Whether you’re trying to consolidate debt, finance your next big purchase, or make home renovations, a personal loan could be the right tool to help you get there.
Last year, outstanding personal loan balances in the U.S. reached over $305 billion, a 12% increase from the year before. All this demand has created a wide variety of personal loan options.
At Money, we understand how hard it can be to choose the best lender for your situation, so we did some legwork for you.
We conducted over 170 hours of research, interviewed experts in the fields of finance and credit, and evaluated 20 of the nation’s top financial institutions to come up with our list of the Best Personal Loan Lenders of 2020.
6 Best Personal Loans of 2020
Here are Money’s top 6 picks for the best personal loan companies:
- LightStream: Best Variety of Loan Options
- Credible: Best Marketplace
- SoFi: Best Online Lender
- Upstart: Best Peer-to-Peer Lender
- PenFed: Best Credit Union
- U.S. Bank: Best Bank
LightStream: Best Variety of Loan Options
|Available terms||24 to 144 months|
|Loan amounts||$5,000 – $100,000|
|APR*||2.49% – 19.99%|
|Minimum credit score required**||700+|
LightStream offers personal loans of all types to borrowers with excellent or at least good credit.
From the usual home improvement, medical bills, debt consolidation, vacation, and big purchase loans to K-12 education, recreational vehicles, fertility, family planning, and even loans to finance the purchase of horses for those in the equine industry.
LightStream’s personal loans also have a starting APR of 2.49%, which is 3% lower than the industry average. The company also offers some of the longest terms available in the market, giving you the flexibility to repay your loan comfortably in installments up to 144 months.
LightStream’s personal loan application process is 100% online from start to finish, and same-day funding is available if you turn in all of the required paperwork by 2:30 p.m. ET on a business day. There are no origination fees or prepayment penalties.
The company offers an AutoPay discount of 0.50% on your quoted APR and a better rate guarantee, which gives you a 0.10% interest rate discount on the lowest APR offer you get from a competing lender.
Finally, LightStream was ranked “Better than most” by J.D. Power, and to prove its confidence on its support staff, it’ll pay you $100 if you’re not satisfied with your experience once you’re approved for the loan.
LightStream is a subsidiary of SunTrust Bank (now Trust).
LightStream and COVID-19
To help borrowers facing financial difficulties due to unemployment or reduced hours as a result of the coronavirus pandemic, LightStream is offering a payment deferral program.
To apply for this program, you must contact the company over the phone and hit the automated option for deferrals, or log into your account to request it. For more information on requirements and restrictions visit LightStream’s website.
Credible: Best Marketplace
|Available terms||12 to 84 months|
|Loan amounts||$600 – $100,000|
|APR*||As low as 4.99% with Autopay|
|Minimum credit score required**||not stated|
NOTE: Since Credible doesn’t service its own loans, the numbers listed above are subject to your location and the offers from the lenders you may qualify for.
If hopping from one lender’s website to another to compare loan offers isn’t your thing, Credible can help. Credible’s lending platform lets you compare quotes from multiple lenders in as little as two minutes — without making a dent on your credit score.
What made us pick Credible as our top choice to compare personal loan rates is that the company features an excellent network of lenders, like SoFi, LightStream, Upstart, and others, and is transparent about how it makes money, so you know what to expect when you use its services.
Credible can save you time and money by narrowing your choices by location, loan amount, desired APR, and loan purpose.
The company welcomes applicants of all credit profiles, but applicants with excellent credit histories tend to see more loan offers, more flexible repayment terms, and low-interest rates.
Another thing that made Credible stand out from other comparison websites is its best rate guarantee. If you find and close a better personal loan interest rate with a competing website within eight days of applying at Credible, the company will give you $200.
*These APRs are valid as of December 2020. APRs fluctuate according to market conditions, so they are subject to change. For more information, visit the websites of the companies listed above.
**Credit scores are valid as of December 2020. These scores are subject to the lenders’ policies and market conditions and can change at any time. For more details, visit the websites of each of the lenders.
Credible and COVID-19
As a marketplace, Credible doesn’t issue its own loans. However, you can check with your specific lender to find out whether you may qualify for any forbearance or deferment plans.
SoFi: Best Online Lender
|Available terms||24 to 84 months|
|Loan amounts||$5,000 – $100,000|
|APR*||5.99% – 20.25%(with AutoPay)|
|Minimum credit score required**||680|
You’d need a good credit score to qualify, but there’s a lot to like about SoFi. Unlike many other lenders, SoFi considers alternative credit data while still offering competitive interest rates.
