Most loans have a single purpose.
Mortgages finance homes and real estate. Student loans finance education expenses, namely tuition. Auto loans finance cars and other vehicles.
But if you need financing for one of multiple reasons, a personal loan may be your best bet. A personal loan can provide flexibility to help manage your current expenses.
Between our experience and your research, we can make your lending experience as swift as possible.
In this guide, we break down everything you need to know about personal loans (including the fool-proof way to get the best deal available).
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According to LendingTree, consumers currently account for 19.5 million personal loans. That’s a 52 percent increase over the past 3.5 years.
So, what has led to this spike in popularity? Before examining the increase in demand for personal loans in recent years, we first need to develop a clear picture of their various benefits.
A personal loan is a predetermined amount of money borrowed from a lender. A timeframe is established for repayment. Monthly payment amounts are fixed as well. That makes personal loans typically more manageable than other forms of credit.
Most personal loans are unsecured debt. This means you don’t need collateral to secure the loan. This makes them different from mortgages and auto loans. With those types of loans, the property you buy is backing up the loan in the event you default.
Lenders of personal loans will assess your ability to repay. You will need to show you have regular income. Your credit history will also determine whether you can get a personal loan. It will also determine the interest rate the lender charges.
Personal loans are fairly easy to obtain. The application requires little in the way of paperwork. The process is done almost entirely online. Loans can be approved in days. Funds can be released just as quickly, depending on the lender.
Even borrowers with substandard credit can obtain a personal loan. Keep in mind, though, that lenders will assess a higher interest rate to those with poor credit.
A personal loan is financing you can use for almost any reason. This type of loan is offered by banks, credit unions, and a number of online lenders. Like other types of loans, you are charged interest and make monthly payments over a given term.
Personal loans are often used by people who suddenly need extra cash. They may have unexpected expenses they can’t cover with their savings. Personal loans are also used as an alternative to other types of financing.
A personal loan may be used in lieu of a credit card for major purchases. In most cases, the interest rate on a personal loan will be lower than that of a credit card.
One of the advantages of credit cards is that they are revolving credit lines. This means as you make a payment, you have more credit available to you. Standard personal loans are not revolving.
Also, credit cards do not have a set repayment term. You are only required to make the minimum monthly payment each month. You can charge more on a card than what you pay as long as you don’t exceed your credit limit. Personal loans do not have that flexibility. You are required to make the same payment each month and you cannot add to the loan balance.
Whether you are finishing your training or already practicing, a personal loan can provide flexibility to help manage your current expenses. Personal loans are available to help consolidate and pay down high-interest credit card debt, finance a major purchase, cover relocation expenses or general living needs. They can also help doctors save thousands in interest costs.
Personal loans have become more popular in the last few years. At the end of 2016, total balances on personal loans exceeded $100 billion for the first time, according to TransUnion.
That’s because they offer many of the benefits of a credit card without the high interest. They have also become more accessible through financial technology companies, online lenders, and improved offerings. And if a borrower makes payments on time, the loan can improve their credit score.
Personal loans also make sense for people who want to reduce the interest they pay on their debt. They can also simplify the process of repaying debt by using one loan to pay off multiple credit cards.
According to statistics obtained from LendingTree:
- Personal loan debt held by Americans has more than doubled in the last five years. It was $55.7 billion in 2013. By mid-2018, it had grown to $125.4 billion.
- Personal loans make up 1.5 percent of consumer debt. They comprise less than 5 percent of non-mortgage debt. Credit card debt, on the other hand, totals more than $1 trillion. That accounts for 7.1 percent of outstanding debt.
- The average personal loan amount was $10,575 in 2018.
- The average Annual Percentage Rate (APR) for personal loans taken in 2018 was 33.52 percent. Rates vary drastically based on credit profiles. For example, borrowers with a credit score of 720 or higher obtained an average APR of 7.09 percent.
- One percent of American families applied for a personal loan in 2017. About 24 percent of those received at least one denial.
- The most popular term length is three years.
- The delinquency rate for personal loans is 3.21 percent. It’s higher than the rate for mortgages (1.67 percent), auto loans (1.22 percent) and credit cards (1.53 percent).
- The most popular reason for obtaining a personal loan is for debt consolidation. About 39.2 percent of personal loan buyers do so for that reason. Another 21.8 percent borrowed to refinance credit card debt. Home improvement accounted for 7.7 percent of personal loans.
Personal loans have several uses. Not all situations are ideal for a personal loan, but here are some that can be:
Perhaps you have a number of outstanding debts. The payment on your combined debt is difficult to pay each month. If this describes you, a personal loan can help you tackle the problem.
Debt consolidation through a personal loan repays existing debts from the proceeds of your new loan. Instead of multiple monthly payments, you consolidate down to one. You can set up the loan term so that your new monthly payment is lower than your previously combined payments.
This is especially true if you owe on credit cards. The average credit card APR is 17.5 percent. Some carry APRs as high as 25 percent. Personal loan rates can be as low as 7 percent to 15 percent. Replacing your credit card debt with a personal loan can therefore save hundreds, maybe thousands, in interest charges.
The personal loan provides several other advantages. If you have a fixed-rate loan, your monthly payment will stay the same throughout the loan term. Plus, assuming you avoid adding debt, you can point to the end of the loan term as the day you’ll be debt-free.
