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If you're in the market for a personal loan, you may have many options to choose from. In addition to looking at loans from your bank or credit union, you can borrow money—often quickly—from a number of online lenders catering to a range of borrowers, from the exceptionally creditworthy to the credit challenged.
The catch: Finding the best fit on a personal loan requires some shopping. Personal loan rates, fees and terms vary widely from lender to lender—and even from loan to loan and borrower to borrower. To get the best loan for your situation, you'll need to do some research. Here's what you need to know.
Know Where Your Credit Stands
A personal loan can provide the funds you need for a wide range of uses, from consolidating your credit card debt or paying for a wedding to covering unexpected expenses. Payments are fixed over a set payoff period, and interest rates are often lower than they would be on credit card debt. If you're looking to lower your costs, simplify bill-paying or commit to paying off credit cards, a personal loan is worth investigating.
If you do a quick scan of the marketplace, you'll find a wide range of lenders, most of which specialize in a particular type of borrower. Before you begin shopping, get a handle on your credit status by downloading your free credit report and obtaining your credit score. Review your report for any inaccuracies and take a quick look at where you fit within credit score ranges. Knowing where your credit stands will help you find a lender who will be willing to lend to you and help you better understand what you can expect in the way of rates and terms.
Now that you're ready to shop, here are 10 things to consider as you navigate this process:
1. Gather Knowledge on Loans and Lenders
You can start shopping individual online lenders by searching the internet. To streamline your search, you can also use a tool like Experian's CreditMatch™, which matches your information with a variety of lenders. You'll see your best options at a glance and can sort your results by estimated APR, repayment terms, monthly payments and more. Borrowers with great credit, for example, may find attractive offers from a loan with no origination or prepayment fees and a potentially low APR.
2. Be Aware of Restrictions
You can probably find a personal loan for almost any legal purpose, but individual loans may carry restrictions on how they're to be used. Before applying, make sure you can use your money for the purpose you have in mind. Loans from Payoff, for example, are specifically designed to help borrowers consolidate credit card debt with low interest rates and low to no origination fees. If you want to use the money to fix up your car, you'll need to look for a different lender.
3. Consider Your Bank or Credit Union
Although online companies have driven growth in personal lending in recent years, most banks and credit unions also offer personal loans. Rates and fees at banks may be less competitive—especially if you don't already have a relationship with a bank. If you do, though, and your credit is excellent, it may be worth checking out what your bank has to offer.
Nonprofit credit unions often promote personal loan programs with rates and fees that are likely to beat what a typical bank offers. You can find a credit union in your area by visiting the National Credit Union Association.
4. Check Out Intro 0% Balance Transfer Options
If your credit is good, you may already be inundated with offers for 0% balance transfer credit cards. Depending on your circumstances, these can be a viable alternative to taking out a personal loan—as long as you can pay off your balance before the intro period ends and you're charged the standard interest rate. Run the numbers (taking balance transfer fees into account) to make certain you'll come out ahead. This leads to the next important tip...
5. Use a Personal Loan Calculator
Comparing rates, terms, fees and loan sizes by "eyeballing" them will quickly get out of hand. Worse, for most of us it's just not possible to accurately puzzle out how these various factors will affect your monthly payments and overall costs. A loan calculator is a fast and painless way to run the numbers. Using one will enable you to compare many options and still make a fast decision.
6. Build a Better Credit Score
Improving your credit score—even incrementally—can help you get a better rate and terms, regardless of where your score falls on the scale. But if your credit score is in the fair range or lower (below 670), it may be particularly valuable to optimize your score if possible. Depending on how much time you have to work on raising your credit score, here are a few ways to gain critical points:
- Pay off as much existing revolving debt, such as credit card balances, as possible.
- Pay bills on time, every time.
- Bring any delinquent accounts current.
- Try Experian Boost®ø to see if adding your utility and phone bills to your credit report helps your Experian credit score.
7. Consider Peer-to-Peer Lending Platforms
Among the many online lending platforms that cater to people with mid-range credit are companies like LendingClub that match borrowers with individual investors. Although you'll generally need to meet criteria that's similar to what you'd find with a traditional lender, some P2P lending platforms incorporate additional criteria. Upstart, for example, uses alternative data in lending decisions. According to Consumer Financial Protection Bureau data, Upstart's unique underwriting approach resulted in loan approvals for 27% more people than traditional models did.
8. Find a Lender That Works With Borrowers Building or Rebuilding Their Credit
Even if your credit score is truly in need of help, you may still be able to find good options with legitimate lenders. Borrowers at the lower end of the credit score ranges generally pay higher rates and fees and may want to consider adding cosigners to their loans or putting up collateral to bring down rates.
LendingClub, for example, lets borrowers with fair credit use the equity in a vehicle as collateral, which lowers their interest rate and upfront fee. Rise, a lender specializing in poor credit, charges high interest rates (up to 299%), but may reduce your rate if you pay monthly installments on time. And more than half of the money OneMain Financial loaned in 2019 went to borrowers with a FICO® Score☉ of 619 or lower. They offer unsecured and collateralized loans and may be able to fund your loan via debit card or check on the day you close.
9. Stay Away From Predatory Lenders
It's important to compare rates and terms, run the numbers on your loan options, research reviews on your prospective lenders, and look critically at your situation to make sure that your personal loan makes financial sense—whether your credit is exceptional or poor. But for borrowers on the low end of the credit scale, it's even more important to guard against unfavorable deals and unscrupulous lenders.
Payday and car title lenders can charge outrageous interest rates and may structure loans in a way that makes it almost impossible to extricate yourself from debt. Finding quality lenders and reading reviews can help you identify an option that will truly work for you.
10. Make Inquiries Widely; Apply Sparingly
Most online lenders can prequalify you for a loan without running a hard inquiry on your credit. Using this step, you'll be able to see approximately which loan rates and terms they can offer you (rates aren't set until you officially apply)—and, in turn, investigate many options without impacting your credit score. Until you've narrowed the field, try to resist taking the additional step of starting a loan application. This will result in a hard inquiry, which lowers your credit score by a few points.
Paying Off in the Long Run
Shopping for a personal loan requires more than a few steps. But finding a loan that lowers your monthly payments, simplifies your financial life or enables you to make a needed purchase—with rates and terms you can live with—can pay off.