More Information About Personal Loans
There are two main types of financing to consider:
A secured personal loan requires the borrower to submit some form of collateral. This collateral needs to be either material with value or legitimate cash. From the lenders perspective, a secured loan has a safety net to fall back on if the borrower defaults. From the other perspective, the borrower takes on a bit more risk since they can lose this collateral. These are less common with some lenders, but they do exist as options.
Unsecured personal loans are the more common option, but come with much more risk (and consequently, higher interest rates). The lender takes on much more accountability with an unsecured loan, so the application approval process is a bit stricter for unsecured personal loans than its secured counterpart. In short, these loans are not backed by anything, so borrowers need to have excellent credit if they want the best interest rates on an unsecured personal loan.
A new sort of subset of an unsecured personal loan is the peer-to-peer financing. Many of the best online companies operate in a peer-to-peer marketplace. A peer-to-peer product is backed by multiple third-party investors who have invested through a lending partner, who may also service the loans.
What is a Personal Loan Used for?
Personal Loans Can Be Used For:
- To consolidate credit card debt
- Medical bills
- Home Repair
- Moving expenses
- Funeral expenses
- Anything else you need money for
A tough or unexpected financial situation can mean just about anything, so you may be wondering what this type of financing can actually be used for. Well, the answer to this question may surprise you. Just about any financial situation can warrant a personal loan.
The most common reason is debt consolidation. Consumers who have multiple and various forms of debt have the option to consolidate this debt with an unsecured loan. The end result is one source of debt with a one new annual percentage rate (APR) which saves money on overall interest payments.
Aside from debt consolidation, the best reasons include medical bills, relocation expenses, dental bills, a celebration, or a new car purchase. While these all sound like standard reasons for borrowing, there are other reasons for using unsecured personal loans that are fairly surprising - whether you need a large or a small personal loan.
One positive of the best online personal loans is their degree of flexibility. You can qualify for financing for reasons other than financial hardship. There is a great example to illustrate this point; for instance, extra money for a vacation trip is a perfectly acceptable reason that qualifies on a personal loan application. If you have excellent credit, there is really no reason you cannot qualify for the best personal loans. This means you can get financing for new furniture, solar panels, a suit for an interview, or anything else. When you cannot find your reason on a lender drop-down list, you can literally select “other” and explain your reasoning.
Just to reiterate, a borrower with good credit can qualify for the best personal loans for just about any reason. Those with excellent credit can qualify for some of the best personal loan interest rates on the market. When you throw in the peer-to-peer marketplace aspect, it can get much easier to get approved. If you cannot wait and are willing to deal with interest, then check out some of these online personal loan companies below.
How to Apply for Personal Loans
Applying at Credit Unions
Credit unions or local banks are great places to apply because they often have broader lending criteria than big banks. If you bank with a credit union, you should apply there first as they might be able to give you a lower interest rate or give you the benefit of the doubt if your finances don’t make you an ideal candidate.
You’ll have to go into the bank and meet with a financing officer to discuss the type of financing you’re interested in and review your financial details. Dealing with a bank could mean that you get your money more quickly and they might offer more flexible terms than an online lender, but they often have the highest criteria for credit worthiness. That means it might be difficult for many people to qualify for a financing from a credit union or local bank.
Applying Through Best Online Lenders and Lending Partners
These days, online lenders and lending partners are offering installment options that are incredibly easy to apply for. They often have more flexible criteria than even the best credit unions and banks and that means that you’re more likely to get approved. Interest rates can sometimes even be lower than you would get at credit unions as well.
Applying with an online lender or lending partner doesn’t take a lot of time and you don’t need an appointment with a financing officer. You just log on, fill out their forms, send them some scans of important documents, and you could hear whether you’ve been approved in as little time as a few minutes.
Each lender or lending partner has slightly different approval criteria, but, in general, most best lenders or lending partners will look at your FICO credit score and your income. The higher your income and credit score, the more likely you are to get approved for an unsecured financing.
Online companies tend to be more willing to approve borrowers who don’t have ideal credit scores, and they’re also starting to use additional criteria in order to make their credit decisions.
In fact, some online companies like SoFi and Earnest don’t use FICO credit scores to determine their lending decisions and instead focus on things like cash flow, savings, income potential, and employment history. These factors can make originating unsecured debt easier.