Student loan refinancing or consolidation
There are a number of options available to physicians and residents to reduce their student loan obligations. You can refinance your current loans into a new loan. You can also consolidate your multiple loans into a single loan. In either case, a personal loan could be an option.
When you refinance, you obtain an entirely new loan. The new loan completely replaces your existing debt. The proceeds from your new loan pay off your existing loans. Once your old account closes, you are only responsible for the new loan. None of the rates, terms, or conditions from the old loans apply to the new one.
You should be careful and know all the pros and cons of using personal loans to consolidate student loans. For example, you would lose the tax deduction on student loan interest if you use a personal loan to refinance.
You should only use a personal loan if you can lower your interest rate and/or lower your monthly payment. Also, keep in mind that many lenders have maximum loan amounts. If you have accumulated massive student loan debt, you may not be able to refinance or consolidate your entire debt.
A personal loan can sometimes help with large medical bills. One advantage is that you can keep the medical debt out of the collections process. On the other hand, you should try to negotiate a payment plan with the provider before taking out a personal loan. In most cases, medical debt can be repaid in installments without interest.
Renting a truck. Hiring movers. Paying deposits. Buying furniture and household items. Moving can be expensive. The farther the move, the more you’ll shell out. A personal loan can help cover these costs.
Home repairs and improvements
Most people think of using home equity loans or lines of credit. But what do you do if your home needs a repair and you lack equity in your property? One option could be a personal loan.
You can obtain a personal loan regardless of your home’s equity. Another advantage is that home equity loans use your property as collateral. Personal loans do not. If you fall behind on your debt, you won’t be at risk of losing your home if you used a personal loan.
Major auto repairs
You’re not ready to get rid of the car that needs a new transmission. A personal loan can help you pay the mechanic bill. That way you don’t have to pay for it using a high-interest credit card.
We often get hit with unexpected expenses we can’t cover. For these situations, personal loans can provide funds fairly quickly to minimize any financial perils that may result. However, an even better measure to take is to set up an emergency fund that you can fall back on when times get tough.
Many prospective parents need a personal loan to cover the legal and travel fees necessary to adopt a child.
In addition to gaining quick cash, using personal loans can offer a number of advantages.
Personal loans can save you money.
One of the main benefits of using a personal loan is replacing high-interest debt with a lower rate. In addition, you can get a fixed-rate personal loan. This means your interest rate won’t rise with prevailing rates. Credit card rates, on the other hand, routinely rise and fall based on the interest rate environment.
Personal loans can simplify your financial life.
A personal loan can be a great tool to remove the chaos of having multiple payments. You can consolidate multiple higher-interest debts into one fixed monthly payment. If you have difficulty keeping up with your credit cards and store card bills, a personal loan can streamline your payments.
Personal loans can boost your credit score.
A factor that contributes to a negative credit score is your credit utilization rate. This is the percentage of your available credit that you’re currently using.
For example, if you have a $10,000 limit on your credit card and have an $8,000 balance, your credit utilization rate is 80 percent. The higher the rate, the more it negatively impacts your credit. A high rate indicates to future lenders that you use too much of your available credit.
Consolidating credit card debt with a personal loan can lower your utilization rate. That’s because you’ll have additional credit in the form of a new personal loan. The lower utilization rate can improve your credit score.
Also, a personal loan is an installment loan. That means you repay the same amount each month for a specified term. This is unlike credit cards where there is no specified term to repay. A structured payback can help you repay the loan more quickly than you could credit card debt. This would, therefore, lower your future utilization ratio.
Another way personal loans help credit scores is by diversifying your credit. Your credit rating benefits from a mix of different kinds of debt, such as credit cards, student loans, and a mortgage, on your credit report. If your current debt consists only of credit cards, adding a personal loan can help you establish a better mix of debt.
There are times you should avoid a personal loan. In these situations, it may be best to seek other financing options or don’t borrow at all. These scenarios include:
You will have trouble with the monthly payments.
Do research ahead of time to get an estimate on what your monthly payment will be. Make sure it will fit in your budget so that you don’t risk defaulting on the loan. You also want to avoid using a credit card to make up for budget shortfalls caused by taking out a personal loan.
You are about to buy a house.
Getting a personal loan will raise your debt-to-income ratio. This, in turn, affects your credit score, which could affect the mortgage rate you receive. In addition, traditional mortgages limit your DTI to between 35 and 40 percent. That means if you earn $10,000 a month, your current debt can’t exceed $3,500 to $4,000 a month. Be careful not to take on a personal loan that will push your DTI above that mark if you’re thinking of buying a house.
You are tempted to borrow too much.
Whereas secured loans limit your borrowing to the value of the asset you’re buying, unsecured loans have no such limit. People sometimes over borrow just because a lender will loan them a higher amount. If they need $10,000 to consolidate their credit card debt, they may borrow $15,000 to take a vacation also. Some people think nothing of tacking on a few extra thousand on a personal loan just to have extra cash on hand. It’s best to limit your personal loan amount to just what you need.
You are borrowing for something you don’t necessarily need.
Many financial experts caution against using personal loans for unnecessary items. Examples include weddings, vacations, or a big-screen TV. Because of the ease of obtaining personal financing, it may encourage a borrower to go overboard. Plus, you want to strongly consider whether you want to pay for a one-week vacation or a two-hour wedding for the next four or five years.
