Personal loans can help you finance your dreams, whether you’re looking to improve your home, buy a new car or consolidate your debt into one place. When searching for the best personal loan, the most important factor is you. Your own unique situation, including your past and present financial situation, will determine what you need in a lender.
Our guide will help you navigate the complexities to compare the best personal loan options to match your needs.
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Once you’ve figured out what type of loan you’re looking for and have found a few providers that suit your needs, it’s time to choose one and apply for a loan. Here are some things to keep in mind when choosing a lender:
Annual percentage rate. The APR is the interest accrued across an entire year rather than the monthly charge. Different interest rates and loan amounts will impact the APR of your loan, so compare providers based on this number.
Fees. Some lenders charge a monthly service fee, administrative fee or other large fees when you borrow. Find out what each lender plans on charging then narrow down your selection.
Customer reviews. How do real customers rate the lender online? Reading up on the experiences of others will tell you how a business handles customer complaints and problems.
Additional perks. Check if the lender offers any additional perks that might stand out to you including penalty-free early repayments or an easy-to-use mobile app.
How to get a competitive rate
Lenders typically look for the following features before giving a borrower the most competitive rates they offer.
High credit score. Having a good or excellent credit score is one of the most important factors in getting a competitive rate – usually a score over 650 is necessary, however even this score likely won’t get you the best rate.
Strong credit history. Your credit score should reflect your credit history to an extent, but lenders like to see that you have a long history of paying off several different types of debt on time.
High income. Most personal loan providers have minimum income requirements to qualify, but you’ll generally need an income that is much higher than the cutoff to get the best rate.
Low debt-to-income ratio (DTI). Your debt-to-income ratio can often best indicate your ability to take on another repayment. Typically, lenders don’t want to work with anyone with a DTI higher than 43%, and the lower your DTI, the better.
Pros and cons of the application process
Competitive interest rates. Even if you don’t have a perfect credit history, the best personal loans will offer competitive interest rates. As an added benefit, these are usually lower than the interest rates on credit cards.
Simple application. Almost every lender has an online application you can take advantage of, making it easy to enter your personal information and submit a request for approval. In addition, it typically only takes ten minutes or less to fill out the entire application.
Good customer service. The best personal loan lenders will have knowledgeable and responsive customer service teams to answer your questions. They may be available to give assistance by telephone, online chat, email or in person.
You may not be approved. The best personal loans will have stricter eligibility criteria than regular personal loans. This means if you don’t have a good credit rating, you may struggle to get a loan. Even if you have a good credit score, no personal loan approval is ever guaranteed.
The loan purpose might be restrictive. Depending on the type of personal loan you choose, you may be restricted as to how you can use it. Most lenders allow you to use a loan for any legitimate purpose, however if the lender you’re looking at doesn’t cover your needs, look elsewhere.
You might need additional documentation. Depending on your personal finances, your lender might ask to see additional documents you didn’t expect to need while applying. If you don’t have them on hand, this could make the application process tedious and long.
What to watch out for
While personal loans can help you through financial hardships, you need to be aware of some important things.
Read the fine print. Before signing the loan contract, take the time to read the fine print and remember to look for ongoing fees, early repayment fees and late payment fees. Read the terms and conditions document from start to finish and ask the lender any questions if you’re unsure of something.
Check that the lender is licensed. There are a number of online credit brokers and providers who operate illegally and continually scam people. If you wish to safeguard your information, it’s best to do your research to avoid any untrustworthy lenders.
Don’t take on a loan you can’t afford. Just because you qualify for a large loan doesn’t mean you have to take out the maximum amount you’re offered. If you only need $10,000, there’s no need to get a $15,000 loan, for example. You’ll pay a lot more money in interest payments for extra cash that you don’t even need.
Tips to pay off your new loan
Choosing to tackle repayments head-on can save you time, money and stress. Here are some of our best tips to help you focus on paying off your new loan on time, every time.
Put away your repayments. If your bank doesn’t charge you for opening an extra savings account, utilize it! Stick your loan repayments into this account so you don’t have to worry about not having enough in your regular everyday bank account.
Make an extra payment or two. The minimum monthly payment set by your lender will apply a good deal of your money to your interest, not your principal. Making an extra payment can help reduce your total debt and get your loan paid off sooner. Before you do this, make sure you won’t be charged any early repayment fees.
Round up your interest. Rounding to the nearest whole number – for instance, $335.98 to $350 – will only cost you a bit more each month, but can quickly help you make a difference on the total amount of debt you owe. Again, make sure early repayments won’t cause you to deal with any additional fees.
Check out refinancing. If you take out a loan for an extended period of time and make your repayments on time for a couple of years, you’ll improve your credit score, which means you may have the opportunity to refinance your loan and get a better interest rate. Refinancing could reduce the total cost of your loan.
Before you start applying any of these tips, make sure your lender allows you to make extra repayments without additional charges and that you have enough extra income to cover your usual monthly expenses.
At the end of the day, the best personal loan will depend on your own personal needs and financial situation. Before you decide which lender to go with, learn more about personal loans in our comprehensive guide and discover how smart borrowing can change the way you finance your needs and wants.
Not exactly. Your likelihood of approval for a personal loan may be greater with an excellent credit score, but there’s no such thing as a guaranteed personal loan or any type of guaranteed loan for that matter. Before applying for a loan, be sure to consider the lender’s other eligibility requirements, such as having a steady income, being employed, and meeting any age and residency requirements.
Aliyyah Camp is a publisher helping folks compare personal, student, car and business loans. Prior to joining Finder, she ran her own personal finance blog and wrote for numerous finance sites. Aliyyah earned a BA in communication from the University of Pennsylvania. She likes to go to the movies and go for runs outdoors.
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