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Personal Loans

How Personal Loans Work and the Traps to Avoid

The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

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Credit cards shouldn’t be a default when you’re looking to borrow some money. Personal loans are not only simpler, but they offer better rates. Even better, you can shop for a personal loan without hurting your credit score. For example, you can the LendingTree Personal Loan Shopping Tool to get prequalified in less than five minutes. (Note: LendingTree is the parent company of MagnifyMoney).

When you’re approved for a personal loan and accept the terms, the money can be sent directly to your bank account, or you can get the money by check.

Loan terms are usually pretty simple:

  1. There is a fixed term. You know when the debt is paid off, and it is almost always less than 5 years. (Pay the minimum due on your credit card, and you could still be paying 30 years from now). There usually aren’t pre-payment penalties, but some loans do have them, and you should check for that before you accept the loan.

  2. There is a fixed interest rate. Your monthly payment and interest rate stay the same for the life of your loan. Credit cards will increase the interest rate on your existing balance if you become 60 days past due. And they can increase your interest rate on future purchases at any time.

Personal loans aren’t without their faults

Even personal loans can have their own tricks. While we like them better than borrowing with credit cards, you need to watch out for:

  1. Insurance sold with the loan.

  2. Pre-computed interest

  3. The origination fee

  4. Pre-payment penalties

Oddly enough, these tricks might not be buried in fine print. In fact, your insurance salesman might mention a few to convince you they’re necessary for your protection. We want you to understand what these four terms mean so you can decide if you need them, and if you do, how to find options that won’t cost you hundreds or thousands in extra fees.

How To Avoid The Tricks

There are a number of lenders out there that do not bundle insurance, do not use pre-compute interest contracts, do not charge an origination fee and do not have pre-payment penalties.

We recommend you shop online to find lenders without those tricks and traps. A good place to start the search is with LendingTree, our parent company. With one, short online form LendingTree will perform a soft credit pull (with no impact to your score) and match you with multiple loan offers. Interest rates can be below 6% for people with excellent credit. And because dozens of lenders participate in LendingTree’s program, you may also find lenders willing to accept borrowers with less than perfect credit.

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Now we will explain, in more detail, the tricks that you can find hidden in some personal loan contracts.

Trick One: Insurance

We all want to protect our families from the unexpected and insurance is a great way to do just that.  Similar to how we recommend planning in advance for your debt (and looking for the best deal), you should do the same with insurance. However, many personal loan providers will try to add an insurance sales pitch at the end of a loan closing.  The two most typical types of insurance are life insurance and unemployment insurance.

For life insurance, a typical sales pitch would sound like this: “for just the cost of a can of soda a day, you can make sure you children never have to worry about this debt if you die.” Beware these high-pressure sales tactics.  The value of these add-on policies is almost always outrageously bad.

To protect your family, you should think about a good term life insurance policy that covers not just your personal loan, but all of your needs.  Do this search separate from the loan transaction.

Unemployment insurance could be a bit more compelling (because, unlike term life insurance, it is difficult to buy a policy separately that would make loan payments on your behalf if you lose your job).  I have seen people benefit from these policies.  But you need to do the math.  How much does it cost per month?  So long as you don’t have a high risk of losing your job in the next 6-12 months, you are almost always better off saving the money (rather than paying the premium).  There are also a ton of limitations to the amount of the loan payment that can be made (and the length of time that it will be paid).  You should ask them the following questions:

  1. How much does this cost a month?

  2. What are the requirements for me to be able to claim?

  3. How much would it pay and for how long?

When you ask those questions, you will likely see that the policy being offered is poor value, and you are better to just save the money yourself.

Trick Two: Pre-Compute Interest

This one is a bit confusing. So, we will make it simple. Pre-compute interest is a bad deal.  Avoid it. And don’t be afraid to ask if it is being done to you.

It is a complex way of calculating interest – and the entire reason it exists is to make sure that you pay more interest in the early months/years of your loan. So, if you pay off your loan early, you will end up paying a higher interest rate than the rate quoted.

If you take out a loan with a three year term, and you take the full three years to pay back the loan, then there is no difference between a normal loan and a pre-compute loan.  But, if you pay off the loan early, then you will pay more interest.  Advertising is particularly misleading if there is a promise of “no prepayment penalty” because interest is charged according to the “precompute” method.

How does precomputed interest work?

In a normal loan, interest will accrue every day at the agreed rate. If you want to pay off your balance, then you just need to pay back the balance of the loan and any interest that has accrued since your last payment. Simple.

In a pre-compute loan, the total amount of interest that you would pay during the entire term of the loan is calculated and added to the balance up front. So, if you borrow $100, and you will pay back $50 of interest during the loan – then your balance becomes $150.  If you pay off your balance early, then an interest refund is calculated. The interest refund is calcuated using the Rule of 78. This is yet another complicated way to make sure you are charged more interest up-front. If you want to learn how the calculation works, visit this site.

Bottom line: don’t be afraid to ask if they calculate interest using the “pre-compute” method. If they do – don’t be afraid to walk away. Especially if you think you are going to pay off the loan early.

Trick Three: Origination Fee

Most personal loans charge an origination fee – so there is really no avoiding it. To see if you are getting a good deal, make sure you compare the APR of a loan, not the interest rate.  An APR includes the origination fee, and it assumes that you do not pay off the loan early.

There are 2 ways that people get stuck with the fee:

  1. You don’t realize the fee is deducted from the loan amount.  If you need to borrow $10,000 and there is a 3% fee, then make sure you borrow $10,309.28.  The 3% fee would be deducted and you would end up with $10,000 of loan proceeds.

  2. You don’t get a refund if you pre-pay.  In the example above, if you paid off your loan one day later, you would not get the fee refunded.  So an origination fee is like a disguised prepayment penalty.

The APR of a personal loan (including the fee and interest rate) can be well below a credit card interest rate (and it can save you a lot of money).  Just make sure you understand the fee and compare the APR.

Trick Four: Prepayment Penalties

There are indirect ways of charging a prepayment penalties (pre-compute interest and origination fees).  And then there are direct ways: a prepayment penalty.  Most lenders do not charge this, so you should be able to avoid it completely. Just make sure you ask if there is a prepayment penalty.

Personal loans are great, if you do the research

With a personal loan, you can have a fixed interest rate, fixed payment and fixed term.

If you compare APRs, then you will be making the right decision. Don’t just jump into picking a personal loan and end up taking out a pre-compute loan, with three add-on insurance policies and a big origination fee – only to refinance the loan three months later.  These are sub-prime tricks that can dramatically increase the costs.

If you borrow for 36 months and pay it off in 36 months, then you are in good shape.

Nick Clements
Nick Clements |

Nick Clements is a writer at MagnifyMoney. You can email Nick at nick@magnifymoney.com

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Personal Loans

The Ultimate Guide to Personal Loans

The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

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Part I: Personal Loans 101

Personal loans are among the easiest financial tools to understand. When you take out a personal loan, a bank lends you money for a fixed interest rate and a fixed period of time.

This means you’ll be expected to make a fixed monthly payment for the life of the loan, but it also means you’ll face less uncertainty than with a credit card. With a personal loan, you’ll know exactly how much you borrowed, how much you’ll pay every month and when your debt will be paid in full.