Information You’ll Need When Applying
When you’re applying you will need to provide the lender or lending partner with the information that they require to make their lending decisions.
For lenders or lending partners with alternative credit models, that might include additional information like your alma mater or your employment history. When applying to the best companies, you will likely need the following information:
- Identification – Whether it is a driver’s license, Social Security card, or passport
- Proof of Income – If you have an employer, you will need your W-2 forms and pay stubs. If you’re self-employed, you will need your tax returns or bank statements.
- Verification of Address – You need an official piece of mail like utility bills with your address on it or a copy of your lease or deed.
- A list of monthly expenses and current debt
Online Unsecured Personal Loan Interest Rates
Current Unsecured Personal Loan Interest Rates
When it comes to borrowing, one of the most important things to be aware of is the interest rate that you'll be charged. Your interest rate is the percentage that you will be required to pay of the principle of your loan as payment for the privilege of borrowing. Lenders determine the interest rate they charge you by calculating how big of a credit risk they believe you’ll be. If you’re seen as being highly likely to repay your loan, you’ll pay less, whereas if you’re seen as being less likely to repay your loan, you’ll pay more.
The lower the interest rate you’re charged, the less you'll have to pay over the life of your loan. A lower interest rate will make it easier for you to repay your installment payments since a higher proportion of the money you're putting towards your loan payment every month will go directly towards the principal. The best personal loans you can get have the lowest interest rate possible.
While interest rates are calculated on an annual basis, they are annualized over the year and charged on a monthly basis.
Fixed Rate vs. Variable Rate Loan
When you're applying for one of the best personal loans, you'll notice that you often have the option of either getting a fixed rate or variable rate loan. A fixed rate loan is one where the interest rate is the same throughout the entire life of that loan. That means that if the interest rate is 5% when you first take out your loan, it will be 5% when you make your last payment.
In contrast, variable rate loans have an interest rate varies over the course of making installment payments. The interest rate on variable rate loans is usually tied to a particular index such as a prime rate. This interest rate can go up or down and your variable rate loan’s interest rate will also go up and down correspondingly. That means that if you take out a variable rate loans that charges 5% interest, your interest rate could go up, for example, to 7% or 10% over the life of the loan or could go down to as low as 2% or 3%. Because of this uncertainty, variable rate loans are often discounted over fixed rate loans. For that reason, it might seem like your best option is a variable rate because it is a cheaper choice when you're applying for a loan.
What's important to take into account when deciding between fixed and variable rate loans is whether you believe the interest rates are going to go up or down over the course of your installment payments. If interest rates are very high when you’re taking out your loan, then a variable rate loan could give you the opportunity of paying a lower rate later on. But if interest rates are at a particularly low point, then you would have to be careful about taking out a variable rate loan because the likelihood that the interest rate on your loan would increase could be quite high.
Rising Interest Rates in 2018
Currently, interest rates are in a particularly low point. In fact, the Federal Reserve has stated that they intend to raise their interest rates over the course of the next few years. Unless something happens that causes them to stop or curtail their current plans, the likelihood that that the interest rate on a variable contract will go up in the next few years is quite high since prime rates and other indexes that determine variable interest rates are impacted by increases to the Federal Reserve rate.
For that reason, the best idea may be for you to take out a fixed interest rate in 2018, rather than a low interest variable rate loan. The exception to this is if you intend to repay that debt quite quickly. If you intend to repay the loan in six months or a year, then you might be better off taking a lower interest rate now. Of course, whether you come out on top is up to chance, world events, and the Federal Reserve.
How to Get the Lowest Rate
Here are a few things that will help you get the best personal loan rates:
One of the biggest determiners of the interest rate that you’ll qualify for is your credit score. If you have a high credit score, then you will likely qualify for a relatively low interest rate. That's because banks and lenders will feel confident that you will be able to repay the unsecured loan should they lend to you. If you have a low credit score, then lenders might be concerned that you might not be able to repay the loan and so they will price that risk into the interest rate they offer you by giving you a higher interest rate. Improving your credit will make a big difference on the interest rate you can qualify for and will make it easier to get approved for some of the best unsecured options available.
Having a Cosigner
If you don’t have great credit, you can potentially get a lower interest rate if you have a friend or family member with good credit cosign your loan. You would qualify for the interest rate that they would get if they had applied on their own.
