You can choose non-traditional options or look to lenders like banks and credit unions. Personal loans can be a fitting solution for a number of reasons. They can be used at your discretion for whatever you choose, allow you quick access to cash, have lower interest rates than credit cards, provide fixed rates and terms, and offer a range of lenders.
Personal loans are available as secured loans or unsecured loans. With a secured loan, the money you’re borrowing is backed by collateral, so it’s easier to qualify for this type of loan. Home loans and auto loans are examples of secured loans. With an unsecured loan — also referred to as a signature loan — you don’t need to put up any collateral. Student loans and credit cards are examples of unsecured loans.
Personal loans vary. Although most are fixed-rate loans, not all are low-interest loans and some are only available to consumers with good credit. Here are seven unsecured personal loan types for you to consider; check out advantages, disadvantages and typical terms and rates so you can better decide which is the best personal loan for your financial strategy.
1. Peer-to-Peer Loans
Peer-to-peer lending — also called person-to-person, P2P or social lending — connects borrowers with investors willing to fund their loans. Because P2P lenders operate exclusively online, there are savings opportunities for consumers in the form of lower interest rates. For P2P loans, approval depends on a number of factors, which can include debt-to-income ratio, financial history and even career experience. Application requirements include proof of income and employment.
Here’s a quick look at P2P lending advantages and disadvantages:
- Interest rates are low and fixed.
- No prepayment penalties are charged.
- Loans as large as $100,000 are available.
- P2P loans are generally limited to borrowers who have are in the credit score range of good or above-average credit.
- These loans are generally for high-income borrowers.
- Borrowers pay an origination fee of between 1 percent and 5 percent of the loan amount.
- This option is not available in all states.
- Online payments are not available; additional payments can only be made by mail.
The largest P2P lender is Lending Club. Through Lending Club, a person can borrow up to $40,000 with a fixed interest rate for just about any purpose. The monthly principal and payment are also fixed. The minimum to borrow is $1,000, and loan terms are three or five years. Interest rates start at 5.99% APR.
As of December 2015, the average Lending Club borrower had the following:
- 699 FICO score
- 18.12 percent debt-to-income ratio, excluding mortgage
- 16.3 years of credit history
- $75,055 personal income
- $14,741 average loan size
Lending Club reviews indicate that there are other online lenders with loan terms that are more flexible and that Lending Club generally appeals to high-income earners with above-average credit. Payments are automatically deducted from your bank account, which could be considered a positive or negative feature.
Prosper is another P2P lending company that offers personal loans at low rates for those with good credit. Prosper loans are unsecured, so you don’t have to put up any collateral in the event that you can’t make a payment. All loans have either a 36- or 60-month term, and rates start at 5.99% APR. Your credit, income and the number of investors bidding on your loan will determine your interest rate. Prosper offers loans between $2,000 and $35,000.
According to LendingMemo, a provider of information on P2P lending, Prosper loan reviews have included criticisms of the high credit scores and income levels required for approval. Applicants could be disqualified for having poor credit scores. Also, loans are not available in Iowa, Maine and North Dakota.
SoFi, another online lender, offers loans between $5,000 and $100,000. SoFi loans have no origination fee, prepayment penalty or balance transfer fee. Rates start at 5.95% APR, and lending terms are three, five or seven years. SoFi offers a couple of perks, such as protection against unemployment, which freezes payments while you are unemployed. Second, if you pay electronically via its AutoPay feature, you can earn a 0.25-percent discount on your rate.
2. Bank Loans
Banks are the traditional source of personal loans. If there’s a particular bank with which you have an existing relationship, you might get the best rate and loan there, if the institution values your relationship.
Here are a couple of the pros and cons of personal loans from banks:
- Rates might be better if you already have an established relationship with the bank.
- Loans up to $100,000 are available.
- Rates from online lenders might be just as low or lower.
- Geographical restrictions — for example, PNC Bank does not offer installment loans in all states.
