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Knowledge is power, especially when it comes to taking on large amounts of debt. Unfortunately, when it comes to consumer lending, many of us get ‘spooked’ when trying to figure out what the loan details and terms mean before we can even apply.
While six-figure debt is scary enough to make even the most financially-savvy borrower shriek in horror, personal loans don’t need to be scary. In the right scenarios, they can be helpful financing tools if you go into the application process well-aware of the loan details and what to look for.
Are personal loans a good idea right now?
Personal loan interest rates have hit an all-time high this year, with the average rate currently sitting at 11.54 percent. Borrowers in good credit health with an excellent score are more likely to be offered a much lower rate, but if your score isn’t the best, you may want to hold off on applying if possible.
Unfortunately, there’s no telling when rates will begin to drop. However, the Federal Reserve has slowed down the frequency of rate increases, signaling a positive sign in the right direction. If you don’t need a loan as soon as possible, consider dedicating this time to paying down existing debt and improving your score to increase your chances of scoring a lower rate.
Creepin’ it real: What to know about personal loans before applying
If you’re in good credit health and can score a competitive rate, a personal loan can be used to pay for an emergency or consolidate debt. Plus, your credit mix and score could benefit from a loan if you make consistent, on-time payments.
However, taking on debt is always a risk, especially if you aren’t familiar with the basic details of a personal loan. There are a few questions you should be able to answer to ensure that you’re not stuck with a loan that has more ‘tricks’ (like hidden fees and high rates) than ‘treats’ (benefits like interest discounts).
Are there benefits to taking out a personal loan?
Taking out a personal loan comes with the inherent risk of taking on debt and potentially high interest rates and fees, especially if you do not have good credit. However, personal loans have benefits over other lending products and can be a great way to consolidate debt or cover a major expense.
Borrowing limits on personal loans tend to be higher than other lending products. Plus, even in this high-rate environment, personal loans have relatively lower interest rates than credit cards, allowing access to more capital with less added cost.
Potentially improve credit
Another benefit to personal loans is that they typically have fixed interest rates and repayment terms. This means that your payments will be predictable throughout the life of your loan, taking any guesswork out of the budgeting and payment process.
You can also build up your credit score with a personal loan through making regular, on-time payments. This will also help you diversify your credit mix, especially if you don’t have other loans.
Good for consolidating debt
A personal loan is especially helpful if you want to consolidate debt. Debt consolidation is one of the most popular reasons to take out a personal loan. Debt consolidation is the process of combining multiple high interest debts under one new, lower interest loan. If you are considering a personal loan for debt consolidation, make sure that you qualify for a lower interest rate than you are currently paying before making a decision.
How can you get a personal loan with no credit?
You technically can get a personal loan with little to no credit, but not from most banks and online lenders. Since most lenders and banks base approval on credit score and history, you’ll likely have to look to loans with non-traditional lending and approval models for approval.
Small dollar loans
Small dollar loans are geared toward borrowers with little to no credit history or a less-than-stellar score. These loans are different from traditional personal loans in that they’re federally regulated through the Small Dollar Loan Program (SDLP) and are required to have flexible eligibility and rates capped at 36 percent.
Approval is based on your day-to-day bank account activity, rather than your credit score. So as long as you have an account in good standing (that’s been active for at least 3 months) with a participating bank or credit union, you may be eligible.
Keep in mind that these are credit-building products and they have smaller maximum limits of up to $2,500.
Buy now, pay later loans
A buy now, pay later loan (BNPL) is a popular payment method with online retailers that allows customers to break up a purchase into four equal installments.
BNPL products don’t require a hard credit check, so the application won’t ding your credit and they’re relatively easy to get approved for. However, your credit will be negatively impacted if you make a late payment or miss one altogether.
However, due to the convenience of these loans, it can become easy to spend past your budget and become overwhelmed with multiple monthly payments. It’s recommended that you use a BNPL product sparingly and only if you know you have the funds to pay down the entire purchase by the end of the loan.
Bad credit loans
Bad credit loans are traditional personal loans that lend to those across the credit spectrum, particularly to those with low credit. They tend to have more lenient requirements to qualify, and many have reasonably low rate caps to avoid sky-high interest rates.
While these loans have lower interest rates than payday loans or other forms of short-term lending, they are often more expensive than loans for borrowers in good credit health.
That being said, make sure you know exactly how much you’ll pay in interest and fees before signing up for a loan. Pay close attention to the origination fee, which is often higher for lower credit borrowers, as this can add thousands to the total cost of your loan.
Many lenders offer prequalification, which allows you to see your predicted rates and eligibility odds without impacting your credit. Prequalify for as many bad credit loans as possible to make sure you’re getting the best possible rate for your credit situation.
Getting a loan with bad credit
If you have bad credit or you haven’t started building credit yet, there are many things you can do to build a positive credit foundation and raise your score. You can apply for a credit card and make on-time monthly payments, become an authorized user on someone else’s account, or report your rental payments to build your payment history.
How do you apply for a personal loan?
Every lender and bank will have different application processes, but there are a few steps and requirements that are universal amongst applications. Regardless of the loan, come prepared with basic personal and financial information, like a government-issued ID, your Social Security card (or applicable documentation) and income-verifying documents (W2, pay stubs or a bank statement).
The application process will likely occur online if you work with a lender. If you work with a bank or credit union, you may have the option to fill it out in-person or with assistance over the phone. Each lender or institution will list out its minimum eligibility requirements for approval on its website. To ensure a smooth and easy process, have everything on hand and ready to go before applying.
Once you have submitted your application, it can take up to a week to be approved, depending on the lender. However, some lenders offer next-day and even same-day approval, especially if you apply online.
How long does it take to get a personal loan?
The time it takes to get a personal loan varies significantly depending on the lender you choose and the complexity of your financial profile. In general, banks and credit unions tend to have slower turnaround times than online lenders and can take up to a week to deposit the funds into your account.
Online lenders are often the quickest option when it comes to disbursement, with many offering same-day approval and funding.
How to get money quickly
If you need money fast, make sure your credit is in a good place and review the lender’s interest rates and fees before applying or you could end up paying more than you can afford. Applying for a loan online is the quickest option, but you should take the time to get pre-approved if possible. This lets you know what you will be eligible for without hurting your credit or making a commitment.
What can be used as collateral for a personal loan?
Most personal loans are unsecured, meaning that they do not require collateral. However, secured loans are available by some lenders as a lower-cost loan option for those with bad credit. To minimize potential risk, the lender will require that you back the balance with some form of collateral.
Collateral can be any valuable asset that you own, although some lenders require specific forms to get approved. Common types of collateral include homes, vehicles, stocks, bonds, future paychecks and savings.
The danger with a secured loan is that if you default on the balance, then your collateral could be seized to satisfy the delinquent payments. To avoid this risk, make sure your monthly payment is affordable both now and well into the future.
The bottom line
Reading through the loan details and navigating the application process may be intimidating, but it doesn’t need to be bone-chilling. While taking out a personal loan in a high-rate environment comes with inherent risks, being informed is the best way to keep your finances safe.
Before applying, make sure you understand the process, the steps you need to take and are familiar with the loan details. Before deciding on a specific lender, shop around and compare rates to make sure you’re not missing out on a more competitive offer.