Personal loans 101: How to get the money you need
With credit card interest rates soaring as high as 30%, people continue to look for alternatives to credit cards, especially when an emergency comes up. Personal loans can be a good option, but only if you have a good credit score; otherwise, the rates can be even higher than credit cards.
Just what can you use a personal loan for? Essentially any cash needed, including credit card payoff, debt consolidation, education, training, home improvement, car financing, business needs, vacation expenses, major purchases, wedding expenses, moving costs and medical expenses.
But be careful out there: If you’re not absolutely sure about what you’re getting yourself into, personal loans can cost you big time. Interest rates, especially from places like the ones that offer payday loans, can be as high as 300%, so be certain you understand the terms before you sign on the dotted line.
There are essentially two types of personal loans: secured and unsecured. Secured loans generally offer lower interest rates than unsecured loans, but you must put up something for collateral, such as your house, your car or your boat. If you don’t pay off the loan, you can lose that collateral, so tread carefully if you’re asked to secure the loan.
Unsecured loans are commonly known as “signature” loans. Essentially, the bank or other institution will loan you the money with just your signature. You can probably get more money and a lower interest rate with a secured loan, but do you really want to put an asset at risk? That’s one of the key questions you need to ask yourself before applying for a personal loan.
The next thing to determine is just where you’re going to get a loan. Banks and credit unions offer loans, and those should be your first stop. You can start by calling your own bank and finding out their personal loan terms. That way you know what the ballpark is for personal loans.
Also, if a you have good, long-term relationship with your bank, they know you as a customer and should be more willing to consider a “signature” loan. Just to be sure you’re getting the best rate, call other banks and credit unions in your area. Since the market for personal loans is very broad, you definitely need to shop around to be sure you’re getting the best offer.
One word of advice: When you start checking on rates, don’t put in an application until you’ve made your choice of lender. Although your lender will likely tell you it can’t give you a rate until after you formally apply, you should try asking for a range of interest rates. You also should ask what credit score the bank or credit union requires to get the best rates.
But why shouldn’t you just apply to see what kind of rate you’d get? For a very good reason: When you apply to a bank, credit union or other lender, the lender will check your credit score. Every time your score gets checked, the inquiry could result in a lower FICO credit score, which means that every time you apply for a loan, the next bank will discover a lower credit score for you than the one before, and so on and so on and so on. And the lower your score, the worse the rates are that you’ll be offered.
After getting an idea of the type of rates you’d get from a bank or credit union, your next step should be to check out one of the peer-to-peer lending websites, such as Lending Club or Prosper. You may find you can get your best interest rate offer from one of these sites. Essentially, by going with one of these sites, you’re cutting out the bank and borrowing from peers — investors will put up the cash that you borrow.
At both the Lending Club and Propser, you can borrow up to $25,000 for personal loans, business loans or student loans — pretty typical for the industry — but you still need a pretty good credit score. With Lending Club, for instance, your credit score must be 660 or above, and with Prosper, you must have a credit score of 640 or above. As with banks and credit unions, the interest rate you’ll be quoted will be based on your credit score; the better your score, the lower the interest rate.
What kind of rate can you expect? At Lending Club, interest rates run between 7.93% and 25.07%. Prosper offers loans from 7.5% to 35%. Both websites require payback in full in three years. You’ll also need to pay an origination fee. For the Lending Club, that’s 2.25% to 4.5% of the total amount of the loan. Prosper charges between 0.5% and 3%.
Not sure what your credit score is? You can get it for free at CreditKarma.com. If your score isn’t at least 640 or above, you’ll likely find it very difficult to get a personal loan at a decent rate. If you find your credit score is lower than that, take the time to order a free copy of your credit reports at annualcreditreport.com and see whether there are any errors on your credit report that could be affecting your score. If you find errors, correct them as soon as possible (my book, “The Complete Idiot’s Guide to Improving Your Credit Score,” offers extensive ideas on how to clean up your credit report and improve your score).
Once you’ve corrected any errors on your credit report, check your credit score again. A higher score could just get you the loan you need to pay off your debts and get you back on track to financial fitness.