Knowledge is power, especially when it comes to taking on major debt. Unfortunately, when it comes to consumer loans, many of us get “shocked” trying to figure out what the details and terms of the loan mean before we can even apply.
While six-figure debt is scary enough to make even the most financially savvy borrower scream in horror, personal loans don’t have to be scary. In the right scenarios, they can be useful financing tools if you go into the application process with a good understanding of the loan details and what to look for.
Are personal loans a good idea right now?
Interest rates on personal loans have reached a record high this year, with the average interest rate currently standing at 11.54 percent. Borrowers with good credit and an excellent score will likely be offered a much lower rate, but if your score isn’t the best, you may want to wait to apply if possible.
Unfortunately, it is impossible to say when rates will drop. However, the Federal Reserve has slowed the frequency of rate hikes, which is a positive sign in the right direction. If you don’t need a loan as soon as possible, consider spending this time paying off existing debt and improving your score to increase your chances of getting a lower rate.
Creepin’ it real: what you need to know about personal loans before you apply
If you have good credit and can score a competitive rate, a personal loan can be used to pay for an emergency or consolidate your debts. Additionally, your credit mix and score can benefit from a loan if you make consistent, on-time payments.
However, taking on debt is always a risk, especially if you are not familiar with the basic details of a personal loan. There are a few questions you’ll need to be able to answer to ensure you’re not stuck with a loan that has more ‘gimmicks’ (like hidden fees and high rates) than ‘treats’ (benefits like interest rate discounts).
Are there any advantages 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 don’t have good credit. However, personal loans have advantages over other credit products and can be an excellent way to consolidate debt or cover major expenses.
Borrowing limits for personal loans are typically higher than for other loan products. Furthermore, even in this high interest rate environment, personal loans have relatively lower interest rates than credit cards, giving them access to more capital at less additional cost.
Possibly improve credit
Another advantage of personal loans is that they usually have a fixed interest rate and repayment terms. This means your payments will be predictable throughout the life of your loan, taking the guesswork out of the budgeting and payment process.
You can also build your credit score with a personal loan by making regular, on-time payments. This will also help you diversify your credit mix, especially if you have no other loans.
Good for consolidating debts
A personal loan is especially useful if you want to consolidate your debts. 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 loan with a lower interest rate. If you’re considering a personal loan for debt consolidation, make sure you qualify for a lower interest rate than you’re currently paying before making a decision.
How can you get a personal loan without credit?
Technically you can get a personal loan with little to no credit, but not with most banks and online lenders. Because most lenders and banks base approval on credit score and history, you will likely need to look at loans with non-traditional lending and approval models for approval.
Small dollar loans
Small dollar loans are aimed at borrowers with little to no credit history or a less-than-stellar score. These loans differ from traditional personal loans in that they are federally regulated through the Small Dollar Loan Program (SDLP) and require flexible eligibility and rates are capped at 36 percent.
Approval is based on your daily bank account activity and not your credit score. So as long as you have an account in good standing (that has been active for at least three months) with a participating bank or credit union, you may qualify.
Keep in mind that these are credit building products and have smaller maximum limits of up to $2,500.
Buy now, pay later loans
A buy now, pay later (BNPL) loan is a popular payment method among online retailers that allows customers to split a purchase into four equal installments.
BNPL products do not require a hard credit check, so the application will not damage your credit and it is relatively easy to get approved for it. However, your credit will be negatively affected if you make a late payment or don’t pay one at all.
However, because of the convenience of these loans, it can become easy to spend beyond your budget and become overwhelmed with multiple monthly payments. It is recommended that you use a BNPL product sparingly and only if you know you will have the funds to pay off the entire purchase by the end of the loan.
Bad credit loans
Bad credit loans are traditional personal loans made to people across the credit spectrum, especially those with low credit levels. They typically have more lenient eligibility requirements, and many have fairly low interest rate caps to avoid sky-high interest rates.
Although these loans have lower interest rates than personal loans or other types of short-term loans, they are often more expensive than loans for borrowers with good credit.
That said, make sure you know exactly how much you’ll pay in interest and fees before applying for a loan. Pay close attention to the origination fee, which is often higher for borrowers with lower credit, as it can add thousands to the total cost of your loan.
Many lenders offer prequalification, which allows you to see your predicted rates and eligibility without impacting your credit score. Prequalify for as many bad credit loans as possible to ensure you get the best possible rate for your credit situation.
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Getting a loan with bad credit
If you have bad credit or haven’t started building credit yet, there are many things you can do to build a positive credit foundation and increase your score. You can apply for a credit card and make monthly payments on time, become an authorized user of someone else’s account, or report your rental payments to build your payment history.
How do you apply for a personal loan?
Each lender and bank will have different application processes, but there are a few steps and requirements that are universal to all applications. Regardless of the loan, make sure you have basic personal and financial information on hand, such as a government-issued ID, your Social Security card (or applicable documentation), and income verification documents (W2, pay stubs, or a bank statement).
If you’re working with a lender, the application process will likely take place online. If you work with a bank or credit union, you may have the option to complete the form in person or with assistance over the phone. Each lender or institution will list on its website the minimum eligibility requirements for approval. To ensure a smooth and easy process, make sure you have everything in hand before signing up.
Once you submit your application, depending on the lender, it may take up to a week for it to be approved. However, some lenders offer next-day and even same-day approvals, especially if you apply online.
How long does it take to take out 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 for the money to be deposited into your account.
Online lenders are often the fastest option when it comes to disbursement, and many offer same-day approval and financing.
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How to get money quickly
If you need money quickly, make sure your credit is in good place and check 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 allows you to know what you qualify for without damaging your credit or incurring a liability.
What can be used as collateral for a personal loan?
Most personal loans are unsecured, meaning they don’t require collateral. However, some lenders offer secured loans as a cheaper loan option for people with bad credit. To minimize the potential risk, the lender will require that you back the balance with some form of collateral.
Collateral can be any valuable asset you own, although some lenders require specific forms to be approved. Common types of collateral include homes, vehicles, stocks, bonds, future paychecks, and savings.
The danger of a secured loan is that if you cannot pay the balance, your collateral could be seized to pay the overdue payments. To avoid this risk, make sure your monthly payment is affordable now and well into the future.
it comes down to
Reading through the loan details and navigating the application process can be intimidating, but it doesn’t have to be hair-raising. While taking out a personal loan in a high-interest rate environment comes with inherent risks, staying informed is the best way to keep your finances safe.
Before you apply, make sure you understand the process and steps you need to take and are familiar with the loan details. Before choosing a specific lender, shop around and compare rates to make sure you don’t miss out on a more competitive offer.
