At some point, everyone experiences a shortage of cash, whether it’s as small as $1,000 or as large as $100,000. Personal loans exist to help people meet a financial need that wouldn’t be satisfied with their savings or income alone. And this article explains how personal loans work, the different loan types, loanable amount, fees, costs, and how you can apply for one.
When you apply for a personal loan, an online lender requires certain documents to determine a few things like your identity, income, and expenses. Typically, you would be asked to supply a form of identification like your passport, driver’s license, etc. Sometimes, your Social Security number is enough.
Income proof may differ from lender to lender, but their goal here is to ensure that your earnings are stable enough to support your current expenses or other existing debt obligations. Some lenders require a low debt-to-income ratio plus a good credit score, but, again, it may vary by the lender as some borrowers can get an online personal loan even with a low credit score.
A personal loan is a type of credit that serves different purposes for the borrower, including purchasing big-ticket items like a car or a house, paying for education or medical bills, or even consolidating other debts to more manageable payments.
When you apply for a personal loan, you are essentially borrowing a fixed amount of money from a bank or a credit union with the promise that you’ll pay everything back in installments plus interest.
And while this credit type aims to finance anything that the borrower needs, not all personal loans are created equal. The loanable amount and the interest rate may vary depending on the institution and your credit history.
Before filling out an application form, it is vital to understand a few fundamental aspects of a personal loan to determine the best one among several choices. Here are a few things you should know:
Most borrowers think that personal loans fall under just one variety, but other types exist with features that may be more applicable to your financial situation. Here are the four general kinds of online personal loans:
The average amount you can borrow from a payday loan can range from $50 to $1,000, while an unsecured personal loan with an online direct lender can offer you from $2,000 to $50,000. Some lenders may even allow up to $100,000. But of course, the amount you are eligible to borrow depends on a few factors.
Lenders evaluate the amount and rate based on your income, current debt, and credit score. Sometimes a FICO score of at least 680 is preferred by lenders plus a debt-to-income ratio of 28% or 36% if using the back-end ratio, which includes all expenses.
However, this doesn’t mean that you don’t have any other alternative if you have a poor credit score. Some online lenders offer personal loans for borrowers with a 500 credit score, but it will come with unfavorable rates.
An option you can go for is a cosigned loan. This way, even if you don’t have the best credit score, but someone is willing to guarantee your loan’s repayment, then there is a good chance you can get approval with better terms.
As previously touched on, the APR represents the loan’s aggregate charges and is your best gauge to evaluate the most cost-effective personal loan option.
One of the lenders that provide the lowest APR is LightStream. It offers a 5.95% APR, a $100,000 max loan amount, and a term length of 2 to 7 years. While not rated by the Better Business Bureau, its parent company Truist Financial Corporation has an A+ rating.
However, to get approved for a loan, LightStream requires a minimum credit score of 660 plus several years of good credit history.
So, if it’s an online lender that is as competitive as what LightStream’s offers but isn’t as stringent on credit score and credit history, SoFi Finance Inc. is the choice. SoFi’s APR is only higher by 0.05% compared to LightStream. And the way they assess creditworthiness is through free cash flow or the remainder of your income after paying all expenses.
Of course, there are also personal loans with guaranteed approval, and borrowers who seek this kind of credit would typically face no hassle in their application. Lenders of this loan type will allow you to borrow money regardless of your credit history or score and without collateral.
This is also called payday loans, fast cash, deferred deposits, low credit loans, or cash advances, and the standard range of the amount you can borrow is $350 to $1,500.
You can benefit from guaranteed personal loans if you happen to run short on a few cash and need to pay for something urgent.
When it comes to online personal loans without a specific credit score, the best option is with One Main Financial. This Indiana-based financial services company can allow you to borrow up to $20,000 with an APR range of 18% to 35.99%.
One Main Financial is great for those with bad credit scores but needs cash fast. This company does not factor in excellent credit scores in approving loan applications and can even accept those with lower-than-average credit. What matters to this lender is your ability to pay back the loan, and it should be apparent just from your application.
The drawback, of course, is this lender’s high rates. It has one of the highest rates among other online lenders, and it also charges an origination fee. But this can be ameliorated by adding a cosigner to your application or opting for its secured loan instead.
Yes, it is possible, but you have to prove to creditors that you have other sources of income to repay your debt. Usually, if the only reason for your lack of a job is due to unexpected unemployment, but you have a good credit score, there is a good chance that lenders may grant you the loan.
Yes, it is possible to do so, but it would be much easier if you have one because your account is where lenders deposit the money you borrowed. Also, without a bank account, your options may be limited to high-fee lenders.
A private lender is either an individual or group of individuals who are not necessarily in the business of lending money but may pool funds to finance investments or businesses, one of which may include extending loans with the sole purpose of earning a decent return.
It sometimes is because it frees you of any debt, which saves you money in the long run, and it might even improve your credit score. However, the disadvantage is that you might pay an early settlement fee or a prepayment penalty fee.
The answer is yes. It is entirely up to you to decide what to do with the sum of money you borrowed. Still, you have to remember that lenders ask what your loan’s purpose is in your application as it is one of their criteria for determining their risk in lending you money.