Credit cards aren’t the only option when it comes to financing purchases or consolidating debt. Because of digital products that simplify the application and approval processes, personal loans are becoming more and more popular.
However, you must ensure that a personal loan is the right choice for you before signing on the dotted line. To do that, you have to understand the inner workings of this borrowing tool. You don’t want to be left with an expensive debt that you are unable to repay or that you were unaware of.
Rewind ten years when consumers had fewer options when it came to borrowing money. They had two options: apply for a bank loan, which was difficult to obtain without excellent credit, or use a credit card, which typically came with high interest rates. The 2008 recession changed that.
Due to the banks’ lack of involvement in consumer lending, a wave of financial technology startups, or FinTechs, have arisen to provide consumers with personal loans. Using different underwriting data and algorithms to predict risk, they created a market that’s now booming.
Unsecured personal loans hit an all-time high of $138 billion in 2018, according to credit scoring firm TransUnion, with a large portion of the growth coming from loans originated by FinTech companies. The average loan size in the fourth quarter of 2018: $8,402. Fintech loans account for 38% of the overall activity in 2018; five years ago, it was just 5%.
Yes, personal loans typically go straight into your bank account. This means you can access the funds quickly and easily, making them a convenient option for covering unexpected expenses or consolidating debt
How Long Does it Take for a Personal Loan to be Deposited?
The time it takes for a personal loan to be deposited into your bank account can vary depending on the lender. However many lenders can deposit the funds as soon as the next business day.
Why This Matters
A personal loan might be a good financing option if you need money quickly. If the money is deposited straight into your bank account, you can easily and quickly access it. If you need to pay for an unforeseen expense, like a medical bill or auto repair, this can be useful.
Advantages of Personal Loans
There are several advantages to using a personal loan to cover your financial needs. These include:
- Quick access to funds: Personal loans can be deposited into your bank account quickly, often within one or two business days.
- Flexible repayment terms: You can choose a repayment term that fits your budget, typically ranging from 12 to 84 months.
- Lower interest rates than credit cards: Personal loans typically have lower interest rates than credit cards, which can save you money in the long run.
- Can help you build credit: Making timely payments on a personal loan can help you build your credit history, which can improve your credit score and qualify you for better interest rates in the future.
Disadvantages of Personal Loans
There are also some disadvantages to using a personal loan, such as:
- Interest charges: You will have to pay interest on the amount you borrow, which can add to the overall cost of the loan.
- Monthly payments: You will need to make regular monthly payments on the loan, which can strain your budget if you are not careful.
- Risk of default: If you are unable to make your payments, you could default on the loan, which could damage your credit score and make it difficult to borrow money in the future.
Personal loans can be a good financing option if you need money fast and have a good credit history. However, it is important to weigh the advantages and disadvantages before taking out a personal loan.
Frequently Asked Questions
How much can I borrow with a personal loan?
Depending on your income, debt-to-income ratio, and credit score, your personal loan limit will change. However, most lenders will allow you to borrow between $1,000 and $50,000.
What is the interest rate on a personal loan?
The interest rate on a personal loan will vary depending on your credit score, the loan amount, and the repayment term. However, you can expect to pay an interest rate between 5% and 36%.
How long do I have to repay a personal loan?
The repayment term for a personal loan will vary depending on the lender. That being said, the majority of lenders will let you pay back the loan over a 12-to 84-month period.
Can I get a personal loan with bad credit?
It is possible to get a personal loan with bad credit, but you will likely have to pay a higher interest rate. You may also need to provide a cosigner, which is someone who agrees to repay the loan if you default.
What are the best personal loans?
The best personal loan for you will depend on your individual needs and circumstances. However, some of the top-rated personal loans include those offered by SoFi, LightStream, and Marcus by Goldman Sachs.
Additional Resources
Disclaimer
I am an AI chatbot and cannot provide financial advice. The information provided above is for general knowledge and informational purposes only, and does not constitute professional financial advice. It is essential to consult with a qualified financial advisor for any financial decisions or before taking any action based on this information.
How Personal Loans Work
Personal loans come in many flavors and can be secured or unsecured. When taking out a secured personal loan, you are required to pledge collateral, or an asset with value, in the event that you are unable to repay the loan. If you default, the lender gets that asset. Mortgages and auto loans are examples of secured debt.
With an unsecured loan, the most common type of personal loan, you aren’t required to put up collateral. If you don’t pay back the money the lender can’t garnish any of your assets. That’s not to say there aren’t repercussions. Your credit score will suffer if you default on an unsecured personal loan, which could significantly increase borrowing costs. And the lender can file a lawsuit against you to collect the outstanding debt, interest and fees.