A Stable Income
Even if you have good credit, you will likely find it very difficult to get a lower interest rate or even get approved for one of the best unsecured loans if you don't have a steady job or source of income. Having a job where you make it significant amount of money will likely to ensure that you get the lowest interest rate. If you make less money, you can expect a higher rate.
A Short Term Length
When you take out a loan, you often have a choice about how quickly you repay it – this is called the term length. For example, you might have a choice of 1 year, 2 year, or 3 year term lengths. Typically, the shortest term will have the lowest interest rate.
Your Choice of Lender
Interest rates vary from lender to lender. Credit unions tend to charge lower interest rates than banks and online lenders sometimes charge less than credit unions. Depending on your particular circumstances, you might qualify for a lower rate from an online lending partner because they use unique underwriting methods that calculate your credit worthiness using additional factors other than just your credit score. To learn more about unique underwriting methods – click here.
Variable Rate Loans
As mentioned previously, you will likely get a lower initial interest rate if you take out a variable rate loan, but you could end up paying more over the life of your personal loan.
Secured vs. Unsecured Personal Loans
If you’re considering applying, there are two main categories of loans to choose from: secured personal loans and unsecured personal loans. The type of personal loan that is right for you will depend on a number of factors including your personal financial situation, what you intend to do with the loan, and what kind of assets you own.
Secured Personal Loans
- Require collateral
- Less Risky for the Lender
- Typically have lower rates
- Easier to be eligible for
- Less common
Unsecured Personal Loans
- Do not require collateral
- More Risky for the Lender
- Typically have higher rates
- Must have good credit history to be eligible
- Widely available
Secured debt has an underlying asset or collateral that is used to provide the bank with a more solid guarantee that the debt will be repaid. For example, if you take out an auto loan, your auto financing is usually secured through the title to your vehicle. If you don't pay your loan payment, the bank or lender can repossess your car and sell it in order to pay off the remaining loan balance. Because the bank can take possession of this asset if you don’t pay, they are more likely to lend to you and offer you a lower interest rate as there is less risk involved in the loan.
Another common type of secured loan is a home equity financing. A home equity loan financing is guaranteed by the equity in your home. A home equity financing is similar to an auto loan in that it gives the bank or lender the right to foreclose on your home if you do not pay them back. They can then sell your house in order to recoup the remaining loan balance. For this reason, home equity loans offer some of the lowest interest rates available.
While one of the benefits of taking out a secured financing is that you're able to qualify much more easily, it can sometimes take longer to process the loan application because there is more paperwork and the collateral has to be verified. These are usually the best solutions for those looking for a personal loan with bad credit. Secured debts do usually offer you a lower rate of interest because there is less risk for the bank, but one of the downsides is that the bank or lender can repossess or foreclose on your property if you do not pay. For this reason, secured debt is not a good choice for those who are facing financial uncertainty and are worried about losing their home.
Another thing to consider when taking out a secured debt is if you might want to sell the asset you’re using as collateral before you pay off your loan. That’s because the balance of the debt is due when you sell the underlying asset. That could create problems for you. For example, if you have a home equity financing and you decide to move, but your home’s value has gone down since you took out the loan, you might face financial difficulties. You might not be able to pay off your home equity debt when you sell and you’ll have to find the money to cover the loan. That could be a significant financial burden for many people. For that reason, secured loans are not ideal for anyone who might have to sell their home or car in the near future.
In contrast, the best unsecured loans aren't guaranteed by an underlying asset or collateral. For this reason, they can often be approved more quickly and require less paperwork. Since you are not using an asset as collateral, unsecured loans can be more difficult to get approved and you’ll likely be charged a higher interest rate. When deciding whether to approve you for an unsecured loan, lenders look at your income, as well as your credit score.
If you have a high income and a good credit score, you will likely qualify for a relatively low interest rate – although it will be higher than what you would pay with a secured loan. If you have a moderate income, or if you have a sub-optimal credit score, you will potentially have a problem getting approved for the best unsecured loans, or you might have to pay an extremely high interest-rate. Some interest rates on unsecured personal loans can be as high as what you might pay on a credit card. However, some of the best online companies offer unsecured options with low interest rates.
The benefit of the best unsecured loans is that they’re available to people who don’t have collateral or who don’t want to risk their assets through secured loans. Popular forms of unsecured personal loans are consolidation loans, student loans, and medical loans.
What’s Right for You?