This isn’t to suggest that personal loans are perfect. Like anything else in life, they come with risks and drawbacks. Most of the downsides depend on how responsible you are with credit and what interest rate you’ll pay.

Keep reading to learn more about how personal loans work, which pitfalls to avoid and how to get the most out of the loan you choose.

How personal loans work

As we mentioned, a personal loan is easy to grasp. You borrow money at a fixed interest rate, over a fixed amount of time, then you pay a fixed monthly payment until your loan is paid off.

While the terms of your personal loan can depend on an array of factors, these loans are typically offered in amounts up to $35,000. You may be able to borrow this amount for any length of time from 12 months to 20 years.

In addition to the interest rate you’ll pay, personal loans may also come with an origination fee, which can range from 1 percent to as high as 8 percent at some lenders, according to a review of personal loan terms on MagnifyMoney.com. On the bright side, it’s a competitive business and many lenders charge no origination fee or any other fees upfront.

The real costs to worry about with personal loans involve the APR. Interest rates charged through personal loans can vary quite a bit, and they are typically higher than you see with secured loans such as home equity or auto loans. That’s because personal loans are unsecured debts. Whereas a secured loan — think home or auto loan — is secured by an underlying investment (in these cases, a home or car), unsecured loans aren’t secured by an investment. The banks are taking on a greater risk lending without any collateral, so they charge higher fees and APRs as a result.

How to qualify for one

If you’re considering a personal loan, here’s what you’ll need to qualify:

  • Good or excellent creditSome personal loan companies will approve you with a credit score as low as 580, according to MagnifyMoney’s parent company, LendingTree. But having very good credit (a FICO score over 740) will put you in a position to qualify for a personal loan with the best interest rate and terms.
  • Proof of ability to repay – You need to be able to show your ability to repay your loan, usually with pay stubs or other evidence of employment.
  • Low debt-to-income ratio – Lenders may be hesitant to lend you money if your debt-to-income ratio is high. This ratio is determined by taking your total monthly recurring debt and dividing it by your monthly income. Discover Personal Loans notes that borrowers with a debt-to-income ratio below 36 percent may qualify for the best terms and rates on loans and mortgages.
  • Co-signer – If your credit score is poor, you may need a co-signer with good credit to help you qualify for a personal loan.

How to pick the best personal loan

When it comes to personal loans, there is no one-size-fits-all option. The best loan for your needs depends on factors such as how much you need to borrow and whether you have good credit scores.

Here are some tips that can help you identify a loan that fits your goals:

  • Shop around with different lenders. Thanks to the internet, it’s easier than ever to shop around and compare rates and loan terms. Our parent company, LendingTree, is an excellent place to start because you can easily explore options from different lenders in one place. Start by filling out an online form.
  • Read the fine print. Make sure you understand each loan’s terms, conditions and interest rate, along with your monthly payment.
  • Look for a low-cost loan. Ideally, you should look for a personal loan with the lowest rate and fees (or no fees) you can find.
  • Read reviews. The internet is a treasure trove for reviews of various lenders. Reading product reviews can help you gauge the quality of each lender and what your experience might be like.

Part II: Common Uses for a Personal Loan

While borrowing money and paying it back slowly can be ideal no matter what your goals might be, you might be surprised to find out just how many uses personal loans can have.

“I’ve found that personal loans can be helpful when looking to consolidate higher interest debt, pay for a major expense or quickly get funds when needed for an emergency,” says Jeff Rose, founder of Good Financial Cents and partner of Discover Personal Loans.

Rose also pointed to a new survey from Discover Personal Loans, which showed that 26 percent of respondents cited a major medical expense as the most popular potential use for a personal loan, followed by 22 percent saying debt consolidation, and 13 percent using it to fund a small business.

Take note: That doesn’t mean personal loans are ideal for all uses. Here are some potential uses for personal loans, along with some pros and cons to consider:

Debt consolidation

If you have several types of debt and you’re struggling to keep up, consolidation can be a smart way to tackle the problem. When you consolidate debt, you take out a new loan, use it to pay off your existing debts and are left with just one loan to repay.

The real benefit of using a personal loan for debt consolidation is knowing exactly how much you pay each month and precisely how long you have until you’re debt-free.

“You don’t get that with a credit card,” says Gerri Detweiler, a writer, educator and authority on credit and loans.

You’ll have to decide when a personal loan makes sense as a debt consolidation tool over other options — such as a balance transfer credit card. It will likely come down to your credit score and which option will cost you the least over time. For example, a debt consolidation loan may have a higher interest rate than a balance transfer credit card, many of which come with a 0 percent APR for 12 to 21 months.

You can find 0% balance transfer offers at CompareCards.com, another LendingTree site.

Medical expenses

Taking a personal loan to cover medical expenses “can be very helpful, especially if it keeps you out of collections,” Detweiler says.

Before you take this step, however, you should speak to your provider to see if it offers a payment plan. If so, you may be able to make payments on your outstanding medical debts without paying interest.

Car purchase

You can take out a personal loan to buy a car, but should you? Detweiler says it depends on the type of car you’re buying and how much it costs.

“You would probably get a better interest rate through a car dealership since personal loans are unsecured but car loans use the car as collateral,” she says.

On the flip side, a personal loan might work better if you’re buying an older used car from an individual instead of a dealership.

Home improvement

Detweiler notes that, while a lot of people use a home equity loan or HELOC, or home equity line of credit, to remodel their home, not everyone has enough equity to qualify. A personal loan could be ideal since you may qualify no matter how much equity you have in your home.

Not only that, but you won’t lose your home if you fall behind on payments with a personal loan. A home equity loan uses your home as collateral.

Moving expenses

Moving can be expensive, but you should try to save up the cash before your move, if you can. If you’re short on funds, a personal loan or a credit card can work well. The best option for your needs depends on the interest rate you qualify for and how long repayment might take you.

Starting a business

Detweiler says she’s a big fan of trying to separate personal and business credit, but there are still times when using a personal loan to finance a business could be beneficial.

If you’re a startup that’s not yet earning money, for example, you might not yet qualify for a business loan.

“In that case, a personal loan could help you get your business off the ground,” she says.

Boosting your credit

“A personal loan can help you improve your credit mix, and that can boost your score,” says Detweiler. “But you shouldn’t get into debt just to build credit.”

If you want to build credit without getting into debt, signing up for a secured credit card and using it regularly can also help. Read more about how secured cards work.

Emergencies

When it comes to the unexpected, personal loans can be a better option than some other types of borrowing, like payday loans. Not only are interest rates typically low, but you can figure out an exact payment plan to pay the debt off before you sign up.

But first, you should “really think about whether you need to borrow or whether you could come up with the money another way,” says Detweiler.

When to avoid using a personal loan

While a personal loan can be a valuable financial tool, there are plenty of times where you might be better off borrowing money a different way – or not borrowing at all.

Joseph Toms, president of the nonbank consumer lender Freedom Financial Asset Management, says these instances really depend on individuals and their situation, although there are many telltale signs a personal loan is not for you.s

One of the biggest signs, he says, is when you can’t afford to keep up with the monthly payments for the loan you plan to take out.