In general, you must supply ID and proof of income to apply for the loan. Requirements to obtain a personal loan from a bank, as well as the terms of the loans, will vary. For example, TD Bank’s personal unsecured installment loan includes details such as:
- Minimum loan amount: $2,000
- Maximum loan amount: $50,000
- Rate: fixed and based upon credit
- Prepayment: no penalty
- Term length: 12 to 60 months
- Fees: no origination or annual fee
As of September 2016, the lowest rate was 8.99% APR, which includes a 0.25-percent discount for setting up automatic payments, according to the TD Bank site. The highest rate was 15.24% APR.
In comparison, Wells Fargo offers the following terms for a personal loan:
- Minimum loan amount: $3,000
- Maximum loan amount: $100,000
- Rate: fixed and based upon credit
- Prepayment: no penalty
- Term lengths: from 12 to 60 months, depending on the loan amount
- Fees: no origination or annual fee
The interest rate on a Wells Fargo personal loan might be as low as 5.99% APR, depending on your credit and the terms of loan. According to the website, the maximum interest rate for a $10,000, three-year term loan is 19.99% APR for existing customers.
CashCall is a quick and relatively easy alternative to other unsecured loans for qualified borrowers. You must provide ID, proof of an active bank account, and proof of income, although there is no specified minimum. Loan amounts range from $2,600 to $25,000.
Take a look at some of the advantages and disadvantages offered by this type of personal loan:
- Customers with the best credit have access to CashCall’s highest loan amounts and lowest rates.
- If you qualify, the process to obtain a loan is fast and easy.
- Fees are high.
- The best rates are reserved for high credit scores.
- Rates and loan products can change without notice.
- This option is only available to borrowers in six states: Arizona, California, Idaho, Missouri, South Dakota and Utah.
These loans are processed through the internet, by phone and by fax. Funds are then wired to a borrower’s checking account in as few as four hours. Loan rates will vary by credit, state, and term; you can find the rates for your location and situation by visiting the CashCall website.
Here’s what California residents, for example, can currently expect from a $25,000 CashCall loan:
- Fee: $950
- Maximum interest rate: 35.52% APR
- Rate: 34 percent
- Term: 120 months
- Payments: $734.02
4. Check Into Cash
Check Into Cash is a financial retailer that offers quick money solutions to customers. The retailer’s payday loan is a popular choice for customers who experience unforeseen expenses or need to cushion their bank account between paychecks, and for those looking for quick, bad-credit personal loans.
Here are some of the pros and cons of a payday loan — which is a type of bridge loan — from Check Into Cash:
- It’s fast: Apply online or in store for same-day pay.
- Lenders don’t check your credit score.
- Only low cash advance amounts are offered.
- Interest rates are high.
Although loan qualifications are more lenient in comparison to others lenders — payday loans are often used as personal loans for bad credit — loan amounts are much smaller. You can borrow up to $1,000, depending on where you live. The amount of your small personal loan depends on income, although no amount is specified. You also need to show proof of having a checking account that has been active for at least 90 days. You repay the loan via automatic withdrawals from your checking account.
The APR for payday loans depends on the advance amount, fees, and terms of the transaction, as well as where you live. Currently, the APR for a $100 single-payment payday loan might range from 260.71% to 782.14% APR on 14-day terms. The typical Check Into Cash payday loan or cash advance term is two to four weeks.
Chances are you have heard of crowdfunded startups. Kickstarter and Indiegogo are among the more popular crowdfunding websites. These platforms are ideal for raising funds that you don’t have to worry about repaying or for using when other loan options are unavailable.
Here’s a quick rundown of the pros and cons of crowdfunding:
- No interest or repayment is required.
- Credit score doesn’t matter.
- Anyone can request crowdfunding.
- A platform fee is charged.
- The process for obtaining your funding goal could be lengthy.
- Funding is not guaranteed.