There are plenty of reputable lenders for personal loans. Unfortunately, there are some who use practices that are frowned upon to win your business. Some examples to avoid include:
Advance loan fees
A lender may offer loans and terms that are too good to be true. In return, however, they insist you pay the first few months of payments to qualify. You should never have to make installment payments before you’ve secured a loan.
Many lenders will advertise guaranteed financing regardless of credit or lending history. Some will even tell you they don’t check credit scores before making loans. Others will tell you they can make loans if you’ve filed for bankruptcy.
In exchange, these lenders likely assess heavy fees and/or high-interest rates. In addition, they may want several payments upfront.
Legitimate lenders never guarantee or say that you are likely to get a loan before you apply. They evaluate creditworthiness and confirm the information in an application before they grant firm offers of credit to anyone.
Some fraudulent lenders offer personal loans, but insist you also buy “loan insurance.” This is to cover the loan in case you default. However, most personal loans are unsecured debt. No reputable lender would require insurance. If a secured personal loan is needed, you would put up collateral instead.
A common scam is for a lender to approve you for a loan, then demand payment of upfront fees before releasing the funds.
Legitimate lenders may charge fees. But they disclose them clearly and prominently. They also take fees from the amount you borrow. And fees usually are paid to the lender or broker after the loan is approved.
Make sure you understand all the fees associated with the loan. This will enable you to compare lenders when shopping for a personal loan.
Also, be wary of lenders who say they don’t check your credit history, but ask for a Social Security number or bank account number. They may use your information to debit your bank account to pay a fee they’re hiding.
This is interest that is stacked in a way so you pay the bulk of it near the beginning of the loan term. Before you take out a personal loan, know how interest is accrued and how it will impact the total costs of your loan.
Some lenders will assess a penalty if you pay off the full balance of the loan before the end of the term. For example, if your original loan term was 48 months and you repaid the loan in 36 months, the lender could charge a penalty. Prepayment penalties should be communicated before you sign for the loan. You should avoid any lender that charges prepayment penalties.
Large origination fees
Some lenders charge an origination fee. This is a fee to originate your personal loan application. Those that do charge this fee make it 1 to 2 percent of the loan amount. Fees higher than that should be avoided. Some may charge as much as 8 percent. On the flip side, many personal loan companies do not charge origination fees.
In addition to the aforementioned lender practices, make sure you do not fall victim to any of these common mistakes we see first-time borrowers make.
Not checking your credit score before applying.
It’s best to know where your credit stands before you apply. That way you can know what kind of offer to expect. In addition, knowing your credit score helps you avoid wasting time applying for loans you can’t qualify for.
Failing to shop around.
Taking the first loan offer that comes your way can make your loan more expensive. Because rates vary by lender, borrowers who don’t shop around may leave money on the table. Also, keep in mind that the lowest rate isn’t automatically the best deal. There are also fees and other loan terms to consider.
Not getting pre-qualified.
With an affirmative pre-qualification, you can know that your chances for loan approval are good. Plus, the pre-qualification process will not affect your credit. Your pre-qualification will also give you a preview of the loan rate and terms you can expect. This will make it easier to compare offers.
Only focusing on the monthly payment.
Borrowers often fixate on the loan’s monthly payment because they want to know they can afford it. While that’s important, you should also review the loan’s APR. There are also fees to consider, such as origination fees, late fees and prepayment penalties. It’s best to know what these fees are upfront. That way you don’t make a mistake that costs you money later.
Not reading the contract.
Take time to read the terms and conditions of the contract. Otherwise, you may be surprised later by provisions you didn’t realize were contained in the document. If you have questions, don’t sign until you understand everything contained in the contract.
Making late payments or not repaying the loan.
Late payments negatively impact your credit score. By not repaying the loan, the lender will send it to collections. You could also be taken to court. If it’s a secured loan, you may lose your collateral.
Not asking how interest is calculated.
Lenders calculate interest differently. It’s important to know before signing how the interest on your loan will be calculated.
For example, some lenders use a simple interest method. This means the amount increases based on the amount your borrow, the interest rate, and the length of the loan. If you borrow $1,000 at 5 percent, you would pay $50 in interest each year.
Other lenders use compounding interest. This is when interest continues to accrue on top of the existing interest as you pay down the balance.
Lenders also differ on how often they calculate compounded interest. It could be daily, monthly, semiannually, or annually. Interest that compounds daily will cost the most over time. Annual compounding will cost the least.
Personal loans are fairly easy to obtain. In general, a borrower must be 18 years of age, be able to provide a government ID, have a Social Security number, have a minimum amount of income, have a bank account, and live in a state that the lender does business.
Even borrowers with less than ideal credit can typically obtain personal loans. Keep in mind that poor credit will mean paying a higher interest rate. It could also require collateral or a cosigner to obtain financing.
Lenders will review the following criteria to qualify you for a loan. These factors will also determine the interest rate you pay.
The higher your credit score, the more favorable the terms of your loan. Loans are granted based on the risk presented by the borrower. The riskier you are perceived, the less likely you are to secure funding.
Before you apply for a loan, you should check your credit score. Checking your credit score is like getting a physical. It’s a way to understand your overall financial health.
Your credit score informs lenders and other interested parties of your credit risk. It is based on a number of factors, including how much debt you have relative to your income, and whether you’ve paid past debts on time.
You will need to show you have the ability to repay the loan. The lender will want to see pay stubs or other evidence of employment.