“Not being able to keep up with the monthly payments means you won’t pay your loan on time,” he says. “If you pay your bills late or not at all, your credit will take a hit. That can lead to higher interest rates and cause your debt to spiral out of control.”

Before you take out a personal loan, you should write out a budget and make sure you can truly afford the monthly payments, he says.

Another time you shouldn’t take out a personal loan is when you don’t truly need what you’re borrowing for – or if you should probably live without it.

“A personal loan can be like a candy store,” says Toms.

The temptation of being able to borrow money can be too much for some people. It can inspire crazy actions, like financing purchases that can leave the borrower in financial peril, Toms says.

Another instance where you may not want to get a personal loan? “If you’re going to buy a house in the near future, you should think twice about taking out a personal loan,” Detweiler says.

This is because the amount you owe can affect how much you can borrow for a home.

Lastly, you should probably avoid a personal loan if you’re on shaky financial ground, says Detweiler.

“If you aren’t in a very stable financial situation, a personal loan could make your problems worse,” she says. “It’s risky because if you don’t make the payments, you could wind up hurting your credit and could end up in default or collections.”

Using personal loans for a vacation might be tempting, but it’s not the wisest choice. However, the truth is, some people do this anyway. In a recent survey, we found that 16 percent of people who said they are going into debt for vacation are using personal loans.

“Don’t borrow money and go into debt for a vacation,” Detweiler urges. “You’ll come back from vacation in debt. Save the money instead, or have a staycation.”

Like vacations, a wedding financed with debt is rarely a good idea.

“Don’t start your marriage in debt,” says Detweiler. If you have to use a personal loan for your wedding, make sure you shop around for a loan with the lowest interest rate and best terms.

If you believe you could pay the balance off in a short amount of time, you may also be better off with a 0 percent APR credit card.

The risks of using a personal loan

Taking out a personal loan can help you borrow the money you need to achieve any goal, but that doesn’t mean these loans are without risk. Some of the perils you’ll face when taking out any loan include:

  • Overspending – A personal loan can be the answer to your prayers, but some experts say they’re almost too easy. “No one is going to question what you’re spending the money on, so you might use this loan to justify things you shouldn’t really buy,” says Detweiler. “If you go overboard, you can end up with debt that takes years to pay off and a lifetime of regret.”
  • Damage to your credit if you don’t repay the loan – Obviously, your personal loan may go off without a hitch if you don’t borrow too much and can always afford your payments. “But if you can’t afford your payments due to job loss or another issue, your credit will see damage,” Detweiler explains. That damage can ruin your credit, or even lead to collections or bankruptcy.
  • Bad financial habits – Getting into the habit of constantly borrowing money can make your life more difficult, she adds. While personal loans can be easy to get, relying on credit over and over can leave you short on cash to reach other financial goals.

And the benefits?

There are times to avoid a personal loan, without doubt, but these loans aren’t all bad. In the real world, there are plenty of instances where a personal loan can help you get what you want or even improve your financial life.

If you take out a personal loan – and do it in a financially responsible way – there are plenty of benefits to look forward to. These loans can:

  • Simplify your financial life – “A personal loan can be a great tool for people looking to simplify and save by consolidating higher interest debt into one fixed monthly payment,” says Rose, of Discover Personal Loans. “If you have multiple credit cards or store card bills, and are having difficulty keeping track of them all, a personal loan can be a smart tool to streamline your payments and potentially save thousands of dollars on interest.”
  • Help with emergencies – If you are hit with an unexpected expense you can’t cover, “personal loans can provide the funds fairly quickly to help manage through the situation,” says Rose. In that sense, a personal loan could actually save you from financial peril.
  • Offer you predictable payments and interest – Because of the way personal loans are set up, you’ll never wonder how much you’ll pay each month or how much interest you owe. “Compared to higher-interest financial tools, having a fixed interest rate and monthly payment could save you money in the long run,” Rose explains.

Part III: Personal Loan Traps and Scams to Avoid

While there are plenty of reputable lenders in the personal loan space, that doesn’t mean it’s scam-free. Like most other areas of personal finance, there are plenty of fraudsters who will use personal loans to extract money from you or perpetrate fraud in some other way.

As you explore the world of personal loans, here are some traps to be aware of:

Advance loan fees

Occasionally, a fraudulent loan company will offer outrageous loans and loan terms with a catch: You have to pay the first few months of payments to qualify.

“They usually ask for these funds via Western Union or Moneygram,” says Detweiler. “But it’s a complete scam.”

No reputable lender would ask you to pay money upfront. “Do not pay money upfront for a personal loan under any circumstances,” she says.

Loan insurance

Another one from Detweiler: the fraudulent lender who will offer you a personal loan, only to say you need to buy “insurance” to cover the loan in case you default.

This is also a scam because personal loans are unsecured – and because no reputable lender would require you to buy insurance to insure your own loan.

‘No credit check’ loans

According to the Consumer Financial Protection Bureau (CFPB), a lender who isn’t interested in checking your credit should set off alarms.

Ads that say: “Bad credit? No problem” or “We don’t care about your past” should be particularly worrisome, notes the CFPB. These slogans are usually suggestive of a scam.

Pre-compute interest

Some personal loans might come with the caveat of pre-compute interest, interest that is stacked so you pay the bulk of it near the beginning of your loan term.

This is a bad deal, since you’ll wind up paying extra interest – even if you pay your loan off early. Before you take out a personal loan, make sure you know how interest is accrued and how it will impact the total costs of your loan.

Prepayment penalties

Some personal loans will tack on a prepayment penalty if you pay your loan off early. Since this fee isn’t that common and is totally unnecessary, you should avoid loans that charge this fee altogether.

Make sure you read through your loans terms to check for a prepayment penalty. If you find one, look for another lender and loan.

Part IV: Alternatives to a Personal Loan

A personal loan might be ideal for helping you reach your financial goals, but it’s also possible a different financial product might work better. As you consider the prospect of a personal loan, don’t forget to explore your other options.

Here are some alternatives to consider, along with some instances where they may represent a better deal:

Personal loans versus credit cards

According to Paul Gentile, president of Cooperative Credit Union Association, there are definitely times where a credit card may be better than a personal loan.

“A credit card can be used to purchase something, so that can offer more flexibility,” he says. Credit cards can also be a great deal if you pay them off monthly, he notes, since you have the potential to earn rewards. Lastly, credit cards can be beneficial for certain short-term purchases since many offer 0 percent APR for 12 to 21 months.

On the flip side, “a personal loan may be better for someone who wants to make a large, intentional purchase that they planned for.”

Personal loans also offer the benefit of a fixed payment and payoff date, whereas credit cards can literally tether you to payments indefinitely if you keep using them for purchases.

Personal loans versus HELOCs

As Gentile notes, HELOCs come with the advantage of interest deductions (similar to how you deduct mortgage interest) if you itemize your taxes. In contrast, interest paid on your personal loan is not tax-deductible. Rates on HELOCs may also be lower than those on personal loans, he notes.

A possible downside with HELOCs is the fact that some only require you to pay interest for years. “This means you may not be paying anything toward the principal,” Gentile says.

Some HELOCs also come with balloon payments at the end, and those big payments may be hard to handle. On the other hand, personal loans come with predictable, fixed monthly payments and no surprises.

