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Getting a small loan doesn’t have to be a big hassle

Man applying for a loan
Kelvin Murray/Getty Images
Man applying for a loan
Kelvin Murray/Getty Images
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Looking for a small loan of $5,000 or less? Sometimes you might need access to smaller loans to help cover unexpected expenses, such as car repairs or medical bills. Plus, taking out a small personal loan can be ideal for building credit and establishing a foundation for other asset-building loans, such as mortgages and auto loans.

Most larger financial institutions have moved away from the small end of the loan market. However, there are still great options if you need a small loan. You can try a credit union if you need $500 or less, but online lenders are ideal if you’re looking for more cash.

What is a small personal loan?

Designed to offer individuals affordable loans with reasonable repayment terms, small personal loans are a fixed-amount, lump-sum loan from a lender to a borrower that is paid back over time with interest. Small personal loans usually have a principal of less than $5,000, shorter repayment periods and fixed interest rates. A small personal loan can help you save money on interest when you don’t need a large amount.

In the U.S., unsecured personal loan debt is $133.17 billion overall, according to the most recent numbers. That number grew by $5 billion in 2021, likely a least partly due to rising prices for living expenses such as gas and rent. The average personal loan debt is $17,064. If you don’t need a loan that size, you’ll pay a lot less in loan fees and interest rates over time.

What are small personal loans used for?

A small personal loan is ideal when you need money in a pinch. You need to research to find a lender with the best rates, loan terms and fees for your situation. Some lenders also put limits on how small a loan can be.

Personal loans can be used for almost any reason unless the lender specifically states a certain use isn’t allowed. Because of this, people often use small loans for things like:

  • Car repairs
  • Debt consolidation
  • Medical expenses
  • Unexpected expenses
  • Vacations
  • Weddings

A personal loan can be ideal if you need cash and don’t have time to save or budget for something.

Where can I get a small loan?

Small personal loans are available from several types of lenders.

Major banks

Some banks offer loans of about $2,000 and require a processing fee to be paid. Small-dollar loans from large banks are based on the income and credit score of the borrower. Interest rates will vary based on your qualifications. If you already have a relationship with a bank, you might also be eligible for better interest rates.

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Pros and cons
  • Pro: A bank may give you more time for repayment.
  • Con: Small amount loans may be less common in big banks.

Credit unions

Credit unions offer loans of even smaller amounts, as low as about $500. These loans often come with lower interest rates and better terms than major banks. To obtain a credit union loan, however, you’ll typically be required to become a member. Existing members may be able to use their deposits at the credit union to speed up the approval process.

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Pros and cons
  • Pro: If you need $500 or less, this may be the best option for low rates
  • Con: You may be required to have a membership.

Payday loans

Payday loans offer small, short-term cash advances in exchange for access to the borrower’s deposit account via a post-dated check or electronic funds authorization. Payday lenders will not check your credit score and often provide funds in under an hour.

Use caution when using these loans as the interest rates are far higher than anywhere else–sometimes 1,000 or higher–and repayment will be required in one lump sum. Many borrowers have trouble repaying these types of loans and become trapped in debt.

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Pros and cons
  • Pro: You can get money quickly.
  • Con: Interest rates are very high compared to any other option, and the loans can be hard to repay without getting into a cycle of debt.

Online lenders

Online lending companies usually grant loans starting at $1,000 but charge higher interest rates. Borrowers can use the lender’s website tools to quickly determine the rates they qualify for. The rate you receive is typically based on your credit score, credit history, and proof of income to determine your interest rate. Some online lenders also consider job status and education.

Here are some reputable online lenders to choose from:

Lender Minimum loan amount APR range Fees
PenFed Credit Union  $600 Starts at 6.74% Late payment fee: $29

Returned payment fee: $30

Upstart  $1,000 5.40% to 35.99% Origination fee: up to 10% of the loan amount

Late payment fee: the greater of $15 or 5 percent of the past-due amount

Returned payment fee: $15

Paper statement fee: $10

Upgrade $1,000 6.55% to 35.97% Origination fee: between 2.9% and 8% of your loan amount

Late payment fee: up to $10 once your loan payment is more than 15 days past due

Returned payment fee: $10

Rocket Loans  $2,000 7..727% (with autopay) to 29.99% Origination fee: Between 1% and 6% of the loan amount

Late payment fee: $15 if your loan is more than 10 days past due

Returned payment fee: $15

Avant $2,000 9.95% to 35.99% Administration fee: up to 4.75% of the loan amount

Late payment fee: $25 if your loan is more than 10 days past due

Returned payment fee: $15

PenFed Credit Union

PenFed Credit Union offers unsecured personal loans with no origination or prepayment fees. You can apply without impacting your credit score and receive the loan proceeds in just one to two business days if your loan application is approved. Furthermore, joint applications are accepted if you’d like to use a co-signer to strengthen your approval odds or secure more competitive loan terms.

