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.
Looking for a small loan of $3,000 or less? There are times in life when you might need access to smaller loans to help cover unexpected needs such as car repairs or medical bills. Plus, taking out 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. While most larger financial institutions have moved away from the small end of the loan market, there are still great options if you need a small loan.
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 less than $5,000, shorter repayment periods, and fixed interest rates.
Where can I get a small loan?
Small personal loans are available from 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 smaller personal loans of about $500, for lower interest rates and better repayment terms than most major banks. They often require a borrower to become a member. Existing members can sometimes use their deposits at the institution as collateral to speed up the approval. Consumers who badly need a small loan should shop first at credit unions, as they offer affordable repayment terms.
- Online lenders: Online lending companies usually grant loans starting as low as $1,000, but charge higher interest rates. Borrowers can use the lender’s website tools to determine the rates they qualify for quickly. They’ll use your credit score, credit history, and proof of income to determine your interest rate. Some online lenders also consider job status and education.
- Payday loan stores: 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. They won’t check your credit score, and you can walk out with cash in less than an hour. They are definitely a last resort, however. Payday loans require a one-time payment of the full amount, plus an outrageously high fee and/or interest — 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.
How to qualify for a small personal loan
Unlike home and auto loans, unsecured small personal loans do not require collateral, but your ability to qualify, the amount you can receive, and the interest rate will be based on your credit score and income history. Less qualified buyers may be denied or pay high interest rates, so the best thing you can do before applying for a small personal loan is improve your credit score, if possible.
Alternatives to small personal loans
If you have a credit card, you could use it to cover an unexpected expense instead of a personal loan. However, credit cards usually have a higher interest rate than a personal loan, so a credit card is only a good alternative if you’re sure you can pay off the balance in full before more interest accrues than it would with a personal loan. You could also talk to family and friends and request a small private loan.
If you do apply with a bank or credit union, check for application fees and late payment fees, and ask for the repayment schedule. Know exactly how much the loan will cost you overall, and compare it to your budget to make sure you can repay the loan. 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 large “balloon payments” due at the end of the loan term.
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