This measures the amount of your monthly income that pays debt and obligations. The higher the ratio, the more risk you pose to a lender.
Lenders will tally your credit card payments, car loans, student loans, child support, alimony, store credit payments, and personal loans. When determining your monthly obligations, lenders use your minimum monthly payment for each debt.
When it comes time to borrow, here are the most common types of personal loans you may want to evaluate.
Most personal loans are unsecured. This means there is no collateral securing the loan. You don’t have to put up your house, car or other valuable. Other types of unsecured debt include student loans and credit cards.
Without collateral, the lender takes on more risk. If you are unable to repay your loan, the lender has no assets backing the repayment of the loan. Therefore, unsecured loans typically carry a higher interest rate than secured loans.
Though you are not putting up collateral, you are still legally obligated to repay the debt. Defaulting on the loan or missing payments will negatively affect your credit.
Secured loans are backed by an asset. The most common secured loans are mortgages and auto loans. The house or car you borrow to buy secures the loan. If you default on a mortgage or car loan, the lender can legally seize the asset securing the loan. An asset that secures a loan is known as collateral.
Most personal loans are unsecured loans. However, there are instances where a borrower needs a secured personal loan. This is often because the borrower has risk factors that make getting unsecured financing a challenge.
Some may opt for a secured loan because they may get a lower interest rate than with an unsecured loan. This is because a secured loan is less risky for the lender. The lower the risk, the lower the interest rate.
For a personal loan, the collateral that secures the loan has to be valued at least as much as the amount borrowed. Examples of collateral for a personal loan include a car that is fully paid for, a savings account, or a certificate of deposit.
It’s important to consider the consequences of losing the asset you use as collateral. You don’t want to lose something important for failure to keep up with your payments.
Fixed-rate loans have an interest rate that does not change. Whether your loan is for two years or 20, the interest rate remains the same. That means your minimum payment remains unchanged. You lock in the interest rate once you’re approved and financed.
Variable-rate loans have an interest rate that fluctuates — or varies — over time. The rate on your loan will move in line with prevailing interest rates. As the rate changes, so does your monthly payment.
Often, a variable loan’s rate will be tied to a well-known index. Many are based on the 1-month LIBOR (the London Interbank Offered Rate). This is an interest rate that banks charge one another to borrow money.
Variable loans generally have lower starting interest rates than fixed-rate loans. But over time, the rate paid on a variable loan can exceed that of a similar fixed-rate loan.
Variable loans typically have a rate cap. This is the maximum interest rate you can be charged. For example, if the rate cap is 14.95 percent, that’s the highest rate of interest you will ever pay on your loan. This maximum cannot be exceeded regardless of how much the corresponding index moves.
This type of loan works best for borrowers who want to take advantage of the early savings provided by initial lower interest rates. Borrowers of variable rates should also have the financial flexibility to make higher monthly payments later if interest rates rise.
In general, variable loans also work better for short-term loans, such as 10 years or less.
If you have lackluster credit, you may need a cosigner for your personal loan. A cosigner is like a backup borrower. If the main borrower can’t make payments, the cosigner becomes responsible for repayment. Enlisting a cosigner is another way a lender can assume less risk on a personal loan.
The typical cosigner is a family member. For example, parents often cosign for their children’s first loans. However, anybody who is willing and has adequate credit can cosign for a loan.
Enlisting a cosigner with better income and credit improves the borrower’s chances of qualifying for the loan. In addition, you may get more favorable loan terms, such as a lower interest rate, using a cosigner.
The downside of using a cosigner is that your missed payments will affect that individual as well. The loan could have an adverse effect on your cosigner’s credit report.
Cosigning a loan can be risky. A potential cosigner likely has a good credit score and a decent income. They have nothing to gain by cosigning a loan for somebody with inferior credit. But they have much to lose. In addition, it’s challenging to release a cosigner from the loan. That makes it difficult to find a willing co-signer.
Before you ask a potential cosigner, be prepared. Know the loan terms. Have a plan for how you will repay the loan. Provide some assurance that you will meet your responsibilities.
Personal line of credit
A personal line of credit differs from a personal loan. Instead of receiving a lump sum loan, a line of credit gives you access to a set amount of money from which you can borrow any time.
You only pay interest on what you borrow. For example, if you have a $10,000 line of credit and borrow $5,000, you only pay interest on the $5,000.
There are two parts to a line of credit. The first is the draw period. This begins once you qualify for the credit line. This is the timeframe during which you can access funds from the credit line. The lender will determine how long the draw period will last. Interest will begin to accrue once you borrow from the credit line.
Once the draw period ends, you will enter the repayment period. The lender will give you a set amount of time to pay off the borrowed funds.
Personal credit lines can help people who have uneven income. You can tap into the credit line to cover bills while waiting for income. It’s also a good source for immediate funds if needed for emergencies.
One of the potential downsides is that readily accessible credit can lead one to overspend.
If you can’t qualify for a traditional personal loan, another option may be peer-to-peer lending. This is also often referred to as crowdfunding, only with loans instead of investments.
With peer-to-peer lending, the lender takes funds from their own money to lend to an individual after determining the amount and interest rate. This takes place on special peer-to-peer websites.
Borrowers come to a peer-to-peer lending website for a loan, often with better terms than they can get from a bank. Investors on the site lend money at much higher rates of return than what they can get at a bank.
