consolidation
- Home improvement
- Establish or repair credit
When you don’t have the cash in hand for a large or emergency expense, a personal loan helps to pay for whatever it is that you need. Additionally, this type of loan can improve your credit when used to consolidate high-interest debt or to add a credit line to your name.
As with any loan, it is important to make payments on time or your credit could suffer.
Interest Rates and Credit Scores
Because personal loans are unsecured, they tend to come with higher interest rates -- sometimes higher than credit cards. Like with most loans, your APR on the loan will depend on your FICO credit score and other factors, such as your annual income and monthly housing expenses.
Ideally, you have good credit to ensure that your loan application is approved with a low interest rate. You may still be able to qualify for a personal loan with bad credit, but you could end up with a higher interest rate. Every lender could have a minimum FICO credit score before even considering your application.
Credit Score Ranges and Quality
|Credit Score Ranges||Credit Quality||Effect on Ability to Obtain Loans|
|300-559||Very Bad||Extremely difficult to obtain traditional loans and line of credit. Advised to use secured credit cards and loans to help rebuild credit.|
|560-649||Bad||May be able to qualify for some loans and lines of credit, but the interest rates are likely to be high.|
|650-699||Average/Fair||Eligible for many traditional loans, but the interest rates and terms may not be the best.|
|700-749||Good||Valuable benefits come in the form of loans and lines of credit with comprehensive perks and low interest rates.|
|750-850||Excellent||Qualify easily for most loans and lines of credit with low interest rates and favorable terms.|
Benefits and Drawbacks
It is an unsecured loan. So, you don’t have to put up any assets as collateral. You can borrow the funds for a wide range of reasons (as long as it doesn’t violate the lender’s terms.) Personal loans can diversify your credit mix, which is good for your credit score. The loan’s interest rate is likely to be higher than the interest rate on secured loans. The application process may take longer compared to other loans.
Where to Find Personal Loans
Personal loans are available through many different lenders, including banks, credit unions, online lenders, and peer-to-peer lending platforms. Be careful of predatory lenders that may take advantage of cash-strapped borrowers by hitting them with extremely high interest rates or fees.
Typically, personal loans can range from $500 to $50,000, depending on the lender. The length of the loan also varies by lender. The repayment period usually ranges from 3 to 5 years. You pay a fixed monthly payment every month that includes accrued interest.
Be sure to review personal loans from multiple lenders to compare APRs, borrowing limits, credit score minimums, and terms.