When you take out a personal loan, you receive a lump sum that you repay over time with interest. Personal loans often have lower interest rates than credit cards, making them a more affordable option for larger expenses. Typically, loan terms range from 1 to 7 years, though some lenders may offer longer terms. Longer terms can reduce your monthly payments but increase the total interest paid, while shorter terms result in higher monthly payments but less overall interest.
Interest and fees
In addition to interest, some personal loans include an upfront charge known as an origination or administrative fee. This fee can range from 0% to 12% of the loan amount, depending on the lender and your credit profile. Here are some key points about origination fees:
- They're often deducted from the loan amount upfront.
- The origination fee is factored into the loan's APR, making it important to compare APRs rather than just interest rates.
- A higher credit score can help you avoid origination fees.
Late payments or insufficient funds may result in late fees or NSF fees. However, some lenders, such as SoFi, do not charge late or origination fees.
Eligibility for a personal loan
To qualify for a personal loan, lenders typically review your credit history, income, debt-to-income ratio (DTI)—which compares your existing monthly debts (like credit cards, auto loans, and mortgages) to your gross monthly income—and your employment status.
Before applying, consider prequalifying. Prequalification gives you an idea of the loan options and rates you may qualify for without completing a formal application. It doesn't affect your credit and can display potential rates and terms from specific lenders. You'll usually need to provide basic information such as your name, contact details, loan purpose, loan amount, and sometimes your Social Security number (or the last four digits).
Keep in mind that once you proceed with a full application, the lender will perform a hard credit inquiry, which may lower your credit score by a few points, typically for up to one year.
Bad-credit loans
Designed for borrowers with bad or no credit, these loans can be easier to obtain if your credit score is low or nonexistent, but they often come with higher APRs. If the higher APR is too expensive, consider adding a cosigner to help reduce the cost.
Be cautious of predatory loans, such as payday loans, which often come with extremely high APRs—sometimes 400% or more—depending on your location. These loans typically charge $10 to $30 for every $100 borrowed and have short repayment terms, usually between two and four weeks, with loan amounts up to $500.
The issue with payday loans is that they can be difficult to repay on time if you're already short on funds. This may lead to renewing or rolling over the loan, resulting in additional fees. Over time, payday loans can become very expensive and should be avoided.
A better alternative is a payday alternative loan (PAL), offered by certain federal credit unions. PALs provide a safer option, with loan amounts up to $2,000 and APRs capped at 28%. Some credit unions offer these loans to new members right after joining, even if you're not currently a member.