From debt consolidation to financing a major event like a wedding or vacation to paying an unexpected repair bill, there are dozens of reasons why people seek personal loans. Unlike a mortgage or car loan, personal loans are general purpose funds that can be used for nearly anything that’s legal. They’re not as easy to get as a credit card, primarily because you don’t have to put up anything as collateral if you don’t pay. That means that lenders may have some fairly strict qualification criteria for a personal loan, and you may have to take some extra steps to secure one.
If you’re interested in applying for a personal loan, you may have some questions about exactly how they work and what you’ll need to do to qualify. These are the most frequently asked questions we are asked about personal loans.
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What You Need To Know To Get A Personal Loan
1. How Much Money Can I Get From A Personal Loan?
Most personal loans range from $1,000 to $50,000, but a lender may have an internal limit on how much they’ll loan. The amount you’ll qualify to borrow depends on factors like your credit score and your income.
2. What Factors Will Lenders Consider When They Review My Personal Loan Application?
There are two things that lenders look at to qualify a borrower: Credit score and debt-to-income ratio.
Your credit score, also called FICO score, is the number assigned to you by one of the three large credit bureaus in the U.S. (yes, each bureau calculates a slightly different number, but they should be close).
This number will be between 300 and 850, but each lender will have different ranges for what they consider acceptable when making a personal loan. As a rule of thumb, anything over 670 is considered good credit and anything over 800 is exceptional. If you’re on the edge of having a good score, look for ways to boost your credit score before you apply for a personal loan.
Your debt-to-income ratio tells how much debt you carry as a percentage of what you make each month. To qualify for a personal loan with the best interest rates, less than 43% of your income should go to pay off debt.
3. What Interest Rate Will I Pay?
Your lender will lock down an interest rate for you that is based on your credit score, debt-to-income ratio and the amount you’ll be borrowing. Most personal loans have a set interest rate for the life of the loan, though some lenders are experimenting with variable rate personal loans. Interest is usually higher than that on a mortgage or car loan, but less than most credit cards carry.
4. Will I Pay Additional Fees To Take Out A Personal Loan?
Yes, in most cases, your lender will take an origination fee from the amount you borrow. This can range from 1% to 6%, again depending on your credit score. This also means that the money you get in your hand may be less than you expect after fees are taken out, so make sure you know how much this fee will be and what total amount you’ll receive. You may need to adjust the amount you request to ensure you have the funds you’re expecting to get. If you are considering a lender who does not charge an origination fee, compare the interest rate and terms to make sure you get the best deal.
Some lenders also charge application fees, but these will be assessed upfront when you begin the loan process and is typically only around $100.
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5. How Long Do I Have To Repay My Personal Loan?
The terms of a personal loan can range from 12 to 60 months. Shorter repayment periods usually mean you’ll pay less in interest over the life of the loan, so look for the shortest period with payments you can afford.
6. Will I Have To Secure My Personal Loan?
Personal loans almost never require collateral, or an asset that you pledge if you fail to make payments. However, lenders can take other steps if you don’t pay, like assessing late fees or reporting you to a credit bureau.
7. What I Can Use The Personal Loan Funds For? Are There Any Restrictions?
People use personal loans to finance college, consolidate debt, pay for weddings or cover big household bills (for example, getting the furnace replaced, covering medical expenses or paying for extensive car repairs). Your lender may have some restrictions, but most personal loans can be used for anything you can legally purchase.
8. What Are Some Alternatives To A Personal Loan?
You could put your expenses on a low-interest credit card, or, if you’re a homeowner, you could get a home equity line of credit instead of a personal loan.
9. Can I Pay Off My Personal Loan Early?
If you think you may be able to — and would like to — pay off your loan before the term ends, you must check with your lender to ensure there are no early-payment penalties. Lenders can’t assess prepayment penalties on many types of loans, but they can on a personal loan. These fees can be a percentage of the amount you are paying early, or they may be based on the interest that the bank won’t earn if you pay early.
If the loan you would prefer does carry a prepayment penalty, it may be possible to negotiate with your lender to remove it.
The Last Thing To Remember About Personal Loans
If you decide to apply for a personal loan, you’re not alone. Personal loans are one of the most popular loan products that banks, credit unions, and online lenders make available. But it’s important to know what you’ll be paying each month and be certain you can comfortably afford those payments.
Many financial experts recommend that you carefully consider taking out a loan for a one-time purchase, like an event, that will be through long before you’ve finished making payments. While personal loans are extremely flexible, making wise choices about how you use the borrowed money can help keep you financially strong.