Upstart

Upstart prides itself on offering affordable personal loans with average interest rates far lower than its competitors. You could get approved for a personal loan even if your credit score is lower since the lender also considers your employment and education history to determine if you’re a good fit for financing. Qualified applicants generally get instant lending decisions and receive loan proceeds within one business day.

Upgrade

Upgrade’s flexible personal loan options are also accessible to borrowers with varying financial backgrounds. They come with low fixed interest rates, and you can apply in minutes without affecting your credit score. If approved, select a monthly payment and loan term that works for your budget, and get your loan proceeds in as little as one business day.

Rocket Loans

Rocket Loans provides a seamless application process with real-time electronic verification of your identity and income information. Or you can check your rate before formally applying without impacting your credit score. Same-day funding is available to select customers, and you won’t be assessed a prepayment penalty should you decide to pay the loan off early

Avant

Avant offers personal loans to borrowers with varying backgrounds, including those with past credit mishaps and lower credit scores. It’s quick and easy to check your eligibility for a loan, and you could have the funds in your bank account in just one business day.

Avant also makes it easy to manage your loan while on the go directly from the mobile app, and phone support is available seven days a week if you need to speak with a representative.

What is a small business loan vs a personal loan?

A small business loan is a loan to help someone build a business or pay for business expenses, while a personal loan is a loan that can be used for nearly anything. You can use a personal loan instead of a business loan for business expenses.

A business loan makes sense when you don’t want personal assets at stake, when you want to build business credit or when you need large amounts of money to establish your business.

A personal loan may make more sense for a new business that hasn’t built credit and might have a hard time getting approved for a business loan. Personal loans are also ideal for borrowing smaller amounts, not using collateral or needing money fast. A personal loan calculator can help you identify a loan’s overall costs when you decide what kind of loan may be best.

How can you qualify for a small personal loan?

Unlike home and auto loans, unsecured small personal loans do not require collateral. Your ability to qualify, the amount you can receive, and the interest rate will be based on your credit score and income history.

Those with a higher credit score will have a better chance of being approved or being offered the most competitive interest rates and loan terms. In general, applicants must have at least fair credit with a score of between 580 and 669, but those with a credit score of 670 or above will have a better chance of approval.

Lenders typically also consider your debt-to-income ratio, which is how much of your monthly income is eaten up by debt obligations and repayments. Your debt-to-income ratio can be calculated by dividing your monthly debt payments by your gross monthly income. Lenders use this key calculation when reviewing loan applications as those with a higher debt-to-income ratio may have trouble repaying a loan.

Less qualified buyers may be denied or pay higher interest rates, so the best thing you can do before applying for a small personal loan is to improve your credit score, if possible.

Can you get a small personal loan with bad credit?

Typically, credit scores in the good to excellent range will have the lowest loan costs. However, many lenders still offer personal loans to individuals with lower credit scores by charging higher interest rates.

You may still qualify through other metrics if you have a low credit score. You may also be able to find a lender that allows you to have a co-borrower or co-applicant to help lower the loan costs. If you can wait, you can also work on improving your credit score before you apply.

What are the alternatives to small personal loans?

If you’d prefer not to use a personal loan to cover unexpected expenses, consider these alternatives:

  • Credit card: It is a convenient option but usually has a higher interest rate than a personal loan. So, a credit card should only be used if you can pay the balance in full before interest accrues.
  • Borrow from a relative or friend: You could also talk to family and friends and request a small private loan. Be sure to solidify the terms and get the agreement in writing to avoid confusion later on down the line.

If you apply with a bank or credit union, check for application and late payment fees, and ask for the repayment schedule. Know exactly how much the loan will cost you, and compare it to your budget to make sure you can repay the loan. Loans of less than $2,500 are considered affordable only if the interest rates are below 36 percent, offer three months of amortization and include no large “balloon payments” due at the end of the loan term.

Bottom line

Many options are available for obtaining a personal loan, including major banks, credit unions and online lenders. The rate and terms you receive depend on your credit score and other factors, including debt-to-income ratio. It’s a good idea to shop around to secure the best interest rate and loan terms for your needs.

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Written by
Raija Haughn
Raija Haughn is an associate writer for Bankrate.com specializing in personal and home equity loans. She is passionate about helping people make financial decisions that will benefit them long term.
Edited by
Loans Editor, Former Insurance Editor