Looking for a small loan, totaling $3,000 or less? Most larger financial institutions have moved away from this end of the loan market, but many people still need access to smaller loans to help cover unexpected needs such as car repairs or medical bills.
If you find yourself with these sorts of expenses, consider a small-dollar loan. It’s designed to offer low-income individuals affordable loans with reasonable repayment terms. A small personal loan can be an ideal option for building credit and establishing a foundation for other asset-building loans, such as mortgages and auto loans.
Requirements for small-dollar loans
Unlike home and auto loans, a small personal loan does not require collateral. The interest rate is based on the borrower’s creditworthiness. The borrower’s credit score and income history are the primary factors lenders look at. If the credit is poor, borrowers can still qualify for a loan, but they will have to pay a higher interest rate.
Where to get small-dollar loans
Small-dollar loans are offered by several different types of lenders:
- Major banks. A few big banks offer small loans of about $3,000, and require a $75 processing fee. Small-dollar loans from large banks are based on the income and credit score of the borrower. Interest rates vary, based on the borrower’s qualifications, but are fixed for the term of the loan.
- Credit unions. Credit unions offer small loans, but they often require a borrower to become a member. Credit unions offer loans of about $500, and members can sometimes use their deposits at the institution as collateral to speed up the approval. Consumers who badly need a small-dollar loan should shop first at credit unions, as they offer affordable repayment terms.
- Online lenders. Online lending companies usually offer loans starting as low as $1,000, and borrowers can use the lender’s website tools to quickly determine the rates they qualify for. Credit score, credit history and proof of income are used to determine rates, but some online lenders also consider job status and education.
- Payday loan stores. There is no easier way of getting a small loan than by going to a storefront that does not check credit scores. But payday lenders should be a last resort, if at all. Payday lenders offer small, short-term cash advances in exchange for access to the borrower’s deposit account via a post-dated check or electronic transfer authorization. Payday loans require a one-time payment of the full amount, plus a fee and/or interest, which is exorbitant — sometimes 1,000 percent or higher. Many borrowers who take out payday loans have difficulty repaying them, and become trapped in a cycle of debt.
Borrowers planning to apply for a small personal loan online should carefully check the lender’s fees, such as the application fee and late payment fee. They should also check the repayment schedule. The National Consumer Law Center says loans of less than $2,500 are considered affordable only if the interest rates are below 36 percent, offer three months amortization, and include no balloon payments.
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