How to Get the Best Personal Loan for You

Factors to Consider When Choosing a Personal Loan

When shopping for a personal loan, you'll need to consider five main factors:

1. Interest rates: The lower, the better.
2. Fees: Origination fees either become part of your loan balance or add to your upfront costs; again, less is more.
3. Loan term: A longer loan term will reduce your monthly payments; a shorter term means getting out of debt sooner and paying less over the life of the loan.
4. Loan amount: Personal loans in the range of $1,000 to $10,000 are typical, but some lenders offer up to $40,000 or more.
5. Features: These can range from good (incentives for paying on time) to limiting (prepayment penalties or restrictions on use). Read the details carefully.

So far, your choice is straightforward: The best loan for you has the lowest rate and fees, and a loan amount, term and features that best suit your purposes. But there's a sixth factor to consider: availability. The options available to you will depend most heavily on your creditworthiness. Your credit status, as well as income and assets in many cases, will determine which lenders—and individual loan programs—are likely to be a good match for you.

Why is credit so influential in the personal loan process? Although a few types of personal loans allow you to use collateral to help secure your loan, most are unsecured. If you default on an unsecured personal loan, there is no home or vehicle to repossess. The lender is relying on your credit history and proven ability to repay debt to assess the risk involved in giving you a loan. The lower your credit score, the higher the perceived risk. In turn, higher risk translates to higher rates and fees as a hedge against the possibility that you won't repay.

Know Your Credit Before Applying for a Personal Loan

Many lenders use FICO^® Scores^☉ to rate borrower creditworthiness. Here is how FICO^® rates creditworthiness by credit score band:

• 800-850: Exceptional
• 740-799: Very good
• 670-739: Good
• 580-669: Fair
• 300-579: Very poor

Many online lenders focus on a specific segment of borrowers. If you have exceptional credit—a FICO^® Score of 800 or higher—you may qualify for a low-interest loan through an online lender which caters to top-tier borrowers.

If your credit is good to very good, you'll find a range of lenders and lending platforms, including Marcus and Best Egg, that may want to work with you—although you'll pay higher interest rates and are more likely to pay upfront origination fees to get your loan started. Even borrowers with poor to fair credit have options, though these loans are typically the most expensive. Still, finding a reputable lender or loan product that caters to borrowers with lower credit scores, such as Avant, OneMain Financial is always a better option than resorting to a payday loan.

Before you begin looking for a personal loan, find out where your credit stands by downloading a copy of your credit score and credit report. Checking your own credit won't impact your credit score, so it's a good practice to do this periodically even if you're not shopping for a loan.

Contact lenders individually to get a rate and terms based on your credit score and other qualifying factors. You can find online lenders that fit your credit profile doing research online or by using a service such as Experian's CreditMatch™. Compare as many offers as you can, since rates and terms can vary widely. In addition to online lenders, check with your bank or credit union to see if they offer personal loans. The more information you gather, the more informed your decision will be.

What to Do if Your Credit Needs a Boost

Anyone can raise their credit score if they have enough time. But since time may be in short supply, here are a few steps you can take if your credit needs a boost to help you qualify for a more attractive loan now. While it's unlikely you can parlay a "fair" score into an "exceptional" one in short order, you might be able to add enough critical points to nudge you into a better loan.

1. Study your credit report. Disputing an inaccuracy on your credit report, such as a misreported late payment, might raise your score. Also check for any negative items that are about to "fall off" your report. For example, an auto repossession stays on your credit report for seven years after your original delinquency date. If you're a month shy of that seven-year mark, you might consider holding off until that item is cleared and your scores recover.
2. Do some basic housekeeping. Depending on your circumstances, paying down debt or paying off some of your cards may improve your credit score. Read up on more quick tips for raising your credit score.
3. Get a cosigner. Asking a friend or family member to cosign a loan is serious business. If you default, they are on the hook for your outstanding debt. But adding a creditworthy cosigner can give your application a lift.
4. Try Experian Boost^®ø. By factoring your on-time phone and utility payments into your FICO^® Score, you could see a significant score increase.
5. Find a lender that uses alternative data. Some lenders use different criteria to make a loan decision. A lender will still want to see evidence that you have the income and assets to repay your loan—and they'll offer a rate and terms based on this assessment.

Finding the Best Loan for You

Getting the best personal loan is indeed a personal process. Your rate, terms and fees will be tailored to your credit profile as well as your needs. Be prepared to roll up your sleeves, do plenty of calculations and compare your options wisely. The best loan for you will provide more than the means to pay down debt or make a purchase. You'll also see savings and benefits that promote your overall financial health.