Personal loans versus peer-to-peer loans

Gentile notes that peer-to-peer lending is really similar to a personal loan. Both things allow you to borrow a fixed rate of cash and repay it over a predetermined length of time.

But since peer-to-peer lending isn’t regulated as heavily, this could be worrisome, says Gentile.

Before you choose among personal loans and peer-to-peer loans, make sure you compare all related fees, all total costs and interest rates.

Personal Loans versus cash-out refinancing

Gentile believes that opting for a cash-out refinance is the best option for people committed to their properties in the long term, whereas personal loans are better for short-term financial needs.

There are risks to getting cash out of your home as well, he notes. “If home prices drop, you could end up underwater.”

On the other hand, refinancing your home to get access to your home equity could help you qualify for a lower interest rate than a personal loan. “You also get to write off your mortgage interest, so you get a tax deduction,” notes Gentile.

Check out this cash-out refi calculator from MagnifyMoney’s parent company, LendingTree.

Frequently Asked Questions

According to the CFPB, lenders and loan brokers are required to be registered in all states where they conduct business. To check registration, they suggest calling your state attorney general’s office, or your state’s Department of Banking or Financial Regulation.

Yes, if you use it to consolidate high interest debts from credit cards or other loans. To get out of debt faster, make sure your new personal loan comes with a lower interest rate than you’re already paying, along with no or few fees. Paying more than your minimum payment is another great way to pay down debt faster.

Your interest rate will be determined based on the type of loan you apply for, how much you want to borrow and the quality of your credit. Getting the best loan terms and the best interest rate typically requires a credit score of 740 or more, or very good or exceptional credit.

If you were denied a personal loan due to poor credit, the best thing you can do is take a few simple steps to improve your credit rating over time. Pay all of your bills on time, pay off debt to reduce your credit utilization, and avoid opening or closing too many accounts.

Thanks to the internet, you can apply for a personal loan online and from the comfort of your own home. You can also compare lenders, fees, and interest rates by visiting this page.

Because personal loans are unsecured, you don’t need collateral. What you do need is the ability to illustrate how you’ll repay your loan, along with a good credit score.

You can absolutely pay your loan off early; very few loans will charge a prepayment penalty. Before you take out a personal loan, you should make sure you won’t be charged a prepayment penalty if you’re able to repay your loan early.

While applying for a personal loan will result in a hard inquiry being placed on your credit report, any negative hit your score takes will be short-lived. Borrowing too much in relation to your credit limits can hurt your utilization, however, and yes, that could hurt your credit score.

On the other hand, repaying your personal loan on time, and ultimately in full, can actually help your score in the long run.

Depending on your lender, you may receive funds from your new personal loan as early as the next business day. However, it could take up to seven business days (or longer) if you apply for a loan on a weekend, have errors in your application, or your loan takes longer to process for any reason.

The best part about personal loans is that you can use the funds however you want. You can use the cash to pay off high interest debt, remodel your kitchen or buy a newer car, for example.

Just keep in mind that borrowing is never free. In addition to the interest you pay on your loan, you may also incur additional costs, such as origination or application fees.

Holly Johnson
Holly Johnson |

Holly Johnson is a writer at MagnifyMoney. You can email Holly here

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Personal Loans

Where to Get the Best Personal Loan Rates Online

The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

Where to Get the Best Personal Loan Rates Online

Updated October 2, 2017

If you want a personal loan to pay off credit card or other debt, the absolute fastest and most effective way to lower the interest you pay is to apply for a balance transfer, with a 0% rate. You can read our guide to balance transfers to learn about their pros and cons.

But a balance transfer isn’t for everyone, especially if your credit score isn’t perfect or if you need to borrow cash.

A personal loan with a set payoff period a few years from now is often the next best thing with these advantages:

  • One monthly payment
  • A set rate
  • You don’t need absolutely perfect credit
  • You can check your rate without touching your score

There are more attractive deals than ever thanks to some new online lenders and you can see sample rates below for excellent credit and good credit.

Tip: Apply for several loans to check rates. Every lender has different approval criteria and different pricing models – and the difference in rate between lenders (even for people with excellent credit) can be significant. So long as you shop with lenders that use a soft credit pull, you can check your rate without negatively impacting your credit score.

Start Here – Multiple Lenders at Once

LendingTree

LendingTree

Dozens of lenders participate in LendingTree’s personal loan shopping tool – including all of the lenders listed on this page. (Full disclosure, LendingTree is our parent company.) With one online form, LendingTree will perform a soft credit pull (with no impact to your score) and match you with multiple loan offers. This is our favorite (because it is easy) way to get multiple offers from lenders in minutes. For people with excellent credit, you could get an interest rate below 6%. For people with less than perfect credit, there are many lenders participating with more liberal acceptance criteria.

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Why is this a good way to save?

Banks don’t care much for personal loans because the lower rates earn them less profit than credit cards.

Fortunately, some new companies believe you should be able to get a competitive rate without dealing with credit card intro offers, even if your credit isn’t perfect.

They’re doing it by lending online only without the overhead of branches.

They pass the savings on to you through better rates, and you can check up on them below.

Personal loans for Excellent Credit

The following providers are for you if you want the absolute lowest possible rates that reward a record of no late payments and good income, even though you have some high rate debt you want to clean up.

Unless you get a rate of 5% or less, you’re probably better off with balance transfer deals, but the convenience of a fixed payment and walking away from credit cards makes personal loans appealing.

SoFi

SoFi

SoFi offers some of the lowest interest rates available if you’re looking to refinance your credit card debt or borrow cash. You’ll need to have a good record of paying your bills on time, but they’re willing to offer rates that are very competitive without an origination fee.

Sofi’s believes if you’ve graduated college or went to grad school you’ll be a more responsible borrower, so they may be more likely to give you a better rate, even if your credit history is limited.

For example, if you have $10,000 in credit card debt, good income, and great credit, their best rate could save you as much as 0% balance transfer deals once you factor in the fees for each.

What we like best about SoFi is that they offer no origination fee and no prepayment penalty. If you think you may be able to pay off your loan earlier (or want the flexibility to do that), SoFi is the only lender we reviewed that charges no fee at all. Given their very low rates, we think anyone with good credit should start with SoFi first, and then compare their offer to the rest of the providers.

Rates: 5.49% -14.24%, fixed*, with AutoPay. You can also select a variable interest rate. With AutoPay, the variable rates are from 5.19% – 11.34%*. Rates are based upon 1-month LIBOR.

Upfront fee: 0% – No origination fees, no prepayment fees and no balance transfer fees

Amount: $5,000 – $100,000

Period: 3, 5 or 7 years

Available states: All states except Tennessee and Nevada.

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on SoFi’s secure website

BestEgg

BestEgg

BestEgg is an online personal loan company that offers low interest rates and quick funding. BestEgg is one of the fastest growing personal loan companies in the country, largely because it has been able to provide one of the best combinations of interest rate and loan amount in the market.

You can check to see your interest rate without hurting your score, and they do approve people with scores as low as the mid-600s. If you have an excellent credit score, BestEgg will be very competitive on terms.

