There are many reasons to get a personal loan: debt consolidation, home repairs, tuition costs or that item that you just have to have. A personal loan generally means that the loan is unsecured loan and repaid over a fixed period of time. A personal loan is not typically more than $50,000 and is considered an installment loan.
Is a personal loan right for you?
- If you have a lot of credit card debt, and you’re paying the industry standard interest rate of 14% or higher, getting a personal loan can make a lot of sense, especially if you have good credit. Interest rates are as low as 6% on some loans, so you could be saving a lot of money and consolidate your debt at the same time.
- If you are thinking of going to college, getting a personal loan instead of a student loan can have its benefits, though typically a personal loan repayment period is about 3 years.
- That gadget or toy you’ve been wanting. I applied for and received a personal loan through my credit union when I decided to get an ATV, and the rate was cheaper than if I had decided to finance it through the dealer.
- You want to build credit – a personal loan is a great way to take out a small amount of money and build positive credit history. Having an installment loan on your credit report can really help your FICO score.
- Instead of getting an equity line of credit, which is considered revolving credit, you could get a loan for that new kitchen upgrade you’ve been wanted.
Tips for finding the perfect personal loan
Join a credit union. Credit unions are everyone’s best friend. In addition to lower fees and costs, credit unions have lower credit standards and competitive interest rates on their personal loans.
If you have poor credit, get a co-signor. A co-signer can essentially lend you their credit. The bank or financial institution will consider the co-signer’s credit when underwriting the loan and possibly qualify you for the best rate.
Improve your credit. Speaking of credit, you may want to hold off getting that loan and see if you can do some quick fixes to your credit score. If you have lower than a 680 FICO score, you will be paying high interest rates on your loan. Some things you can do:
- Pull your credit report and fix errors.
- Get added as an authorized user on a friend or family member’s credit card.
- Open a secured credit card and make timely payments and keep the balance low.
Consider a secured personal loan. This is a credit trick that I’ve been touting for years – buy a 1 year CD then use the CD as security on the personal loan. Almost no bank will turn you down for $500 loan secured by a $500 CD. That loan will be reported on your credit report and you will see a credit score boost!
If you don’t need to build your credit, getting a secured personal loan can still make sense: secured personal loans mean lower risk to the lender and therefore you may get a deal on interest rates. You can use home equity, investments, autos or any other asset as security for the loan.
Do your homework! The lending industry is highly competitive and there are many sources for personal loans. Some places you can check:
- Check online banks. There are many online banks who forgo the costs of having a bricks and mortar presence to pass the savings on to you.
- Make sure the costs of the loan are something you can afford: the payment should fit within your budget and the cost of initiating the loan should be small or free.
- Make sure you don’t apply to places who will pull a hard inquiry on your credit, or minimize the number of applications you send out. Hard inquiries can lower your credit score. Some places will qualify you for a loan with a soft inquiry, which does not hurt your credit.
Choose a shorter term of repayment. The shorter the term, the lower your interest rate and the lower the total cost of the loan. Lenders perceive the risk as great as the length of repayment increases and greater risk means higher interest rates. In addition, the interest you will pay for a loan of 1 year vs. 3 years is much lower.