Individual lenders put money into an account from which they will provide borrowers money. Borrowers apply for loans through one investor or across multiple individuals. Lending activity is coordinated by a central website, which hosts the lender's account, sets interest rates, and handles all of the money transfers.
The main advantage of peer-to-peer lending is accessible financing at reasonable interest rates. That can also be a disadvantage, as it gives easy credit access to borrowers who may have trouble with debt.
Once you have identified the type of personal loan(s) that is the right fit for you and your needs, here are the steps you need to take to get financing.
First, make sure a personal loan is actually your best option.
In many cases, a personal loan isn’t your only financing option.
For example, if your goal is to retire credit card debt, another option may be a balance transfer credit card.
A balance transfer card is one that offers a 0% introductory rate for the first nine to 18 months. Therefore, when you transfer your current credit card debt onto your new card, you will pay no interest during the introductory period. After that, the card will charge regular credit card interest.
If you can pay your entire credit card balance during the introductory period, then you may want to consider this option. Otherwise, a personal loan will likely offer better repayment terms.
Other alternatives to personal loans are home equity loans and lines of credit (HELOC). A home equity loan allows you to borrow money using your home’s equity as collateral. A HELOC allows you to borrow a little at a time against an established line of credit based on your home’s equity.
Interest rates will typically be lower on a home equity loan or HELOC. However, you will have to use your home as collateral. The application process is also much quicker with a personal loan.
Personal loans are also sometimes used in place of auto loans and small business loans.
As you research your financing options, compare APRs and repayment terms. Also, consider the advantage of having an unsecured personal loan versus financing that requires collateral. Finally, if you opt for a personal loan, make sure your lender will loan you money for your intended purpose. While some lenders have no restrictions on what you use funds for, others have limitations.
Check your credit score.
Checking your credit score is like getting a physical. It’s a way to understand your overall financial health.
Your credit score informs lenders and other interested parties of your credit risk. It is based on a number of factors, including how much debt you have relative to your income, and whether you’ve paid past debts on time.
Many people assume their credit is fine. Others avoid checking because they know it’s not.
Knowing your credit score will prepare you for the loan rate and terms you will be offered. The higher your score, the better your chance of securing financing.
In general, scores fall into the following categories:
- 720 and higher means excellent credit
- 690 to 719 denotes good credit
- 630 to 689 means fair or average credit
- Below 629 usually typifies bad credit
Just because you have low credit doesn’t mean you can’t get financing. But it will likely mean you pay a higher rate. Low credit can also result in needing collateral to secure a personal loan. You may also need a cosigner.
Another reason to check is that there may be inaccurate information adversely affecting your credit score. A checkup may also reveal identity theft.
If your credit score looks like a bad cholesterol reading, there are ways to improve it. You can lower your credit card balances. Pay bills on time. Fix any errors on your credit report.
Decide what you need.
Finding the right loan starts with knowing what you need.
- How much do you need to borrow?
- How much can you afford to repay each month?
- What will your current credit score and financial situation allow you to borrow?
Pre-qualifying gives you an idea of what terms you can expect. Many online lenders perform a soft credit check during pre-qualification. This is an inquiry that doesn’t affect your credit score.
Lenders often list basic eligibility criteria that need to be met before you can apply for the loan.
You may be asked for information such as a Social Security number, current debt and income, your employer’s name, and personal information.
Many banks and credit unions offer unsecured personal loans. There are also a number of online lenders that offer this type of funding. There is no one-size-fits-all option. The lender that offers what you need will depend on several factors. These include how much you need to borrow, how healthy your credit is, and what you can afford to repay each month.
Compare the amounts you qualify for, the monthly payments, fees, and interest rates. Compare the maximum loan amount offered to be sure you can get all the funding you need. Review the different types of loans a lender offers. Ascertain whether you can qualify if you have bad credit, or whether you will need collateral or a cosigner.
Read reviews of lenders you are interested in. You can find a wealth of information by doing an Internet search. Read the opinions of respected financial columnists about the options available. Product reviews can help you gauge the quality of each lender and what your experience might be like.
You also want to confirm that a particular lender can offer personal loans in your state.
Base your research on what you need. Then compare all options to ensure you’re getting a competitive loan.
Read the fine print.
As with any financing, read the terms of the loan offers and get answers to your questions. Make sure you understand the loan’s terms and conditions. Be especially mindful of fees charged, such as origination fees and prepayment penalties. Also, keep in mind that the contract may require automatic withdrawal for payments.
Apply for the loan.
Once you’ve settled on the right loan, it’s time to apply. Most lenders enable you to apply online. If you’re approved, you will likely receive a loan agreement to sign electronically. Funds can be available within a few hours or few days.
The information you need to apply will depend on the lender. In most cases, you need to confirm your identity, address, employment, and income. The documents you will need may include utility bills, tax returns, pay stubs, bank statements, and your driver's license.
If you’re applying for a secured loan, you need documentation regarding your collateral.
The average personal loan rate extended to borrowers in 2018 was 33.52 percent APR, according to LendingTree customer data.
Broken down by credit score, the average APR paid last year was:
- 7.09 percent for credit scores above 720
- 11.44 percent for scores between 680 and 719
- 16.72 percent for scores between 660 and 679
- 22.43 percent for scores between 640 and 659
- 28.69 percent for scores between 620 and 639
- 49.06 percent for scores between 580 and 619
- 99.00 percent for scores between 560 and 579
- 135.94 percent scores below 560
According to Bankrate, current interest rates for unsecured personal loans range from 5 percent to 36 percent.