To decide what’s right for you, you need to first determine your priorities when it comes to taking out a secured or unsecured personal loan. If you want to get the lowest interest rate possible, then you’ll likely want to get a secured personal loan. If you are concerned about putting your assets at risk, or you don’t own assets, then an unsecured personal loan is likely the best choice. Both secured and unsecured financing has its pros and cons so make sure to do your research before applying online.
Using Personal Loans to Pay Off Credit Card Debt
People who have a significant amount of credit card debt often face difficulties paying it off. That's because the high interest rates that are charged on credit cards mean that a big proportion of their monthly payments go towards paying interest and not towards paying down their debt. Rather than continuing to struggle trying to pay down your high interest credit card debt, it makes more sense to take out an unsecured personal loan in order to pay off your credit cards.
If you have a good credit score and a job, you can often get a significantly lower interest rate on unsecured financing than you're currently paying on your credit cards. This will allow you to repay your debt more quickly since the lower interest rate will mean less of your monthly payment will be going to pay interest and more of it will be going towards the principal.
You can also consolidate the debt that you have on multiple credit cards, paying off your credit cards through a secured or unsecured personal loan can also make it for more straightforward to repay your debt since you only have one bill. This will make repaying your debt easier.
How to Apply
Many people believe that it's difficult or time-consuming to apply for an unsecured personal loan. While it does require that provide information and copies of certain important documents and information it isn’t as difficult as it once was.
While you can go into a bank or credit union branch in person and apply there, there are also lots of options to apply online. Online companies allow you to apply for personal loans in your pajamas from the comfort of your own home. They have streamline the process so that it doesn't take a significant amount of time. Another great thing about online lenders and lending partners is that they generally get back to you quickly to let you know whether you've been approved.
How to Do It
If you do decide to consolidate your credit card debt through a personal loan, then you should shop around to get the lowest interest rate. Each lender has different criteria by which they set interest rates and approve loans and that means that one lender might offer you a significantly lower interest rate than another.
One thing to keep in mind is that there is usually no origination fee when you apply with online companies. An origination fee is a set percentage of the amount you borrow that is charged when you take out your loan. However, sometime you may be asked to pay 2%-3% of the total loan balance, but it’s important that you factor this in when you are comparing the best places.
What’s Right for You
If you currently have credit card debt, you should look into whether you can qualify for financing to pay off your credit card debt. If you have a high credit score and a well-paying job, it will be easy for you to qualify and the lower interest rate that you’ll get will help you pay off your credit cards much faster.
Even if you don’t have perfect credit, you will likely still qualify to borrow money at a much lower interest rate than you’re currently paying on your credit cards. This will allow you to repay your loans much more quickly. If you’re not able to qualify to borrow by applying on your own, you might consider asking a friend or family member to cosign for your loan.
Applying With a Cosigner
If you're applying to borrow, but don't have a high credit score or a well-paying job, then you might consider asking a friend or family member to cosign for you. A cosigner is someone who legally commits to being responsible for the loan if you are unable to repay it.
If you have a cosigner, the lender will give you an interest rate and approve you for an amount that is commensurate with what your cosigner would get if they applied for a loan. That means that you will likely get a much lower interest-rate on unsecured financing and be able to borrow more money than you would have if you had applied on your own.
Benefits of Using a Cosigner:
- More likely to be approved
- Receive a lower interest rate
- Have someone to motivate you to stay on top of loans
- Cosigner may be discharged after certain number of on-time payments
Risks of Using a Cosigner:
- Credit of primary borrower and cosigner will both be affected if payments are missed
- Cosigner's retirement could be delayed
- Cosigner will be required to make payments if primary borrower does not
The Advantages of Applying with a Cosigner
One big perk of having a cosigner is that you might qualify for one of the best unsecured loans that you might otherwise qualify for or you could qualify to borrow more money. You could also be charged a lower interest rate - which would mean that you would pay less over the life of your personal loan.
Getting a loan with the help of a cosigner is a great way to build credit. If you don’t have a long credit history, qualifying for a loan with a cosigner’s help and then paying that loan on time will help boost your score.
The Disadvantages of Having a Cosigner
One of the big disadvantages of applying for a loan with a cosigner is how difficult it is to find someone who is willing to cosign for you. Because people know that they will be responsible for the loan if you're unable to repay it, not many people are willing to cosign loans. Someone might believe you have the best intentions of repaying the loan but be worried that you could face health challenges that would interfere with your ability to repay your loan or that you could die unexpectedly.
