When you take out a personal loan, you receive a lump sum amount that you will repay over a fixed period with interest. Personal loans typically offer lower interest rates compared to credit cards, making them more cost-effective for significant expenses. Loan terms usually range from 1 to 7 years, but some lenders may offer longer terms. Longer terms reduce monthly payments but increase overall interest paid, while shorter terms result in higher payments but lower total interest.
Interest and Fees
In addition to interest, some loans may have an origination or administrative fee, ranging from 0% to 12% of the loan amount, depending on the lender and your credit profile. Key details about origination fees:
Late payments or insufficient funds could lead to additional fees, such as late or NSF fees. However, some lenders, like SoFi, do not charge these fees.
Eligibility for a Personal Loan
Lenders evaluate your eligibility based on credit history, income, debt-to-income ratio (DTI), and employment status. The DTI compares your monthly debt obligations to your monthly income. Prequalifying for a loan can give you an idea of the loan options and rates available without affecting your credit score. Prequalification typically requires basic information, like your name, contact details, loan purpose, desired amount, and sometimes the last four digits of your Social Security number.
Be aware that completing a full loan application triggers a hard credit inquiry, which may slightly lower your credit score for up to a year.
Bad-Credit Loans
For those with poor or no credit, bad-credit loans are an option, but they often come with higher APRs. If interest rates are too high, consider adding a cosigner to lower rates.
Be cautious of payday loans, which can have APRs over 400% and come with high fees and short repayment terms. These loans may lead to rollovers, increasing costs significantly. A safer option is a payday alternative loan (PAL) from a federal credit union, offering loans up to $2,000 with an APR cap of 28%. Some credit unions may even provide these loans to new members, regardless of when they joined.