Unsecured personal loans are generally taken out to pay off high-interest credit card debt, consolidate student loans, or fund large purchases like weddings or vacations.
Personal loans are issued as a lump sum which is deposited into your bank account. Most of the time, you have to repay the loan at a set interest rate over a predetermined length of time. The repayment period varies from lender to lender and can be as little as a year or as long as ten years. For example, SoFi, an online lender, offers personal loans with terms between three and seven years. Rival Marcus by Goldman Sachs offers loans with terms from three to six years.
Borrowers who aren’t sure how much money they need can also take out a personal line of credit. This is an unsecured revolving line of credit with a predetermined credit limit. (In that respect, it’s a lot like a credit card. Generally speaking, a revolving line of credit’s interest rate is variable, meaning it fluctuates in accordance with the market rate. You only pay back what you draw down from the loan plus interest. Lines are commonly used for home improvements, overdraft protection or for emergency situations.
Your Credit Score Dictates the Cost to Borrow
When weighing whether a personal loan makes sense, you have to consider your credit score. It’s a number ranging from 300 to 850 that rates the likelihood of you paying back your debt based on your financial history and other factors. Most lenders require a credit score of 660 for a personal loan. With credit scores lower than that, the interest rate tends to be too high to make a person loan a viable borrowing option. A credit score of 800 and above will get you the lowest interest rate available for your loan.
In determining your credit score a lot of factors are taken into account. Some factors carry more weight than others. For instance, 90% of lenders in the nation use a FICO score, and the first 35% of this score is determined by your payment history. (More FICO facts are here. Lenders want to be sure you can manage loans responsibly, so they’ll assess your credit history to gauge your future creditworthiness. Lots of late or missed payments are a big red flag. In order to keep that portion of your score high, make all your payments on time.
Coming in second is the amount of credit card debt outstanding, relative to your credit limits. This represents 70 percent of your credit score and is referred to in the business as the credit utilization ratio. It looks at the amount of credit you have and how much is available. The lower that ratio the better. (For more, see The 60 Second Guide To Credit Utilization. Your credit score is also influenced by the quantity of new credit applications you have recently submitted, the kind of credit you currently possess, and the length of your credit history.
Lenders consider your income, work history, liquid assets, and total debt amount in addition to your credit score. They want to know that you can afford to pay the loan back. The more assets and income you have, and the less debt you have overall, the more favorable you appear to them.
Having a good credit score when applying for a personal loan is important. It establishes your eligibility as well as the total amount of interest you will pay for the duration of the loan. According to ValuePenguin, a borrower with a credit score between 720 and 850 can expect to pay 10. 3% to 12. 5% on a personal loan. That increases to between 13. 5% and 15. 5% for borrowers with credit scores from 680 to 719 and 17. 8% to 19. 9% for those in the 640 to 679 range. Under 640 and it will be too cost prohibitive even if you can get approved. Interest rates at that level range from 28. 5% to 32%.
A personal loan may seem like a good option to pay off credit card debt or other high-interest debt or to finance a large purchase. Terms are flexible, allowing you to create a monthly payment that fits into your budget. The longer the term, the smaller the monthly payment.
But there’s a trade-off. You pay interest for a longer period. What’s more, the personal loan interest rate increases the longer the term of your loan.
Take a personal loan from SoFi as an example. On a $30,000 loan, a borrower with the best credit will pay 5.99% for a three-year loan. That jumps to 9.97% for a seven-year loan. At Citizens Financial Group the interest rate is 6.79% for a three-year loan and 9.06% for a seven-year loan. At LightStream, a unit of SunTrust Bank, the interest rate on a three-year loan starts at 4.44%. For seven years, expect to pay 5.19% in interest.
In addition to the interest rate, some lenders charge a loan origination fee, which is the cost to process your application. That can make the cost of borrowing more expensive. The good news: origination fees are starting to disappear, particularly on digital platforms. Some of the online lenders that don’t charge borrowers origination fees include SoFi, LightStream, Marcus By Goldman Sachs and Earnest. All require at least a 660 credit score. When shopping for a personal loan, compare the annual percentage rate or APR. It includes the interest rate and fees to give you the full picture of how much you’ll pay.
A personal loan is a sensible choice to finance a large purchase or consolidate debt if you have good credit. If paying a higher interest rate is necessary to pay off even higher rate debt, it might be worthwhile if your credit score isn’t the best. Before you make the leap do the math. Consider the interest rate, fees and terms. It’s not the best choice for you if you wind up having to pay thousands of dollars to consolidate your debt.