Some of the things SoFi takes into account besides your credit score and income are free cash flow, professional history, and a history of financial responsibility.
So if your credit score hasn’t reached SoFi’s minimum qualifying requirements, you may still get approved based on your track record in these other departments.
Originally a student loan lender, SoFi now offers personal loan amounts up to $100,000, which is one of the highest loan amounts we’ve seen from an online lender. Pre-approval is also available, so you can check your rate before applying, without hurting your credit score.
The company doesn’t charge any fees — not even late payment fees, — and offers a 0.25% AutoPay discount and a $500 loan referral bonus.
If you lose your job, SoFi will temporarily suspend your monthly payments for up to 12 months, in three-month increments, and will provide you with free tools, like career coaching and financial advisory, to help you get back on track.
SoFi and COVID-19
SoFi is currently offering to defer payments to a later date for those who cannot meet their next payment as a result of being impacted by COVID-19. The only thing members have to do is complete a form by logging into their accounts.
Additionally, the company is extending a 30-day forbearance to its members, with a possible extension for those who continue to experience hardship.
To find out more, visit SoFi’s website.
Upstart: Best Peer-to-Peer Lender
|Available terms||36 months and 60 months|
|Loan amounts||$1,000 – $50,000|
|APR*||8.41% – 35.99%|
|Minimum credit score required**||620|
Peer-to-peer lenders started the digital lending trend in the personal loan space. Their model is simple: instead of getting the money from a traditional financial institution, you get it from investors — provided you meet their qualifying requirements.
While it’s true that Upstart does have higher interest rates than the other lenders featured on our list, they’re the only peer-to-peer lender that allows you to apply with fair credit. A credit score as low as 620 may be enough to qualify for borrowing.
Upstart also uses an alternative application model to determine eligibility, which takes into account your job history, the highest level of education achieved, and area of study. You can check your rate before applying, and loan
Funds can be disbursed as early as the next business day after you close on the loan.
Something that makes Upstart stand out from other lenders is that, besides traditional personal loans, it offers personal loans for continuing education and professional development courses.
You can even apply for a loan even if you don’t have a job, as long as you have an employment offer with a starting date that isn’t more than 60 days away from the date of your application.
The company also welcomes applicants with short credit histories, so it is a good option for those who’ve recently graduated and are looking for ways to build credit.
Although Upstart does charge origination and late payment fees, it doesn’t charge any prepayment penalties on any of its loans.
Upstart and COVID-19
To help borrowers affected by the coronavirus pandemic, Upstart has worked with its partners to create a hardship program so those affected can immediately skip up to two monthly payments, without incurring interest or late payment fees during that time.
You can read more abou Upstart’s COVID-19 initiative here.
PenFed: Best Credit Union
|Available terms||6 to 60 months|
|Loan amounts||$500 – $20,000|
|APR*||6.49% – 17.99%|
|Minimum credit score required**||A representative told us that the company does not disclose this at the time|
Credit unions typically offer some of the lowest rates on loans, but not everyone can join. You can join PenFed, which has branches nationwide, simply by donating $5 to any of its affiliated charities.
And if you’re not a member and are hesitant to join because you’re not sure whether your loan would be approved, PenFed has a solution: You can apply for a personal loan, even without being a member, and join only if you choose to accept the loan offer.
PenFed offers a lower APR range than other credit unions, and you can apply both individually or with a co-borrower.
You could use PenFed personal loans to consolidate high-interest credit card debt, to finance medical and dental expenses, to improve your home, to take a vacation, and even to provide health care for your pet.
Other features that make PenFed our top credit union for personal loans are its flexible repayment terms starting at 6 months, its low loan amounts starting at $500, and the fact that it doesn’t charge prepayment penalties or loan origination fees.
Additionally, it has a Financial Hardship Center dedicated to helping borrowers who may be in a tight financial spot.
PenFed and COVID-19
For members with financial concerns about their accounts, PenFed is offering a deferment or skip-a-payment program, which you can request at a local branch, over the phone, or online by logging into your account and selecting the “Financial Assistance for Members Affected by COVID-19” option.
PenFed’s support staff will also work with members who apply for the hardship program to explore all options and help them understand which one works best for their situation.
For more information, check out the company’s entire statement here.