Upfront fee: 0.99% – 5.99%

Amount: up to $35,000

Period: up to 5 years

APPLY NOW Secured

on BestEgg’s secure website


Lightstream

LightStream

Lightstream is a great choice for people with excellent credit. It is actually part of a bank you might have heard of, SunTrust Bank. They were recently set up to offer some of the best personal loan rates available, and they are delivering. The interest rate you are charged depends upon the purpose of the loan. Interest rates can be as low as 2.29% for a new car purchase (and Lightstream does not put their name on your title. They just put the cash in your bank account, and you can shop around and pay cash for the car). Home improvement loans start at 4.99% APR with AutoPay , making them cheaper and easier than a home equity loan.

They’ll also approve and deposit your money fast, often the same day, and give extra consideration if you have money in your 401K or equity in your home.

LightStream has created an exclusive offer, just for MagnifyMoney readers. (This offer went live in January 2016). Credit card consolidation loans for MagnifyMoney readers are now as low as 5.49%. The highest rate is 14.44%. Just beware: LightStream does a hard credit pull.

Upfront fee: None

Amount: $5,000 – $100,000

Period: 2 – 7 years

Available states: All


Personal Loans for Good Credit

These providers may be able to help you out if you’re not approved for the very best rates or a 0% balance transfer offer. Check those deals first, there’s no real harm to do that, but if they fall through, give these a try.

LendingClub*

Lending Club

You might not have heard of LendingClub yet, but they are a big player in online loans. And they offer a wide range of rates and terms based on your credit profile and needs. Generally you’ll need a score of about 600 or higher to get approved.

Rates: 5.99 – 35.89% APR

Upfront fee: 1 – 6%

Amount: up to $40,000

Period: up to 5 years

Available states: All except Iowa and West Virginia

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on Lending Club’s secure website


BestEgg

BestEgg (reviewed earlier in this post) will approve people with credit scores as low as the mid-600s. If you have good credit and are looking for a loan, you should consider BestEgg.

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on BestEgg’s secure website


Upstart*

Upstart

Upstart offers loans that look a lot like the ones from the bigger online lenders like LendingClub or Prosper.

They’ll let you borrow up to $50,000 for 3-5 years. But the key is they will take into account the schools you attended, your area of study, the grades you earned in school, and your work history to see if you can get a better rate.

So while the range of rates Upstart offers is similar to the bigger guys, if you did well in school, you might find the rate you actually get is lower than what the others will offer you, so it’s worth trying.

You’ll need a 640 or better FICO and your monthly payments can’t be more than 55% of your monthly income.

Rates: 9.48% -29.99%

Upfront fee: 3.66% – 8%

Amount: $5,000 – $50,000

Term: 3 & 5 year loans available

Available states: All


PenFed

Previously, PenFed offers a fixed rate of 9.99% interest rate for 5 years. Veterans get extra special attention so it’s worth checking this online only offer. You have to be a member of the PenFed credit union, but that’s easy and anyone can do that online as part of the process.

Rates: 9.99%

Upfront fee: None

Term: 5 years

Available states: All


Personal Loans for Bad or Minimal Credit

Avant*

APRs range from 9.95% – 35.99% and there is no prepayment fee. You can check to see your interest rate without hurting your credit score. Just one warning: if you are willing to borrow money at 35.99%, then you really need to step back and think about building a longer term financial plan. You can download our free Debt Guide, which will help you put together a plan so that you never have to pay interest rates this high again.

Avant’s platform offers access to loans from $2,000 to $35,000, with terms from 2 to 5 years. The minimum credit score varies, but we have seen people with scores as low as 580 get approved.

The good thing about Avant is that these loans are amortizing. That means it is a real installment loan, and you will be reducing your principal balance with every payment.

Rates: 9.95% – 35.99%

Upfront fee: 1.50% – 4.75%

Amount: up to $35,000

Period: up to 5 years

Available states: All except: Colorado, Iowa, West Virginia, and Vermont.

For Example: A $6,500 loan with an administration fee of 3.75% and an amount financed of $6,256.25, repayable in 36 monthly installments, would have an APR of 29.95% and monthly payments of $265.40.

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on Avant’s secure website


OneMain Financial

OneMain Financial offers personal loans through its branch network to people with less than perfect credit. You can start your application online. If you qualify, you will have to visit a branch to complete the application. Once in the branch, if you have all of the required documents, you can receive you loan proceeds immediately via check.

You can borrow from $1,500 to $25,000. The interest rates are not low, and can go up to 36%. They will also charge an up-front origination fee that is not refundable. You should definitely shop around at other lenders first, given the high cost of the loan and the need to visit a branch.

Rates: 25.10%-36.00%

Upfront fee: Varies

Amount: Up to $25,000

Period: Up to 5 years

APPLY NOW Secured

on OneMain Financial’s secure website


As these new companies evolve, expect even more attractive options to emerge, so when you think about lowering your rates, don’t just look to the banks you know.

Give an online lender a chance. You may be rewarded with lower rates, good service, and faster freedom from debt.

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* We’ll receive a referral fee if you click on offers with this symbol. This does not impact our rankings or recommendations You can learn more about how our site is financed here.

Got questions? Get in touch via Twitter, Facebook or email (info@magnifymoney.com)

Brian Karimzad
Brian Karimzad |

Brian Karimzad is a writer at MagnifyMoney. You can email Brian at brian@magnifymoney.com

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Mortgage, Personal Loans

Can You Use a Personal Loan for a Home Down Payment?

The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

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Scraping together the down payment on their mortgage is the biggest challenge facing many would-be homebuyers. And lots of those would probably like to use a personal loan to top up their savings so they reach their lender’s threshold. But can they do that?

The short answer is that few lenders would give their consent to a borrower looking to use a personal loan for their down payment. You would be taking on new debt and then taking on even more debt on top of that…not exactly the greatest solution.

The good news is that there are lots of different options out there for low down payment mortgages and even assistance programs that can help you get together funds for a down payment.

How Much Do I Really Need For A Down Payment?

Let’s make sure you know how big your down payment needs to be. Because, if you are a bit fuzzy on that, you are not alone. And you could be in for some good news.

A survey of professionals at a 2017 conference hosted by the Mortgage Bankers Association revealed a persistent myth: Twenty-eight percent of respondents thought “consumers still mistakenly believe that a 20 percent down payment is a requirement for purchasing a home.” And another four in 10 respondents thought that even those who knew 20 percent isn’t necessary still believed they’d find it difficult to buy a home with less.

Those consumers couldn’t be more wrong. Creditworthy buyers can usually get approved for a mortgage with a down payment as small as 3 or 3.5 percent. And some (more than you may think) who qualify for specialist mortgage programs need put down nothing. Discover more about all those options below.

Here are the minimum down payments required for a selection of mortgages.

Remember: You may get a better mortgage rate if you increase the amount you put down.

