We’ve all seen ads for personal loans and even received promotions in the mail, claiming low interest rates and quick cash flow. So are personal loan options too good to be true? Below we break down the upside and downside of these types of loans.
Personal Loan Basics
First, it is important to review the basics of personal loans. There are two types of personal loans, unsecured and secured.
A secured loan is a loan that is backed by an asset as collateral (home or car) . If you default on the loan, the lender can take the asset. A secured loan typically offers lower interest rates and better overall loan terms.
Unsecured loans have no collateral, however if default occurs the bank can take legal action in hopes to recoup the money. Due to the fact that these type of loans tend to be riskier, they have higher interest rates and often poor loan terms.
Both types of loans are taken out for a set period of time and have a fixed monthly repayment schedule.
Interest Rates
Deciding whether a personal loan is a good fit is largely dependent on the interest rate. Most times the interest rate is determined by your income and credit score. The higher your combined credit score and income the lower the interest rate. Additionally, interest rates may vary by state and bank, making it important to shop around for the best rate.
Downside of Personal Loans
- Certain personal loans penalize borrowers for early repayment, have high interest rates and poor terms.
- Most personal loans do no allow part payment which means you pay the entire loan period, often paying a significant amount in interest.
- Due to the fact that these loans are considered high risk, most lenders require good credit.
- Lenders who offer loans to individuals with low credit scores often impose stricter repayment terms on these borrowers.
Upside of Personal Loans
- Personal loans allow for flexibility and can be used for a number of purposes. For example, these type of loans are good for home improvement and debt consolidation.
- Personal loans are much easier to get than other type of loans such as mortgages, typically only using a few credit checks to qualify borrowers.
- Looking to pay off credit card debt? Personal loans are a great option IF you can secure a lower interest rate than offered by your credit card company.
- Quick cash. If you are in need of cash, a personal loan tends to have lower interest rates than a cash advance on your credit card.
So is a personal loan a good idea for you? The answer is largely dependent on your specific circumstances. Do you need cash in a hurry, or want to take out a loan without explaining your reason? Then personal loans are your best bet. Below are our favorite personal loan lenders:
SOFI LOANS REVIEW
- Best For: Refinancing student loans. SoFi offers refinancing to those with lower credit scores (650 and above), which makes it easier for people to get financing.
- Interest rates: These depend on the kind of loan you are applying for, but student loan refinancing rates are generally: Fixed: 4.25 percent to 7.75 percent APR. Variable: 2.97 percent to 6.15 percent APR.
- Loan types: SoFi is best known for student loan refinancing, but it also offers actual student loans for your (or your child’s) education. In addition, it also offers mortgages and personal loans.
- Unemployment protection: SoFi offers up to 12 months of protection from paying on your loan if you become unemployed. This is a great feature, although some lenders offer a longer period.
- Customer Service: SoFi is best known for its customer service skills and making loans accessible to a wider range of people.
| Interest Rates | Loan Length | Loan Amounts | STL Rating |
|---|---|---|---|
| Fixed: 4.25% to 7.75% APR. Variable: 2.97% to 6.15% APR |
3 years to 7 years | Minimum: $5,000 Maximum: $100,000 |
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UPSTART LOANS REVIEW
- Best for: Those who can’t get approved for a personal loan. UpStart looks a wide range of factors to approve you, and is known for approving those with 40 percent to 50 percent debt-to-income ratio, which is very uncommon for a loan company.
- Price: Interest rates for loans from UpStart range from 6.925 percent to 29.99 percent, which is pretty standard for a loan.
- Loan length: UpStart has a shorter loan length period than many banks, at 3-5 years, although that is still a good amount of time to pay off your loan.
- Loan amount: Your loan amount will depend on your financial history and what you are using your loan for. Loans for paying off credit card bills will tend to be lower, while business loans will tend to be higher. UpStart’s loan amounts range from $1,000 to $50,000.
- Criteria: UpStart determines who is eligible for a loan using a range of criteria, which include your credit score, years of credit, education, area of study and employment history.
- Check out our full Upstart review to learn more.
| Interest Rates | Loan Length | Loan Amount | STL Rating |
|---|---|---|---|
| 6.925% to 29.99% | 3 years to 5 years | Minimum: $1,000 Maximum: $50,000 |
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LENDING CLUB REVIEW
- Best For: People with average credit. Lending Club is the most popular of the online loan services. It tends to approve more loans than Prosper because it allows people with average credit to apply.
- Interest rates: These depend on what kind of credit history you have and if any investors want to fund your loan, but rates vary from 5.99% to 32.99%.
- Loan types: Lending Club offers personal loans to fund everything from debt consolidation to home improvement projects, and it allows for partial loans.
- Loan Process: You fill out an application and then your loan is assigned a grade, which informs what your interest rate will be. Once your loan is posted, investors can fund a portion or all of your loan. Just like Prosper, investors have 14 days to decide to fund your loan.
| Interest Rates | Loan Length | Loan Amounts | STL Rating |
|---|---|---|---|
| 5.99% to 32.99% | 3 years to 5 years | Minimum: $1,000 Maximum: $40,000 |
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PROSPER REVIEW
- Best For: Easy application.While not the most popular online loan site, Prosper does a great job of streamlining the online loan process.
- Interest rates: Prosper’s interest rates depend on your financial history and whether investors are willing to fund you loan. Its rates range from 5.99% to 36%.
- Loan types: Like Lending Club, you can borrow money for most personal needs, from credit card consolidation to home repairs, and Prosper also offers partial loans.
- Loan process: Fill out an online application that asks you for personal details as well as how much you want to borrow and what you are going to be using the loan for. (There are certain things that you can’t use the loan for, like student loans.) You will then go into the Prosper system and your loan will be pitched out to their pool of investors. Investors then have 14 days to help fund your loan.
| Interest Rates | Loan Length | Loan Amounts | STL Rating |
|---|---|---|---|
| 5.99% to 36% | 3 years to 5 years | Minimum: $2,000 Maximum: $35,000 |
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