The number of Americans choosing a personal loan to fill in some sort of money gap is on the rise, thanks in part to falling interest rates in the past 2 years. But obtaining a loan requires a little advanced preparation to get the best terms.
Demand for unsecured loans at credit unions, for instance, was up 4% in June compared with a year ago, according to Perc Pineda, a senior economist with the Credit Union National Association, or CUNA. That comes after a dramatic drop in interest rates since 2013. The average interest rate on a personal loan has fallen 9.37 percentage points since the end of 2013 and 2.68 percentage points since October 2014 to 10.34%.
A personal loan is a viable option if you are looking for a way to pay for home improvements, a medical procedure or your child’s wedding. Loans can range from $500 to $100,000, and collateral usually isn’t required to cover them.
“Personal loans have become a more mainstream offering with dollar amounts that can go over $100,000 and at really competitive interest rates, well below what you would pay on a credit card,” says John Ulzheimer, a credit expert formerly with FICO and Equifax. “They seem to have evolved from just being low-dollar loans with high interest rates for people with bad credit to high-dollar options for people with good credit and high income.”
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Where and how to get a personal loan
Steps to obtaining a personal loan:
Calculate how much you need.
Check your credit score and credit report to see whether your credit is good enough for a low rate.
Shop for rates and requirements at typical banks, but don’t forget online lenders, who often have different requirements from banks.
Ask the lender whether inquiring about the interest rate on a loan will impact your credit score.
If you are a young borrower without a track record of borrowing, online lenders are often a better option because they may look at criteria like education and career.
Once you choose a lender with favorable rates and requirements, contact that lender.
Consumers have a host of places to turn to for their personal loans. Banks and credit unions are a common option and don’t necessarily require a trip to a local branch. Many offer streamlined application processes online. Other types of lenders, such as credit card issuer Discover, also have personal loan programs.
No matter what type of lender you choose, be prepared to go through an application process that’s similar to one there would be for any other type of loan, Pineda says. That includes a credit check to determine your likelihood of paying back the loan. Generally, a higher credit score translates to a lower interest rate.
Before applying for any loan, be sure to check your credit report for errors that might be dragging down your score. Get yours for free at myBankrate.
Of course, lenders will require more than just a decent credit score before approving a loan.
The Charlotte Metro Federal Credit Union, for example, also requires 2 recent pay stubs to prove your income and a completed application with personal information, employment information and references, says Nicol Matthews, the North Carolina credit union’s chief operating officer. The references are used as another way to contact a borrower if he or she becomes delinquent on the loan and can’t be reached at their home or place of employment. Generally, the credit union requires the debt-to-income ratio to be less than 50% for personal loans, Matthews says.
How much you can borrow and how long you have to pay it back vary depending on the lender. Matthews says her credit union offers personal loans for as little as $500 or as much as $25,000 with a 60-month, or 5-year, term. Interest rates range from 9.75% to 16.95%, she says.
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Why get a personal loan?
Matthews says lenders must ask the purpose of the loan to comply with reporting regulations. “Car repairs or replacing appliances are some of the typical ones. Even Christmas expenses, mostly smaller emergencies,” she says.
Ulzheimer says that even if a consumer says he is using it for one purpose, he can use it any way he wants once approved. The lender just cares that the borrower pays it back.
“The money is deposited in an account of your choice,” he says. “What you do with that money is up to you.”