The Best Mortgages for a Low Down Payment

Type of Loan

Down Payment Requirement


Mortgage Insurance

Credit Score Requirement

FHA

FHA

3.5% for most

10% if your FICO credit score is between 500 and 579

Requires both upfront and annual mortgage insurance for all borrowers, regardless of down payment

500 and up

SoFi

SoFi

10%

No mortgage insurance required

Typically 700 or higher

VA Loan

VA Loan

No down payment required for eligible borrowers (military service members, veterans, or eligible surviving spouses)

No mortgage insurance required; however, there may be a funding fee, which can run from 1.25% to 2.4% of the loan amount

No minimum score
required

homeready

HomeReady

3% and up

Mortgage insurance required when homebuyers put down
< 20%; no longer required once the loan-to-value ratio reaches 78% or less

620 minimum

homeready

USDA

No down payment required

Ongoing mortgage insurance not required, but borrowers pay an upfront fee of 2% of the purchase price

620-640 minimum

Conventional loans (one not backed by a government program)
A conventional loan is simply a type of mortgage loan that isn’t backed by a government program. Usually these loans require a 5 to 20 percent down payment, though that can be as low as 3 percent using offerings such as Fannie Mae’s HomeReady or Freddie Mac’s Home Possible mortgages. You will need to be reasonably creditworthy.

SoFi

SoFI offers mortgage loans for minimum down payments of 10 percent. You can borrow between $100,000 and $3 million. And you will not have to pay for private mortgage insurance (we’ll talk more about PMI below), even though you have not reached the usual 20 percent down payment threshold. But you will need to have good-to-great credit and sound finances.

Federal Housing Administration mortgage (FHA loan)

FHA mortgages require a 3.5 percent down payment if your credit score is 580 or higher. This can be good if your credit score is less than stellar, but it may be more costly than other options. That is because you will be liable for mortgage insurance premiums (MIPs), which will be added to your monthly mortgage payments.

U.S. Dept. of Agriculture mortgage (USDA loan)

USDA loans require no down payment, unless you have significant assets. There are various eligibility criteria, including your having a low to moderate income. And you must purchase in an eligible area, although those areas make up 97 percent of the nation’s land mass. You can check if you and your area qualify using a tool on the USDA website.

Veterans Affairs mortgage (VA loan)

VA loans also require no down payment. These are for veterans, those still serving in the military and related groups. You can check your eligibility on the VA website. If you qualify, it is highly likely this will be the best mortgage you can get.

Learn more by checking out our guide to The Best Mortgages That Require No or Low Down Payment.

3 Ways To Get Help With Your Mortgage Down Payment

Down payment assistance programs

Before exploring ways of borrowing to top up your down payment funds, you should definitely check out your eligibility under various assistance programs. These are typically targeted at middle- and low-income buyers, and you may have to use a lender that participates in the program.

Some programs provide outright grants or gifts that do not have to be repaid. And they are often available to both first-time buyers and existing homeowners.

Many of these down payment assistance (DPA) programs are state-based. You can click through to your local offering, if any, from the U.S. Department of Housing and Urban Development (HUD) website, which has a link for each state. You should also call your city or county to see if it operates a similar, parallel program.

Others are run across multiple states by nonprofits, such as the National Homebuyers Fund. Freddie Mac recommends a look-up tool on the private Down Payment Resource website as a way of tracking down DPA programs for which you might be eligible.

Finally, do not forget to check with your human resources department. Some employers offer help.

Using a gift from family or friends

Suppose you cannot get help from a mainstream DPA or your employer. Perhaps your parents or another close relative, fiancé, fiancée or domestic partner may be willing to give you a gift toward your down payment. Your lender should normally have no problems with this arrangement. But it is very likely to apply a couple of industry-standard rules:

  1. You must meticulously document the gift process and provide copies of the donor’s withdrawal slip or check, and the recipient’s deposit slip. If appropriate, a copy of the donor’s check to the closing agent is fine.
  2. You must provide a letter or form signed by the donor declaring that the payment is a gift and not a loan. This must include certain information and statements, and you can download a sample gift letter from the NOLO legal website.

Many lenders will allow this gift to cover 100 percent of the down payment. However, some may prefer you to provide some of the funds yourself.

Expect your loan officer to be mildly suspicious of large gifts. Some applicants try to sneak through money that is actually a loan in disguise, risking jail time or fines for mortgage fraud. If you raise any red flags, your loan officer can investigate the funds in great detail, including their ultimate source.

It is generally fine to borrow money from friends or relations for part of your down payment, providing you declare the loan(s) to your lender. It can then include your repayments when it assesses your ability to afford your mortgage.

Central to that assessment is your debt-to-income (DTI) ratio. As the name suggests, that is the proportion of your monthly income that goes out in debt payments, including minimum payments on credit cards and standard payments on instalment loans, such as auto, student and personal loans, as well as your new mortgage. You should also include any regular commitments for alimony or child support.

LendingTree, our parent company, has a DTI calculator that can help you determine yours. If you plan on borrowing for your down payment, include the payments on the loan(s) from your family or friends when you use it. It is unlikely a lender will allow your DTI to be higher than 50 percent. Some types of mortgage require 43 percent, and many lenders prefer it to be in the 30s.

Borrowing from yourself

One way to keep your DTI low is to borrow from yourself because not all lenders count repayments of such loans in your DTI, even if you have to make them. But you need to check your lender’s policy before you proceed, and either rule out this option or find a more sympathetic source for your mortgage.

How do you borrow from yourself? By raiding your retirement pot. You may be able to make a withdrawal or take a loan from your 401(k), IRA or Roth IRA to fund your down payment.

But, unless you are a tax accountant, you should take professional advice before doing so. No, really. This is a big step with lots of potential implications.

Potential implications of raiding your retirement funds

  1. Unless you use money in a Roth IRA, you could find yourself with significant tax liabilities if the loan isn’t repaid.
  2. If you withdraw money from your 401(k), your employer could demand immediate repayment in full if you switch jobs or otherwise leave.
  3. Some 401(k) funds have rules against this sort of borrowing.
  4. Whatever you do, there is a high chance your retirement fund will take a big hit.

As previously suggested, take advice from a trusted, reputable professional.

Advantages of making a 20 percent down payment

There’s a reason that 20 percent down payment myth survives. It may well be that, decades ago, your parents or grandparents had to find that much as a minimum.

And 20 percent remains an important threshold for borrowers. Put down that much or more, and you won’t have to pay for private mortgage insurance (PMI).

You have to pay the premiums for PMI (they are mostly wrapped up in your monthly mortgage payment, but you may have to make an upfront payment too), but the only benefit you get from them is an ability to borrow with a smaller down payment. If any claim is made on the policy, probably because you have defaulted on your loan, the payout will go directly to the lender.

The biggest downside to a low down payment: PMI

Like we mentioned, most mortgage loans that come with a low down payment requirement have a big caveat — the added cost of private mortgage insurance.

