How to choose the best personal loan
What is a personal loan?
An unsecured personal loan is a fixed rate loan that is not backed by collateral and is repaid in monthly installments over a fixed term, typically two to seven years. When you need money to cover a large expense or to consolidate your debt, think about a personal loan. You can use the funds for almost any purpose.
To qualify, lenders look at factors like your credit rating, credit report, and debt-to-income ratio. You can get a personal loan from some major banks, credit unions and online lenders.
What rate should I expect?
Here’s what the average personal loan interest rates look like:
28.7% (lower scores are unlikely to qualify).
Source: Average rates are based on aggregated and anonymized offer data from users who prequalified in the NerdWallet lender market between January 1, 2020 and December 31, 2020. Rates are estimates only. and are not specific to any lender.
Borrowers with good to excellent credit (690 and above on the FICO scale) typically get the lowest interest rates and can borrow larger amounts. They also have the most options when it comes to buy a loan.
Those with fair to bad credit (FICO scores below 689) may need to look a little harder and pay a higher rate for a personal loan. Some online lenders target borrowers with low credit, offering loans with rate of 18% to 36% APR. Stable income, low debt, long credit history, and a history of on-time payments will improve your chances of being approved.
Before choosing a personal loan
Compare your options. Interest rates on personal loans for good credit start around 5% APR, but if you can qualify for a 0% interest credit card – and pay off the balance during the promotional period – then you will be maybe better with the credit card. here’s how compare personal loans and credit cards.
Find a co-signer. If you have bad credit, have a co-signer with good credit allows you to rely on its creditworthiness and potentially get a better rate.
Consider a secured loan. Using a car, savings account, or other collateral asset may earn you a lower rate.
Evaluate your overall financial well-being. Personal loans work best as part of a balanced financial plan. Borrow money to consolidate debt if it means you no longer have debts faster. But don’t borrow if it only adds financial constraints. If your current debt is overwhelming, investigate your debt relief options.
What is the impact of COVID-19 on personal loans?
In response to the COVID-19 crisis, some lenders have introduced small loans for consumers facing financial losses. Other lenders have tightened the requirements for their loans, making it more difficult for borrowers with bad credit to qualify for a personal loan.
Especially during tough times, it is important to know the hardship options offered by lenders. Some lenders allow you to defer loan payments for a specified time. If you miss payments without telling your lender first, your credit will take a hit and your loan could be in default.
Reasons to get a personal loan
One of the benefits of getting a personal loan is that you can use the money for almost any purpose. Ideally, getting one has a positive impact on your overall financial health, helping you pay off debt faster, for example, or increasing the value of your home. Here are some tops reasons consumers get personal loans:
Debt consolidation: Consolidate your debt into one monthly payment, potentially reducing the interest you pay on debt and helping you pay it off faster.
Home improvement: Need to add a home office or install a swimming pool? Use a personal loan to cover the costs.
Large Expenses: You can use a personal loan to purchase a boat, VR or other items with large price tags.
Weddings: Using a personal loan to pay for your marriage can help you stay on a budget.
How to choose the best personal loan?
If you decide that a personal loan is right for you, always compare the rates of several lenders. The cheapest loan APR is the cheapest – and therefore, generally the best choice.
Also take into account the duration and monthly payments of the loan. A longer term can mean lower monthly payments, but you’ll pay more interest over the life of the loan. Evaluate how the payments fit into your monthly budget.
Some loans have features that may be important to you. If you are consolidating debt, a lender who sends your loan proceeds directly to your creditors skips this step of the process. Some lenders offer flexible payment options that allow you to change a payment due date or postpone a payment.
How to get a personal loan
If you have good credit and an existing banking relationship, it’s worth checking out your current bank or credit union’s loan options. Here is some the best banks that offer personal loans.
To compare lender rates online, use NerdWallet’s Lender Marketplace above to pre-qualify and easily compare multiple offers at once. If you qualify, you could receive your money the next day.
Online Personal Loan Companies Reviewed by NerdWallet
Top Lenders for Great Credit Borrowers (FICO Score over 720)
Discover: Ideal for flexible payment options.
SoFi: Ideal for free financial advice.
Best lenders for borrowers with good credit (FICO score between 690 and 719)
Pay: Ideal for consolidating credit cards.
Prosper: Ideal for flexible payment options.
Best lenders for borrowers with good or bad credit (FICO score below 690)
Before: Ideal for flexible payments and the option of refinancing.
Main: Ideal for joint and secured loan options.
Improve: Ideal for debt and credit consolidation tools.
Reached: Ideal for AI-based underwriting.