Broken down by credit score, the average APR currently paid is:
- 9.8 percent for scores between 720 and 850
- 15 percent for scores between 690 and 719
- 21.3 percent for scores between 630 and 689
- 28.2 percent for scores between 300 and 629
Another factor that determines your rate is the loan term. Earnest lists these rates on a hypothetical $10,000 loan:
- 6.99 percent to 14.24 percent on a 3-year term
- 7.49 percent to 16.24 percent on a 4-year term
- 9.49 percent to 18.24 percent on a 5-year term
To illustrate how much a higher interest rate can impact your payments, consider this scenario. You want to borrow $7,500. You plan to repay the loan over five years.
- At 8 percent interest, your monthly payment will be an estimated $152 a month. Over five years, you will pay about $1,624 in interest.
- At 12 percent interest, your monthly payment will be an estimated $167 a month. Over five years, you will pay about $2,510 in interest.
- At 15 percent interest, your monthly payment will be an estimated $178 a month. Over five years, you will pay about $3,205 in interest.
The more you borrow, the more that higher interest rates will affect your payment. Consider if you borrow $15,000 over five years.
- At 8 percent interest, your monthly payment will be an estimated $304 a month. Over five years, you will pay about $3,248 in interest.
- At 12 percent interest, your monthly payment will be an estimated $334 a month. Over five years, you will pay about $5,020 in interest.
- At 15 percent interest, your monthly payment will be an estimated $357 a month. Over five years, you will pay about $6,410 in interest.
The length of your repayment term will also affect your payment and total interest. Consider a scenario in which you borrow $10,000 at 10 percent interest.
- Over a three-year term, your monthly payment will be an estimated $323. The total interest paid over the life of the loan will be about $1,616.
- Over a five-year term, your monthly payment will be an estimated $212. The total interest paid over the life of the loan will be about $2,748.
- Over a 10-year term, your monthly payment will be an estimated $132. The total interest paid over the life of the loan will be about $5,858.
There are a number of ways you can qualify for a lower rate. However, these tactics take time and financial discipline to execute.
Lower your debt-to-income (DTI) ratio.
Your DTI is an important part of your credit score. The lower it is, the better your credit. To receive the best rate on a personal loan, try to lower your DTI before you apply. If you have debts with small remaining balances, try paying them off. Increasing your income can also help your DTI. So, if you expect a raise or are about to complete residency, you may want to wait to get a personal loan.
Decrease your credit utilization.
Credit utilization refers to the percentage of your available credit that you have borrowed. It typically refers to credit cards or retail credit. Financial experts suggest staying below 30 percent utilization. That means if you have a $10,000 credit limit on your credit card, your balance should stay below $3,000.
Higher credit utilization can negatively impact your credit score. Therefore, if you can lower your credit balances prior to getting a personal loan, it can have a positive impact on your loan terms.
Make your payments on time.
Late payments hurt your credit. In fact, your payment history is one of the biggest determining factors of your credit score. Whether it’s student loans or credit cards, make sure you’re making payments on time, even if it’s only the minimum required.
Compare the rates and terms of several lenders.
Between banks, credit unions, and online lenders, you have multiple options. Each has its own rate structure. Take the time to evaluate and get quotes from multiple lenders.
Also, keep in mind how loan terms can affect your rates. For example, lenders typically charge lower rates the shorter your repayment term. One lender will charge between 5.24 percent and 14.29 percent on a $5,000 loan with a repayment term of 24 to 36 months. But if the loan term is lengthened to 49 to 60 months, the rate range increases to between 6.29 percent and 15.84 percent. Also, some lenders will give a discount for setting up automatic payments.
When comparing rates, look at APR and not just the advertised loan rate. That’s because the APR will take into account all fees associated with the loan.
At LeverageRx, we help doctors cut through the noise to make smart, swift financial decisions. That means giving you the resources you need to effectively comparison shop.
Based on our insights and analysis, here are the top five personal loan companies for doctors in 2019.
SoFi offers personal loans between 6.79 percent APR and 15.49 percent APR. Loan amounts are available between $5,000 and $100,000. Fixed and variable rate loans are available. You can select terms ranging from two years to seven years. There are no fees and all loans are unsecured. If you lose your job, SoFi will temporarily pause your payments. Along with student loan refinancing and mortgages, SoFi offers a personal loan product for physicians, dentists, and other medical professionals.
Earnest offers an extremely flexible personal loan product for physicians, dentists, and other medical professionals. They evaluate more than just your credit score and look at other factors like your savings habits, education, and earning potential. By building a better picture of your full financial profile, Earnest is able to offer very competitive rates on their personal loans. You can choose your preferred monthly payment and increase your payment amount anytime. There are no origination fees or prepayment fees on Earnest's personal loan product. Fixed rates range from 6.99 percent APR to 18.24 percent APR. Loan amounts range from $5,000 to $75,000. Terms of three, four, or five years are available.
A division of SunTrust Bank, LightStream offers low, fixed rates and flexible terms. A LightStream loan for $5,000 to $100,000 can be quickly delivered directly to a borrower’s bank account. LightStream advertises that it will beat an interest rate (APR) presented by any other lender by .10 percentage points, provided the other lender’s rate meets certain terms and conditions. There are no fees or charges, nor penalties for early payment.