U.S. Bank: Best Bank
|Available terms||12 to 60 months|
|Loan amounts||$100 – $1,000 / $1,000 – $25,000|
|APR*||2.99% – 16.49%|
|Minimum credit score required**||680|
U.S. Bank is our top bank lender for several reasons. First, the company offers the lowest starting APR available right now for personal loans — even lower than those of online lenders that traditionally offer the most competitive rates in the industry.
Its maximum APR for this type of loan caps out at 16.49%, much lower than those of other big banks like Citi and Wells Fargo, which cap their APRs at 23.99% and 24.49%, respectively.
While other banks offer only the traditional cookie-cutter personal loan for larger amounts, U.S. Bank also has a Simple Loan available. The Simple Loan is an emergency loan designed for smaller, short-term expenses, with loan amounts ranging from $100 to $1,000.
This loan does have a $6 monthly fee for every $100 you borrow, but it’s a great alternative for those who need a smaller amount quickly and want to avoid payday loans.
We also liked U.S. Bank’s open-ended loan purpose policy. This bank does not restrict its personal loans by purpose.
You can get the loan funds as early as the next business day after your loan is approved, and the application can be completed online or at a local branch. It’s also worth noting that U.S. Bank doesn’t charge origination fees or prepayment penalties on its regular personal loans.
US Bank and COVID-19
U.S. Bank is currently assisting both potential borrowers and existing clients impacted by the economic situation caused by the COVID-19 pandemic by lowering its interest rates and fees.
Members experiencing hardship may also be eligible for a loan extension or other forms of relief.
To explore your options, visit one of the bank’s local branches, call their support staff, or request assistance online.
To find the best personal loan lenders of 2020, we started by looking at some of the country’s largest financial institutions by market share and consolidated banking assets, as well as the top personal loan originators in the FinTech market.
That left us with an initial list of 20 companies.
Then, we consulted over half a dozen industry experts to come up with a set of 14 comparison points with which to evaluate each company.
Some of the factors we examined were customer support, minimum and maximum loan amounts, APR range, personal loan options, available terms, credit requirements, state-availability, and streamlined online applications.
Using these factors we narrowed our list to the top 6 lenders with the most to offer in each category.
Other Personal Loan Providers, We Considered
To choose lenders for our Best Personal Loans of 2020, we specifically set out to provide alternatives for consumers. We didn’t want to feature only the companies with the lowest interest rates since that’s only one of several relevant features that make a lender standout.
We looked at other important factors such as the customer experience, loan amounts and options, available terms, and credit requirements.
As always, we also considered J.D. Power rankings, in this case the 2019 Personal Loan Satisfaction Study, as well as registered complaints with the Consumer Financial Protection Bureau (CFPB).
We started out with a list of the largest financial institutions, top FinTech personal loan originators, and most-used online marketplaces which was gradually trimmed until we reached our top six personal loan companies.
Of course, we had to leave out a lot of quality financial institutions for one reason or another. Let’s take a look at some of the companies that almost made it and the reasons why they almost did.
Marcus by Goldman Sachs
Marcus by Goldman Sachs is the investment bank’s foray into FinTech lending. The company provides many of the service features an online lender can offer.
Features include no service fees of any kind, customizable due dates, and a Direct Payment option that allows you to pay creditors directly and then receive the remaining amount into your account.
Marcus even has a one payment deferral bonus if you make 12 consecutive on-time payments.
Although its average minimum APR is middle-of-the-pack, this lender does offer a 0.25% APR discount for customers who enroll in AutoPay. Marcus by Goldman Sachs is also rated as “Among the Best” according to J.D. Power’s Personal Loan Satisfaction survey.
The main drawback is that the company only accepts individual applications, with no cosigners or co-borrowers allowed. This is an automatic disqualification for borrowers who might need the boost to meet certain lender requirements.
Among the top FinTech lenders on the S&P, Prosper uses the peer-to-peer (P2P) lending model in which investors, and not financial institutions, provide the funding for and assume the risks of the personal loans.
The main benefit of P2P lending with Prosper is that it accepts lower-than-average credit scores, an advantage for borrowers that lack excellent credit history or who don’t want a co-signer on their loan. Prosper also forgoes prepayment penalties and offers pre-approval, something not all lenders do.
However, while other P2P lenders consider alternative data to determine eligibility, Prosper does not. Additionally, Prosper had a high number of complaints registered against it with the CFPB. It’s “About Average” ranking in J.D Power’s survey wasn’t enough to push it into our top six.