The amount you pay for PMI will depend on the type of mortgage you choose and maybe your personal circumstances:

  • Conventional loan — You will get a quote from your lender. Monthly payments are typically lower than on some other types of mortgage and will depend on your credit score and the size of your down payment. Your upfront payment is likely to be small or sometimes zero.
  • SoFi loan — There is no PMI and so no MIPs on these loans with a down payment equal to or higher than 10 percent.
  • FHA loan — This is often the most expensive type of PMI. But its costs are not affected by your credit score, and the size of your down payment tends to have less impact. So this is a good bet if your credit is iffy and you don’t have substantial savings. At the time of writing, in 2017, you can expect to pay 1.75 percent of the loan value as an upfront charge, and then anything between 0.45 percent and 1.05 percent annually, depending on how much you borrowed and the sizes of your original loan and down payment. Although calculated on an annual basis, ongoing premiums are spread evenly through the year and collected through your monthly payments. If you cannot afford the upfront payment, it may be possible to wrap it up in your overall loan.
  • USDA loan — This is similar to the FHA loan’s PMI model, but typically has lower upfront and monthly payments. As with FHA loans, if you cannot afford the upfront payment, it may be possible to wrap it up in your overall loan.
  • VA loan — You do not pay ongoing monthly premiums with one of these. However, you do pay an upfront cost, called a “funding fee.” For first-time buyers in 2017, these range from 1.25 percent to 2.4 percent, depending on your type of service and the size of your down payment. For regular military with a zero down payment, it is 2.15 percent. If you cannot afford that funding fee, you may be able to wrap it up in your overall loan.

Most sorts of PMI terminate (either automatically or on request) when your mortgage balance reaches 80 percent of the contract price or the property’s appraised value when you bought your home. However, that does not apply to FHA loans. You will likely be on the hook for PMI premiums for those until you move or refinance.

Should you wait to get a mortgage until you can avoid PMI?

By now you may be pondering a dilemma: Should you jump into the market now and swallow those PMI costs? Or might you be better off holding back until you have the whole 20 percent down payment, thus avoiding PMI altogether?

Your smart choice largely depends on the real estate market where you want to buy. It might also depend on the market where you are selling, if you are not a first-time buyer. And it is mostly down to math.

A matter of math

Research home-price trends in your target neighborhood to see whether they are rising (they are in most places) and, if so, how quickly. Bear in mind that some forecasting companies expect growth to continue, but more slowly. For example, CoreLogic calculated home prices grew 6.7 percent nationwide in the year ending July 2017, but expects that to slow to 5 percent by July 2018.

It makes sense to go ahead and jump into the housing market if you anticipate that the value of your home will increase sufficiently year after year to offset the added cost of PMI.

Once you have a feel for those price trends, use a calculator like MagnifyMoney parent company LendingTree’s mortgage calculator to model your options. It will itemize your PMI as part of your total monthly payment. Work out how much you could save by avoiding PMI, and compare that with how much you stand to lose in home-price inflation if you wait to save that 20 percent.

You are now in a position to make an informed decision over whether to buy now or carry on saving. Of course, if in the meantime you find the home of your dreams, you can always choose to go with your heart rather than your head.

For more information, read What Is PMI and Is It Really That Bad?

One last thing about personal loans…

There are lots of things to like about personal loans. They are easy, quick and relatively cheap (or often free) to set up. They almost always have lower interest rates than credit cards for equivalent borrowers. And they make budgeting simple, because you know how much you will pay each month, subject to rate hikes.

However, typically their rates are noticeably higher than secured loans, such as mortgages and home equity products. And you need good credit to get a low interest rate.

Some lenders advertise personal loans for as much as $100,000. Others have more modest caps. How much you will be able to borrow will depend on many factors, including how easily you can afford to repay it and your credit score.

Find out more at Shopping for Personal Loans.

Peter Warden
Peter Warden |

Peter Warden is a writer at MagnifyMoney. You can email Peter here

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Personal Loans

Your Guide to Navigating New and Used Boat Loans

The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

Bankrolling a new or used boat can shock borrowers straight out of the water if they don’t understand the lending process. There are ample financing options to find a good deal. Loans are available from manufacturers, dealers and financial institutions – each source with distinct advantages and drawbacks.

PART I: How to finance a boat

boat loans
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When you apply for boat financing, the application process involves a written application (or telephone screening), followed by verification of income and submitting details on the watercraft make, year, model and features. Similar to underwriting on auto loans, the lender will review the applicant’s credit history, debt to income ratio, and the market value of the boat.

Experian reports that terms on auto loans average 69.7 months, with higher subprime terms up to 72 months. In contrast, boat loan terms at Essex Credit, a 30-year-old boat lender and division of Bank of the West, go as long as 360 months on loans of $250,000+.

Jim Coburn, consumer finance consultant and former president of the National Marine Lenders Association (NMLA), says banks and credit unions allow the use of cosigners in a boat loan. Each lender has their own sets of requirements for cosigners. For boat financing companies that do not accept cosigners, there’s a simple way around this limitation: applicants can instead apply for a personal loan that allows a cosigner and use that loan to pay for the boat.

The pros and cons of financing a boat depend almost entirely on the kind of loan used to buy the watercraft. Here are some general considerations:

The Pros and Cons of Boat Financing

Pros:

  • You’ll have predictable monthly payment amounts (with fixed-rate loans)
  • You’ll know exactly how long it will take to pay off the loan
  • So long as you make on-time payments, financing can help build credit
  • The boat can be used as loan collateral

Cons:

  • Variable interest rate loans can blindside your budget
  • Unsecured loans may cost more than those using a boat or home as collateral
  • Subprime boat loans can carry double-digit interest rates
  • Loan payments can tie up cash reserves

Boat loan interest rates — what can I expect?

The interest rate on a boat loan will depend on the type of boat financed and the total amount you’re looking to borrow. But there are three other key factors to keep in mind that are directly in your control.

You creditworthiness. Plain and simple, the better your credit score is, the better your boat loan rate will be. That being said, lenders have no problem extending loans to “subprime” borrowers — even those with credit scores under 550, Coburn says— but they will charge a hefty price for doing so. Borrowers with poor credit can easily face double-digit interest rates ranging from 10-20%, per Coburn — which means your boat loan APR could be higher than the APR on some major credit cards. Furthermore, borrowers with poor credit will also likely face limitations in how much they can borrow and for how long. Repayment terms are typically shorter than those offered to customers with good credit, he says.

Your debt-to-income ratio. Just like a mortgage, a key factor for determining interest charges is the applicant’s debt-to-income (DTI) ratio. Your DTI simply tells the lender how much of your income is being spent on debt payments. To get your DTI, simply add up your total monthly debt payments and divide it by your gross monthly income. A low DTI can help you secure a lower interest rate, while a high DTI may indicate the borrower has maxed out their credit. According to boat lender SeaDream, a DTI above 40% can disqualify loan applicants.

Your down payment. The amount of your down payment will depend largely on the type and age of the boat you’re looking to finance. Some lenders will require a minimum down payment based on the amount you wish to borrow and the type of boat. Essex Credit cites its required down payments by price range as:

  • $10,000 – $150,000, 10 percent down
  • $150,001 – $250,000, 15 percent down
  • $250,001 – $500,000, 20 percent down
  • $500,001+, 25 percent down
  • Boats constructed from 1919 to 1996, 30 percent down

Other factors include the borrower’s assets, the cost of the boat, the boat’s age, current value and the amount of the down payment.

Boat loan terms

Terms for boat loans are generally pegged to the total amount the borrower finances – not on the current value of the watercraft. For example, boat loans by BoatUS that are financed for more than $100,000 have terms available up to 20 years. According to the NMLA, lenders who only offer boat loans may offer longer terms than those offering multiple loan products.