PersonalLoans.com provides an easy and convenient way for consumers to be connected with a personal loan through its network of lenders and lending partners. Its online service can enable you to get a loan between $1,000 and $35,000. Though its process is designed to connect clients to potential lenders, the company does not function as a lender. Repayment timeframes range from 90 days to 72 months.
LendingPoint focuses on providing personal loans for doctors with fair credit. Its typical borrower has a FICO score between 600 and 680. LendingPoint provides personal loans from $3,500 up to $20,000.
One alternative to a personal loan is a home equity loan. This type of loan allows you to borrow money using your home’s equity as collateral. That is the difference between its value and what you still owe on it. If you have a home appraised at $250,000 and you still owe $125,000 on the original mortgage, you have $125,000 in equity.
Like personal loans, home equity loans are often used to pay off debts with high-interest rates. They typically offer lower interest rates than unsecured debt. People also use home equity loans to consolidate and pay off multiple debts, which lowers the monthly payment.
Some also use home equity loans to finance a home improvement project or other large expenses, such as funding a child’s college education.
Most lenders will allow you to borrow up to 80 percent of the equity in your home. So if you have $100,000 in equity, you can borrow up to $80,000. Some lenders will allow borrowers to exceed that percentage for a higher interest rate. In addition to having home equity, lenders will also assess your creditworthiness and your current debt-to-income in determining whether to make the loan.
The major difference between the two types of loans is that personal loans require no collateral. Therefore if you default on a personal loan, you are not in danger of losing your house. Default on a home equity loan and the lender will likely foreclose.
That also means a home equity loan will typically offer lower interest rates than a personal loan.
On the other hand, personal loans carry fewer upfront fees. Some lenders may charge an origination fee, but many others require no fees. Home equity loans will include several fees, including origination, appraisal, title, and others.
Depending on the amount of equity you have, you will likely be able to borrow more from a home equity loan than a personal loan. And if you use funds for home improvement, you can use the home equity loan interest as a tax deduction. You cannot deduct personal loan interest.
An advantage of personal loans is that you will receive approval much faster. Funds are also released to borrowers much more quickly than with home equity loans.
By now, we hope to have answered most of your questions regarding personal loans. However, you may still have one or more lingering questions you're not quite sure about. (And that's ok!)
Fortunately, we keep track of the most common questions we hear from doctors like yourself when discussing their personal loan options.
How long will it take to get the loan funds?
Personal loans typically have quick turnaround times. How soon you receive loan approval and funds will depend on the lender.
According to SoFi’s website: “Once your application is complete and verified, if you are approved for a loan, you will receive a Loan Agreement for electronic signature. Once you’ve signed the document electronically, we will give you a call to confirm your address and welcome you to the SoFi Community, and then your funds should generally be available within a few days.”
According to Earnest on its website: “At this time we are able to make a decision on most Personal Loan applications within 5-10 business days. This timeline can vary depending on what additional information is required to process your request. Once approved, you will have 7 calendar days to accept the loan offer. Once you accept and enter your bank account details, we will transfer the funds by the next business day. You will usually see the loan transfer into your account within 1-2 business days after signing.”
According to LendingPoint’s website: “Based on your credit picture and the information provided on your application, we’ll return your loan offer(s) in just moments. Once you have accepted an offer we will ask you to provide some additional information and documents. After all required documentation has been received and verified, a final underwriting review and loan approval can be completed in just a few hours in many cases.”
According to PersonalLoans.com's website: “Your loan request may be approved within minutes. If you have been approved by your lender, reviewed their policies, and then signed a loan agreement, your funds should be available as soon as the next business day.”
Does applying for a personal loan affect your credit?
The application process should not affect your credit report. Lenders do a soft credit check, which is simply a data request. If and when you sign for a loan, the lender will conduct a “hard inquiry” to verify the information in your application. The hard inquiry will be shown on your credit report.
Credit cards are better for smaller purchases of, say, $500. But personal loans are typically a better option for large expenses that you need to pay over a longer period. In most cases, the APR for a credit card is higher than that of a personal loan.
Why do personal loans carry higher interest rates than other types of loans?
Most personal loans are unsecured loans. This means there is no collateral securing the loan. You don’t have to put up your house, car or other valuable. Without collateral, the lender takes on more risk. If you are unable to repay your loan, the lender has no assets backing the repayment of the loan. Therefore, unsecured loans typically carry a higher interest rate than secured loans.
On the other hand, mortgages and auto loans are secured by the property you are financing. That means less risk for the lender. With less risk comes lower interest rates.
Should I choose a fixed rate or variable loan rate?
There’s no right or wrong answer. The best choice depends on the individual borrower.
If you like the consistency of having the same monthly payment, you probably should choose a fixed-rate loan. Also, the longer the term you plan for repayment, the more you will benefit from a fixed rate. This will eliminate the risk of interest rate changes over time.
Fixed rates are also advisable if current prevailing interest rates are low and subject to increase in the near term.
A variable rate, on the other hand, can save you in the first months of your loan. That’s because variable loans start with a rate lower than a fixed-rate loan. If your repayment term will be short, you might benefit more from a variable rate loan.
Interest rates on variable rate loans depend on prevailing market interest rates. The total interest owed will depend upon changes in the broader environment.