USAA is one the largest VA loan originators in the country, and this association also provides its members with a variety of personal loan options they can use to pay off higher-interest loans or credit card debt, upgrade or repair a home, or prepare for unforeseen expenses.
USAA excels with customer service. J.D. Power’s survey ranks it “Among the Best,” and the CFPB has fewer complaints registered against it than other similar lenders.
But not everyone can join USAA. If you’re not an active duty or retired member of the U.S. armed forces — or a qualifying family member — you can’t take advantage of USAA’s great customer service.
Since it’s a closed institution, USAA wouldn’t tell us much about its loan terms and amounts, APRs, and fees. If you’re already a part of USAA, you might find that exclusivity as a positive. But those on the outside looking in might be better off going with another lender.
LendingTree is the largest lending marketplace in the U.S., allowing potential borrowers to compare rates and offers from a wide variety of institutions.
LendingTree offers many reputable lenders to choose from including Marcus, LightStream, SoFi, OneMain Financial, and others.
The platform’s online tools, such as credit and debt analyzers, calculators, and FAQs give shoppers the resources they need to choose the best lending option for them. LendingTree partners can provide some of the lowest APRs on the market to qualifying borrowers.
As a marketplace, LendingTree has no major faults. Nonetheless, they just barely missed our list because other marketplaces had higher maximum loan amounts and lower minimum credit score requirements. LendingTree had slightly more CFPB complaints as well.
Big national banks generally have comparable APRs and lending requirements for personal loans. Wells Fargo bucks this trend, having a lower minimum APR than similar banks, and accepting substantially lower minimum credit scores (620 as of December 2020).
Wells Fargo gives borrowers the option to use its extensive online tools or visit one of its more than 8,000 physical branches.
For the purposes of our list, Wells Fargo gets tripped up on customer experience. Although it was ranked “About Average” by J.D. Power’s Personal Loan Satisfaction survey, Wells Fargo didn’t make our list because of its extremely high number of complaints with the CFPB.
While many large lenders pile up many complaints, Wells Fargo almost doubles the next highest. While not necessarily a deal-breaker, borrowers should take this fact into consideration.
Borrowers with fair credit — FICO scores as low as 580 and VantageScores as low as 550 — could get funding from Avant. With such lenient underwriting, which is uncommon even for secured loans, Avant got our attention.
However, this flexibility comes with a cost: loan origination fees approaching 5% of loan amounts. A fair credit borrower who needs funding for an emergency should choose Avant over payday or title loans.
But the high costs of borrowing, along with steep $25 late fees, kept Avant off our list of contenders for Best Personal Loans of 2020.
Things to Consider Before Applying for a Personal Loan
This one is probably a no-brainer, but one of the most important things to consider prior to taking out a personal loan is the shape of your credit score.
As per TransUnion’s 2018 Personal Loan Market Overview, the majority of personal loans were issued to borrowers with a prime credit score (661-720).
This means that in order to increase your chances of getting approved, you must have a credit score of at least 660, which is the minimum credit score required by most lenders.
Your credit score will also affect your APR. For example, if you have an excellent credit score of 760 or more, and take out a $5,000 personal loan with a 36-month term, your APR could range from 9.49% to 11.74%.
If you take out the same loan amount with the same term, but with a credit score of 660, your APR could range from 16.50% to 22.50%. This means that the same loan would cost you almost $1,000 over the life of the loan.
Typically, you have the right to one free copy every 12 months, but due to COVID-19 you can request weekly credit reports from all three bureaus until April 2021.
Keep in mind, however, that your credit report won’t include your credit score, but it can give you an idea of where you stand with creditors. And if there are any mistakes in your report, you can dispute them and have them corrected before applying for a loan to increase your chances of approval. Credit reporting errors can create bad credit almost overnight.
To get a better idea of what your credit score could be, check out the FICO Score Estimator.
Your Debt Load
If you’ve been shopping around for personal loans, you have probably seen the term “DTI” more than once. The DTI, which stands for debt-to-income ratio, is the sum of all of your monthly debt payments divided by your monthly gross income.
Most lenders allow a maximum DTI of 43% for personal loans, although some may allow DTIs as high as 47%, depending on your annual income and other factors.
The DTI is one of the main deciding factors for lenders, as it determines your ability to repay the loan. If your DTI is on the high side, consider paying off some debt before you apply.
