If you're in need of cash for a small business start-up, to pay for an unexpected expense or to fund a wedding or vacation, a personal loan could be the solution you need. Personal loans range in amounts as little as $1,000 up to $100,000 or more. Your unique situation-including how much money you need to borrow and what your credit score is-will determine which type of personal loan is right for you.
In order to qualify for a personal loan, the bank or lending institution is going to check your credit. The higher your credit score, the better your chances are of qualifying for a high personal loan amount. Those that carry a high credit score will also qualify for lower interest rates and more flexible repayment schedules. To improve your credit score, pay all of your bills on time, keep balances low on credit cards and work toward paying off your debt rather than moving it around.
Types of Personal Loans
The two main types of personal loans are secured personal loans and unsecured personal loans.
Secured Personal Loans
Secured personal loans are backed by collateral-such as your house, your car, jewelry or artwork. If you were to default on the loan, the lender could take possession of your collateral. Because of this, secured loans are not as risky as unsecured loans and usually come with a lower interest rate.
Personal Unsecured Loans
The other main type of personal loan is a personal unsecured loan. An unsecured personal loan is not backed by collateral and is therefore more risky of a loan. Lenders typically charge a higher interest rate for these types of loans and will require a good credit score. If your credit score is not up to par, you could consider getting a cosigner on the loan. Keep in mind, though, that if you were to default on the loan, the cosigner would be responsible for paying it.
Other types of personal loans include:
Short term personal loans. Short term personal loans are loans that are paid back in a shorter period of time, usually between three and five years. Applications are typically approved quickly, making this type of loan perfect for those in need of a small amount of cash in a short amount of time.
Guaranteed personal loans. Guaranteed personal loans are specifically designed for individuals with less-than-stellar credit. Lenders will look at your current financial situation-most importantly, your current income-to determine how much of a loan you will qualify for. Because the lender doesn't take your credit history into consideration, fees and rates are typically higher on these types of loans.
Where to Get a Personal Loan:
Banks or Credit Unions
When most people think of getting a loan, they think of visiting their local bank or credit union. It's always a good idea to shop around when looking for a personal loan, and banks and credit unions will sometimes offer better rates to long-time customers. Credit unions are typically able to offer lower loan rates to their members because they are a not-for-profit organization.
Online Personal Loans
Another avenue of getting a personal loan is through online peer-to-peer lending, such as Prosper or Lending Club. Peer-to-peer lending sites are a trusted way to connect borrowers and investors. Typically, high credit scores are required and the loans can take longer to be approved than with a traditional bank.
Before getting a personal loan, it's important to consider all of your options-including zero-percent interest credit cards, borrowing from friends or family members, or saving up the money until you can afford to pay cash. If those options are not possible, personal loans comparison to make the most informed decision on which type of personal loan is best for your individual situation.