How long of a repayment term should I choose?
Typical repayment terms for personal loans range from 12 months to 84 months. Some have longer terms available.
Financial advisors recommend paying off the loan as quickly as possible. That’s because the longer you hold onto the loan, the more overall interest you will pay. Not only is your interest rate higher, but it compounds over a longer period if you choose a longer repayment term.
It’s also better to pay off a personal loan sooner rather than later because it affects your debt-to-income (DTI) ratio. If you want to buy a house in the future, having a lower DTI will help you obtain better financing. And paying off loans in full boosts your credit score.
The bottom line is you should base your loan term on the monthly payment you can afford to pay.
Also, keep in mind that you can pay more than the minimum. If your income improves, pay more than the minimum to get rid of the loan before the repayment term. If your repayment is $150, paying $200 or more will get rid of the loan quicker.
This is why it's important to ensure your loan does not have a prepayment penalty. If it does, you cannot pay off your loan early without incurring an additional fee.
Are there limits on what I can use a personal loan for?
That may depend on the lender. For example, SoFi states that its loans are solely for personal, family, or household purposes. They are not permitted to be used for real estate, business purposes, investments, purchases of securities, post-secondary education, and short-term bridge financing. Other lenders have no limits on what personal loans can be used for.
What happens if I’m late on a payment or default on the loan?
If you have a secured personal loan, the lender may take ownership of the property you put up for collateral. Even if the loan is unsecured, there will be consequences. The lender will likely assign a collection agency to obtain payment. Defaulting will also hurt your credit score. That will make it more challenging to obtain financing in the future.
If you can’t make a single payment on time, you may be able to negotiate an extension. Before you miss a payment, talk to your lender. Explain the situation. They are more likely to work with you if you give them notice than if you simply skip several payments.
Missed payments and defaults will also likely be subject to fees.
Last but not least, here is our comprehensive personal loans glossary. It's chock full of important terms and phrases you will likely run into along the way.
- Accrued interest. This is the accumulated interest you have to pay on a personal loan.
- Annual Percentage Rate (APR). This represents the total cost of credit. The APR includes interest and fees expressed as a yearly rate.
- Collateral. If you have a secured loan, the loan is secured by collateral. This is the property you own, such as a car or house. If you default on a secured loan, the lender has the right to take your collateral as repayment.
- Conversion. Transferring debt to another account with the same bank.
- Cosigner. A cosigner serves as an additional repayment source for the primary borrower. A cosigner can help a borrower obtain loan terms they may have otherwise been unable to be approved for. If the main borrower can’t make payments, the cosigner becomes responsible for repayment. Enlisting a cosigner is another way a lender can assume less risk on a personal loan.
- Credit limit. This is the maximum amount a lender will allow a borrower to borrow from a personal line of credit.
- Credit line. A line of credit gives you access to a set amount of money from which you can borrow any time. You only pay interest on what you borrow.
- Credit utilization. Credit utilization refers to the percentage of your available credit that you have borrowed. If you have a $10,000 limit on your credit card and a $3,000 balance, your credit utilization is 30 percent. The higher your credit utilization, the more it negatively impacts your credit score.
- Default. This is the failure to repay a loan. If you default on a secured loan, the lender takes possession of the property you used as collateral. Defaulting on a loan will significantly hurt your credit score. It will also negatively affect your ability to obtain financing in the future.
- Fixed interest rate. An interest rate that does not change during the life of the loan.
- Merit-based qualifications. Some lenders will consider your education and earning potential when approving you for a loan. This is especially helpful to low-income borrowers at the beginning of their careers.
- Origination fee. This is a fee some lenders charge to originate your personal loan application. Those that do charge this fee make it 1 percent of the loan amount. Some, however, charge as much as 8 percent.
- Prepayment penalty. Some lenders will assess a penalty if you pay off the full balance of the loan before the end of the term. For example, if your original loan term was 48 months and you repaid the loan in 36 months, the lender could charge a penalty. Pre-payment penalties should be communicated before you sign for the loan. You should avoid any lender that charges prepayment penalties.
- Prequalify. Pre-qualifying is the process of discovering what kind of rates and terms you can expect before you officially apply for financing.
- Principal. The amount of money you borrowed on a loan. It does not include interest.
- Revolving loan. This refers to a credit line. Once you make a payment on a credit line, it provides more money for you to borrow from it.
- Secured loan. Secured loans are backed by an asset. The most common secured loans are mortgage and auto loans. If you default on a secured loan, the lender can legally seize the asset securing the loan. An asset that secures a loan is known as collateral.
- Signature loan. Another name for an unsecured loan. As the name suggests, the loan is secured by nothing but your signature, or your promise to pay.
- Soft credit check. This is an inquiry that occurs when a person or company checks your credit report for background. This typically occurs during a preapproval or prequalification process. Soft inquiries have no effect on your credit score.
- Term. The time limit you have to pay back your loan.
- Unsecured loan. This is a type of loan in which no collateral secures the financing. You don’t have to put up your house, car, or other valuable to get the loan. Most personal loans are unsecured loans.
- Variable interest rate. Variable interest rates fluctuate over the term of the loan. The rate on your loan will move in line with prevailing interest rates. As the rate changes, so too does your payment.
Jack is the Head of Content & SEO at LeverageRx, a personal finance company exclusively for doctors.