The Annual Percentage Rate and the Term of the Loan
A lot of applicants confuse a loan’s annual percentage rate (APR) with its interest rate. The interest rate is the amount you’ll pay to the lender for taking out the loan. This percentage is calculated based on your credit score, annual income, and DTI, among other factors.
The APR, on the other hand, includes the interest rate plus other lender fees, such as origination and administrative fees. This figure represents the real cost of the loan, which is why you should always compare APRs rather than their interest rates to determine which lender is offering you the best deal.
Another thing to think about is the term of the loan, which is the length of time you have to repay it. Personal loans usually have shorter repayment terms than other types of loans, like mortgages. Personal loan terms tend to range from 12 to 60 months.
The term of the loan will also have an impact on your monthly payment, as longer terms directly correlate with a lower monthly payment.
However, a longer-term also means you’ll end up paying more on interest over the life of the loan, so make sure to take this into account when shopping for a loan.
Fees and Penalties
Personal loans usually charge fees for the loan’s origination and for late or missed payments. The origination fee is charged upfront and designed to cover the costs of processing your loan application. This fee can be as low as 2% of the total loan amount or as high as 8%, depending on the lender.
Many lenders charge prepayment penalties for paying off the loan ahead of schedule. This fee ensures that the lender doesn’t lose as much money on interest charges should you decide to pay off the loan early.
Since online lenders have lower overhead costs than those of traditional banks and credit unions, they tend to waive most, if not all, of these fees.
Of course, you can avoid late fees by making on-time payments. Connecting your loan to your bank account helps make on-time payments. Setting up automatic payments can often shave 0.25% off your loan’s APR.
The Purpose of the Loan
Many borrowers have no idea their loan purpose can directly affect their personal loan’s APR. For instance, if you apply for a loan to pay off high-interest credit card debt or to pay for medical expenses, chances are the APR is going to be 2% to 3% lower than for a personal loan to cover vacation expenses.
Before applying for a loan, ask yourself if its intended purpose is really worth taking on additional debt or if it’s something you can put off until you’ve saved more money.
When possible, use an auto loan if you’re borrowing to buy a used car. Auto loans are secured loans because they use your vehicle as collateral. Secured loans like auto loans and mortgages often have significantly lower APRs compared with personal loans.
However, most auto lenders won’t finance a car once it reaches a certain mileage or age which means people buying older cars often turn to personal loans.
Your Exit Strategy
According to Matt Lattman, Vice President of Personal Loans at Discover, one of the smartest moves to determine whether you’re ready or not to take out a personal loan is planning your exit strategy.
“You should always start by determining the amount that you want to borrow and how much you can budget that to pay back each month,” says Lattman. “There might be a situation where a longer term loan has a slightly higher APR than a shorter term loan.
“However, if you can only budget for the longer term loan, then that may be a better option for you as a consumer.” This exercise could help you understand how much you can really afford to borrow without getting yourself into financial distress.
If you’d like to know how much your monthly payments could be, you can use our Personal Loan Calculator:
How to Find the Best Personal Loan Lenders?
To give you a head start on research and help you find the best personal loan lenders of 2020, our team conducted the following three-part assessment:
Step 1: Financial Stability
The first step was selecting lenders that have been around for a long time and have proven their financial stability over the years.
To do this, we looked at the 2019 Largest 50 Institutions By Consolidated Banking Assets report by the Federal Deposit Insurance Corporation (FDIC).
This was an important step, as doing business with a lender that’s financially stable can mean less chances of having servicing issues with the loan, plus they’re in a better position to make accommodations should you face any type of hardship in the future.
The FDIC report only included traditional lenders, which isn’t bad, but we wanted to have an inclusive and well-rounded list of companies that also featured other types of lenders, like peer-to-peer and online lenders.
For this reason, we also took into account the top unsecured personal loan originators included in Standard & Poor’s 2018 US Fintech Market Report.
Using both of those reports, we ended up with a list of 20 companies, including banks, credit unions, peer-to-peer, and online lenders.
Step 2: Client Satisfaction and Affordability
For the second step, we decided to evaluate each of the companies based on consumer satisfaction, accessibility, and affordability.
customer satisfaction, we used J.D. Power’s 2019 U.S. Personal Loan Satisfaction Study, favoring companies ranked “Among the best” and “Better than most.”
We also took into account the number of complaints each of them had with the Consumer Financial Protection Bureau (CFPB). The average number of complaints was 198, so we eliminated those that exceeded that number by far.