Generally, entrepreneurs reward lenders with products rather than repaying them. The typical platform fee for using a crowdfunding site is 5 percent. There are other companies, such as Honeyfund.com, which don’t charge such a fee.
6. Debt Consolidation Loan
Another type of personal loan is the debt consolidation loan. With debt consolidation loans, you combine all your debts into one loan payment each month — ideally, at a lower rate. This type of loan is great for people who can stick to a debt payment plan.
Here are some of the other advantages and disadvantages of this loan type:
- Payments are simplified to only one per month.
- Interest rates can be lower than those of credit cards.
- It’s not guaranteed that you’ll reduce or pay off debt sooner.
- Debt-transfer fees might apply.
- Depending on their credit, borrowers might not qualify for lender’s advertised rate.
In addition to consolidating credit card debt, another common reason for obtaining a consolidation loan is to consolidate student loan debt. Here’s what an option for student loan consolidation looks like from Wells Fargo:
- Fees: none
- Variable interest rates: from 3.49% APR (with discounts) to 8.74% (without discounts)
- Fixed interest rates: from 5.99% APR (with discounts) to 10.99% APR (without discounts)
- Discounts: 0.25-percent interest rate reduction for existing customers; 0.25-percent discount when borrowers use AutoPay for monthly repayments
- Loan amount: up to $120,000
- Rate of terms: 15-year term for amounts under $50,000; 20-year term for anything over $50,000, according to a customer service representative
7. Installment Loans
Under the general terms of an installment loan, you agree to pay the loan back to the lender in monthly payments over a set period of time. Unlike payday loans, installment loans have a longer duration and lower interest rates. Personal installment loans commonly range from $150 to a few thousand dollars, but some providers offer loans of up to $35,000. Interest and other fees are commonly paid in fixed monthly payments. Here are some other advantages and disadvantages to installment loans.
- They’re easy to obtain.
- They’re available to low-income customers.
- A variety of money-lending institutions offer them.
- Interest rates are high.
- Fees are large.
Requirements, range of terms, APR and the amount of loan that a customer might qualify for all depend on credit and where the customer resides, according to installment loan provider Avant. Terms for Avant installment loans range from 24 to 60 months.
Here’s what you can expect from a typical Avant installment loan:
- Loan amount: $1,000
- Interest rate: 25% APR
- Number of payments: 24
- Monthly payment: $53.37
With installment loans, online payment is not available; instead, monthly payments are automatically withdrawn from the borrower’s bank account.
Tips for Paying Off a Personal Loan
Paying off your personal loan should be a top priority. Using autopay features — automatic payments arranged to repay the lender electronically — can help you pay down debt faster and with ease. You’ll also have the option to set up multiple monthly payments, which means you’ll pay less interest and pay off the loan faster. Some lenders, such as SoFi and PNC Bank, offer discounts for using this feature.
It’s wise not to rush when selecting a personal loan and trying to lock in the best possible rates. Making the effort to do your research and compare lending options could buy you time to build your credit while helping you obtain the best possible loan rate.
What to Do If You Can’t Qualify for a Personal Loan
Despite the range of options in rates, terms, and lenders, a personal loan might not be the right solution for your situation. You can consider the following alternatives if a personal loan isn’t ideal for you.
Low-Interest or 0% APR Credit Cards
If you have good credit, you might be eligible for a low-interest credit card. According to Coan, credit cards are the easiest way to borrow money. Some cards even offer no-fee debt consolidation. If you can afford the monthly payments and don’t need to borrow much, a credit card could be the better deal for your budget. In contrast, if you have to borrow an amount that will take a longer period of time to repay, a personal loan would likely be better.
To get a secured loan, you must provide collateral such as the title to your car or home. If for some reason you’re unable to pay back your loan, the lender can take the item you put up for collateral as payment. According to Wells Fargo’s website, secured loans can offer lower interest rates, higher borrowing amounts, and better terms than unsecured loans.
Source: Go Banking Rates