Another downside of having a cosigner is that they usually can't be removed from the loan. If, at some point, your credit improves or you get a full-time job, it can be very difficult or impossible to get the cosigner removed from the loan. Even if you might be able to qualify for a better loan on your own, you will be stuck with having the cosigner involved unless you refinance your loan.
Another thing to consider is that not all lenders allow you to have a cosigner and so if you want to apply for a personal loan with a cosigner, you might not be able to get a loan from certain lenders or lending partners. This is particularly true with online companies who don’t routinely consider cosigners.
Finally, one of the downsides of having a cosigner is that you might not get as much of a benefit from having them cosign the loan as you might expect. Before you take out a loan with a cosigner, make sure you understand how much of a difference having one will make.
What’s Right for You?
Whether you should apply for a personal loan with a cosigner will depend on things like your credit score, your income, and the amount you want to borrow.
If you do decide to use a cosigner and want to get a personal loan online, there are some online lenders and lending partners that allow for cosigners or co-applicants include FreedomPlus, Lightstream, and LendingClub. FreedomPlus allows for cosigners and around 40% of their applicants have them. Another popular lender, Lightstream, does not allow you to apply with a cosigner, but does allow you to apply with a co-applicant. LendingClub is currently testing out a joint application feature as well.
Unique Underwriting Models Involving No Credit Score
When you apply for financing from a bank or credit union, they likely use your FICO credit score in order to decide whether to lend to you. In fact, 90% of lending decisions are made using FICO scores, despite the fact that FICO’s scoring method isn’t perfect and disadvantages young borrowers or borrowers without long credit histories.
Lately, some best online lenders and lending partners have been using alternative models to decide whether an applicant is credit worthy and to determine the interest rates offered. These models often take a more holistic view of a client’s financial situation and look at things like savings, cash flow, employment history, and earning potential – rather than just focusing narrowly on their credit score.
This is allows lenders and lending partners to give the best personal loans to credit worthy clients that have bad FICO scores, but who are likely to pay back their loans on time and in full. These clients are increasingly millennials who don’t have high credit scores because they don’t have long credit histories, might not have built their credit because they don’t have a credit card, or might be just out of school.
These clients don’t look like good loan applicants when evaluated using the traditional method, but online lenders and lending partners who are using alternative underwriting methods are finding that they faithfully repay their loans. This is allowing them to expand their business to clients that are often ignored or missed by mainstream lenders and banks.
One example of an online lender with a unique underwriting is SoFi, a lender who started first by giving out student loans but has since moved into also providing some of the best personal loans and mortgages. They decided to stop using FICO scores because they found that the scores weren’t an accurate reflection of credit worthiness. Instead, they created a metrics that looks at savings, cash flower, earning potential and employment history. This allows them to provide loans to people they would have previously denied and to offer lower interest rates options.
Another example of a lender who has decided to turn their back on FICO scores is Earnest. They decided to move away from using FICO as their sole way to test applicants’ credit worthiness when they looked at their data around their loan applications.
Many of their loan applicants were professionals in business, law, or the medical field and they had high levels student debt. They found that the higher the student debt an applicant had, the lower their credit score was likely to be.
If they looked at FICO scores alone, they felt like they would miss an opportunity to service clients who had a high lifetime value to them as a lender. Instead, they look at a borrower’s degree, income, and the value of their education to help them decide whether they are a good credit risk. Earnest has been able to offer lower interest rates to more individuals since expanding their views on how to get approved.
One more great example of an online lender using an alternate underwriting strategy is Upstart. Upstart does use a FICO score in their lending decisions, but they will consider loan applications from borrowers who don’t have sufficient credit history to have a credit score.
In those cases, they use alternative lending criteria that they have found indicate that someone is a good credit risk. They look at the school someone attended, their grades, their work history, and their area of study. Getting approved at Upstart is much easier than it could have been.
What it Means for You?
The fact that lenders and lending partners are using alternative underwriting models in order to make credit decisions is good news for anyone who has a low FICO score or an insufficient credit history, but has good income potential, cash flow, or savings. These lenders and lending partners are changing how the loan industry works, that means that more millennials are now qualifying for some of the best personal loans. In short, it is getting relatively easy to get approved.