We then looked at each company’s minimum credit score requirements, as we wanted to feature lenders that cater to both consumers with excellent credit as well as to those who are just getting started — or have less-than-stellar credit scores — but can prove their ability to repay the loan.
Finally, we checked the APRs offered by each of the lenders, selecting those with the lowest starting APRs. This left us with 11 companies.
Step 3: Overall Lending Offer
For the third and final step, we interviewed experts, including economists, personal banking officials, and spokespersons from credit rating, credit scoring, and credit counseling agencies, to have a better understanding of the most valuable factors to take into account when choosing a lender.
Using the data collected from our interviews, we ranked the companies based on what they offer for each of these categories: types of personal loans offered (home improvement, debt consolidation, medical and dental, travel, to finance a big purchase, etc.), APR range, available terms, minimum credit score requirements, types of credit data considered (alternative vs traditional), fees (origination, late payment and returned-check fees), and prepayment penalties.
We also checked each company’s service or interest rate guarantees, funding times, fund disbursement options (direct deposit or mailed check), ways to apply (online, at a local branch, or over the phone), state-availability, discounts (for enrolling in automatic payments or product referral) and customer support (via email, chat, over the phone, or at a physical branch).
That left us with six lenders that offered the best in their particular categories.
Quick Facts About Personal Loans
Prime Scores Have Greater Chances of Approval
In recent years, prime and near prime borrowers lead the unsecured personal loan market in the United States, with both groups accounting for 62% of loan originations.
FinTech Lenders Take the Lead in Originations
The majority of loans (38%) issued were originated by FinTech lenders, while banks originated 28%, credit unions 21%, and traditional financial institutions only 13%.
Personal Loan Balances by Generation
As of recently, the average personal loan balance in the United States was $16,259. Baby Boomers had the highest personal loan debt compared to the other generations, with an average balance of $19,253.
Big Purchases Are the Driving Force Behind Personal Loans
Most consumers cited “financing a big purchase” as the main reason to take out a personal loan, while refinancing existing debt took the backseat with only 9% of originations.
Personal Loans vs Credit Cards
Personal loans and credit cards share some similarities, like the freedom to use the loan funds however you want. However, they differ in many ways, including average APR, predictability when it comes to their monthly payment, liquidity, credit requirements and fees.
Here’s a side-by-side comparison between the two:
What to Expect from the Market Moving Forward
It May Be Harder to Get a Personal Loan for a While
“In response to the current economic crisis, many lenders are pulling back on personal loan and credit marketing, and tightening their credit standards. We’re also seeing less supply as well. So, I think the contraction of the market is going to be both in demand and supply.”
– Liz Pagel, senior vice president and the leader of the Consumer Lending at TransUnion.
Technology Will Reshape the Way Banks Offer Personal Loans
“FinTech companies became important players in the personal loan space, specifically after the financial crisis. Initially, they catered to consumers who wanted to consolidate other loans, but they have kept expanding — they have increasingly gained market share. Over the last several years, banks have been trying to catch up. They’re spending a lot of money on technology, especially the big banks that we follow. They’re making big strides in terms of digitalization of customer service.”
– Yanni Koulouriotis, vice president of Financial Institutions at DBRS Morningstar
Alternative Credit Data Is Here to Stay
“Using alternative data, lenders are able to identify people with lower credit scores, but who actually are really diligent about repaying their personal loan. They have identified borrowers who have been mislabeled using the traditional credit score. There is a sign that the alternative data has become more of an accepted tool in finance because credit rating agencies, like TransUnion, Experian, etc., are now offering these essential services to banks and financial firms. You can now benefit from applying that kind of information, and it will likely continue to be more prevalent in those kinds of decisions.”
– Eldar Beiseitov, business economist at the Federal Reserve Bank of St. Louis.
Personal Loan FAQs
What exactly is a personal loan and what can I use it for?
Personal loans are a type of unsecured installment debt, meaning that they don’t require collateral and have fixed interest rates and repayment schedules.
According to Experian, as of 2019, personal loans were the fastest-growing debt in the United States, with 38.4 million accounts open nationwide.
Unlike other types of loans, which must be used for a specific purpose — like buying a house or car — personal loans can be used for any purpose, hence their growing popularity.
Some of the most common uses for personal loans are debt consolidation, home improvement projects, medical expenses, and to finance big purchases, events, or vacations.
