Are you in need of a personal loan? First, have you weighed all of your other options-including borrowing money from a friend or family member, applying for a zero-percent interest credit card and saving up the old-fashioned way? If you've considered all of your options and decided a personal loan is what's best for you, you'll want to choose a lender that can offer you a competitive interest rate and competitive loan terms.
Secured and Unsecured Personal Loans
There are two types of personal loans-secured and unsecured. Secured personal loans are backed by collateral, meaning you put up an asset that the lender will take possession of if you were to default on the loan. Examples of collateral include your home, your vehicle, jewelry and even artwork.
Unsecured personal loans are not backed by collateral and are therefore more risky for the lender. If you default on the loan, the lender will keep trying to get you to make your payments and might possibly take you to court. Because this loan is not secured with an asset, the lender compensates by charging a higher interest rate. The riskier the loan, the more you'll be charged in interest.
How to Get the Best APR for Your Personal Loan
When applying for a personal loan, you'll want to get the best interest rate, or APR, possible. A low interest rate means a lower monthly payment and less you'll pay for the loan overall. Below are four ways to help you qualify for a low personal loan interest rate.
Have a good credit score. People with good credit will qualify for better interest rates than people with poor credit. However, there are still personal loans for bad credit, such as through LendingClub. LendingClub is a highly reputable peer-to-peer lending site that requires a minimum of a 620 credit score. If you're credit isn't where you want it to be, you can improve it by paying all of your bills on time, reducing your debt and removing old inquiries on your credit report.
Tip: Another way to get a personal loan with bad credit is by having a co-signer on your personal loan.
Shop around. The lender, your term, your credit score and your loan amount can all affect your interest rate. It's best to research a few different lenders-including banks, credit unions and online lenders-in order to find the best rate. Online personal loans can typically offer better rates than traditional banks because there is no overhead. Prosper, for example, is a peer-to-peer online lending site that offers fewer fees than traditional banks and low interest rates.
Get a secured loan. Secured loans offer better interest rates than unsecured loans because they are backed by collateral. Again, lenders base their interest rates off of how risky of a borrower you are. If you have collateral to back up your loan, the lender will view you as a less risky borrower and will therefore offer you a better rate.
Borrow as little money as possible. The more money you need to borrow, the more you're going to end up spending in interest, even if the rate is low. It's best to borrow the least amount of money you will need and try to find other ways to make additional money if you fall short. Personal loans should be a last resort after all of your other options have been considered and eliminated.
By following these tips, you'll be able to secure the best interest rate on your personal loan.