Should I apply for a personal loan or a balance transfer card to consolidate debt?
If you have higher interest debt, you’ve probably looked into personal loans and balance transfer credit cards to help you pay off debt faster.
While balance transfer credit cards have lower interest rates than traditional credit cards — and most offer an introductory 0% APR — these offers typically last between 12 and 18 months, after which your APR will be based on your creditworthiness and market conditions.
Additionally, these credit cards can have transfer fees that go up to 5% of the transferred amount.
Since personal loans are considered installment debt, they feature lower interest rates than credit cards, with terms lasting up to 60 months in most cases. Additionally, some lenders offer personal loans without additional fees.
“We’ve done research that shows that if a consumer takes all of their unsecured credit card debt and consolidates it into an unsecured personal loan, they do typically see their credit score improve in the year following that consolidation,” says Liz Pagel Senior Vice President and the leader of the Consumer Lending at TransUnion.
According to this study, 68% of those who used personal loans to consolidate debt saw their credit scores increase by over 20 points, which is something to consider if you’re looking to pay off debt and rebuild your credit.
Which is better for home improvements, personal loans, or home equity loans?
With mortgage rates at an all-time low, it’s hard not to think about how much you could save by getting a cash-out refinance or taking out a home equity loan to pay for those much-needed home improvements.
However, if you’re in a time crunch or only need to make small repairs, this may not be an ideal option. Interest rates for cash-out refinance, home equity loans, or lines of credit tend to be much higher than those of traditional rate-and-term loans.
Also, you have to gather a lot of paperwork and it usually takes an average of 30 days for the lender to approve the loan and disburse the funds. With a personal loan, you only need to provide a few basic details, such as your name, Social Security number, and income.
You can get a decision within minutes and, depending on the lender, you may be able to get the loan funds in a matter of hours or within a couple of days.
Taking out a personal loan to renovate your home could be a good option if you need a smaller amount, don’t have enough equity in your home, are close to paying off your mortgage, don’t want to use your house as collateral, or have a short-term need.
Can I get a personal loan while unemployed?
While it’s not impossible to get a loan while unemployed, Dara Duguay, CEO of the Credit Builders Alliance, says it’s tough, especially if there’s no job offer on the table or another source of income you can show proof of besides unemployment benefits.
Some lenders, particularly those who consider alternative credit data, may extend you a loan offer. However, keep in mind the interest rate will likely be high, as you’ll pose a higher risk to lenders.
“If you’re unemployed, the best thing you can do is to lower your expenses and contact your creditors to see if they can stop payments for a couple of months,” says Duguay.
Do all lenders consider the same factors when you apply for a personal loan?
Most lenders take into account what’s known as “traditional credit data.” Traditional credit data includes your credit score, credit report, statements of assets like savings or investments accounts, debt-to-income ratio, and source of annual income (usually verified through W2s or your most recent tax returns).
However, some lenders — particularly credit unions, online lenders and peer-to-peer lenders like LendingClub — also take into account what’s called “alternative credit data.” This includes your employment and education history, history of utility and rent payments, and information that’s available in public records.
Will applying hurt my credit?
According to Tom Quinn, vice president at myFICO, this will depend on the type of inquiry performed by the lender.
“When you apply for credit, the lending institution will almost always pull up your credit report to view your credit profile. If they conduct a hard inquiry, that usually causes the score to drop by a few points. The average hard inquiry costs about 5 to 10 points,” says Quinn.
“Soft inquiries, on the other hand, happen when you pull your own credit report to know what’s in there, or when you’re pre-approved for a credit offer. These don’t impact your score at all,” he said.
When looking to take out a personal loan, it’s important to look for lenders that offer pre-approval or pre-qualification, that way you avoid damaging your score and can determine whether it’s the right time for you to take out a loan.
What happens if my personal loan isn’t approved?
“If you’re rejected for credit, the lender is required to give you a reason,” says Duguay. “What you need to do is take a look at that reason, and understand how you can make that situation better,” she says.
According to Duguay, getting rejected for a loan won’t impact your credit score unless the lender has requested to view your credit report using a hard inquiry, in which case, it’ll only drop temporarily by a few points.
If you think you may have trouble getting approved for a personal loan now, you could wait until you’re able to improve your credit score, or apply using a co-signer.
“If you reapply with someone that has better credit, the lenders are also going to take their credit history into consideration, and so that might make you qualify,” says Duguay.