When considering terms, loan applicants need to recognize that the term directly affects the total cost paid for interest on the boat and the amount charged for monthly payments. A longer term can deliver a schedule of lower monthly payments, but you’ll pay more interest on the boat overall. However, a short-term loan may strap the buyer to payments that put their monthly cash reserves on a perilous edge. Boat loan calculators (more on these later) can be instrumental in finding an affordable balance of terms, interest rates and payments.

What type of boat is eligible for a boat loan?

Financing is available for most of today’s range of new and used boats, including:

  • Human-powered craft
  • Sailboats
  • Motorboats
  • Powerboats
  • Cabin cruisers
  • Sailboats
  • Fishing boats
  • Open-bow craft
  • Houseboats
  • Classic wooden boats
  • Yachts
  • Catamarans
  • Canal cruisers
  • Wakeboard and ski boats
  • Runabouts
  • Personal watercraft
  • Cuddy boats
  • Kayaks
  • Trawlers
  • Runabouts
  • Pontoon boats
  • Center-console boats
  • Dinghies

Types of boat loans

Banks, credit unions, and financial service companies are the more-common sources of loans for boat buyers. Many boat loan providers are members of the NMLA. Applicants have a choice of loan types that best-suit their finances and credit. The three major types include

Let’s examine each in order:

Fixed-rate collateral loans

How they work: When consumers take out a fixed-rate collateral boat loan, they can expect to make a predictable monthly payment over the life of the loan, with an unfluctuating interest rate. The collateral used on boat loans typically is the watercraft itself, which can be plucked out of the water by the lender without notice following a missing payment. Borrowers should check their contract to see if there is a grace period for delinquencies. Repo laws vary by state.

The security against the loan is evaluated during the application process. The lender may require a market-value assessment by a professional marine surveyor to determine the value of the security. The larger the boat, the larger the cost for a survey, according to Coburn. “Pricing for marine surveys vary widely for recreational boats and may cost for anywhere from $10 to $25 per foot,” he says. He recommends that consumers choose a qualified surveyor who is an accredited member of the Society of Accredited Marine Surveyors, Inc. (SAMS), an organization of marine surveying professionals that evaluates standards and practices.

Penalties for defaulting: According to Coburn, each lender has its own policy on when a default takes place. “Most lenders we deal with consider foreclosure (boat repossession) more in the sixty days [late] or greater range,” he says.

Who fixed-rate collateral loans are best for: A fixed-rate collateral boat loan is a good option for buyers who don’t have other assets to apply toward the loan. Fixed-rates offer protection from fluctuations in national interest rates. They’re a good choice for consumers who cannot secure a collateral-free loan because of their income, outstanding debt, or low credit score.

Home equity loans

How they work: A home equity loan can provide a borrower a source of cash for buying their boat. The amount you can borrow depends on your current loan-to-value (LTV) ratio and current market value of the home. The LTV represents how much the borrower owes on the mortgage compared to the home’s current market value.

According to Wells Fargo’s lending department, consumers with 621-699 credit scores should expect to pay higher rates on a home equity loan. The amount you borrow and the existing debt on the home, combined, cannot exceed 85 percent of current home value. And your current debt may not exceed 43 percent of your monthly pre-tax earnings.

Pros: The interest rate on a home equity loan is fixed, meaning stable, predictable monthly payments over the term. And the rate will be lower than the interest charged on unsecured personal loans. The lump-sum of the equity loan can be more than the total cost of the boat, which can be a blessing given the insurance and operating costs of maintaining a safe watercraft. Plus, interest paid on a home equity loan may be tax deductible.

Cons: On the negative side, home equity loans come with initial fees and closing costs. In a worst-case scenario, a borrower uses up home equity and, if they default on their loan, they lose their house.

Personal loans

Unsecured or secured personal or “signature” loans can let boat buyers pay for their boat if they can afford the higher interest associated with these loan products. The good thing about personal loans, is that lenders don’t care how you spend the money.

With a secured personal loan, the borrower puts up the boat as collateral. They usually offer higher loan limits than unsecured signature loans. Current rates on a personal loan are as low as 3.24% APR.

Based on the applicant’s creditworthiness, unsecured personal loans are usually extended with fixed rates.

Variable rate vs. balloon payment loans

In addition to fixed-rate boat loans, consumers can also choose variable-rate or balloon-payment loans. A variable-rate lender may extend a low introductory rate on their loan product that adjusts following the initial rate period. These loans reset according to interest rate indexes, so borrowers need to ensure that they can afford monthly payments after the attractive introductory rate expires.

With a balloon payment loan, borrowers agree to pay off the balance on a specified date. The NMMA advises that balloon-payment loans may be best suited for borrowers that intend to own the boat a short while and sell it off prior to the due date of the balloon payment.

PART II: Shopping for Your Boat Loan

Credit score and credit history are the key variables lenders examine when it comes to approving an affordable boat loan. Don’t sail into the application process blindly. Is your credit good enough to land a favorable interest rate and term? Should you improve your credit score prior to searching for financing?

Know your credit score

Credit scores directly impact loan approvals and rates in a similar way that they affect home mortgages and car loans. Good credit scores are considered optimal for securing a boat loan at a favorable rate. You can check your credit score for free using the Discover Scorecard.

The credit-reporting firm Experian defines an “excellent credit score” as 750 or higher. Boat lender Lightstream offers loans to excellent credit applicants with rates from 3.24 percent to 10.69 percent.

Bad credit will severely impact the interest rates on a boat loan, although there are mid-tier credit and subprime loans available. Applicants with credit scores in the 500-550 range can anticipate rates from 10 to 20 percent, according Coburn.

Know how much boat can you afford

The National Marine Manufacturers Association (NMMA), an organization that represents more than 80 percent of today’s boat and marine engine makers, recommends that new owners consider more than the asking price of the watercraft. Consider costs for insurance, equipment upgrades, maintenance, and storage as well.

A good way to begin assessing the affordability is to use the free NMMA Boat Loan Calculator or LendingTree’s free Boat Loan Calculator [Disclaimer: MagnifyMoney is a subsidiary of LendingTree]. Enter the loan amount (sans the down payment), the interest rate and the length of the term. The calculator will crunch the numbers and estimate the monthly payment on the loan. Compare the monthly payment to your income and financial cushion.

One way to constrain the monthly payments is to alter the term or the down payment. A longer term may make monthly payments more affordable, but the total price of the loan will increase accordingly. The size of the down payment can also reduce the monthly payments. Consider the size of a down payment you can make without toppling your finances.

How to get pre-approved for your boat loan

Getting a pre-approval for a boat loan is a solid way of determining the ceiling of your budget. The pre-approval (or pre-qualification) process for a boat loan is similar to other types of loans. The lender does not have to look at the prospective boat contract. The underwriter calculates the amount the applicant can spend based on the loan amount and allows consumers to go boat shopping knowing their limits.

Once the lender grants a pre-approval, the shopper has more leverage with the dealer, who knows the buyer can afford the boat and is ready to buy if it meets their requirements. A pre-approval can provide a hedge against unfair seller mark-ups or long delays in waiting for the loan to go through.

Pre-approvals are acceptable during a specific time frame, typically up to 60 days.

New vs. used boat loans

There’s an age-old argument over whether buying a new or used boat makes more sense. Financing options are much the same for each. Banks, credit unions and dealers can help buyers into fixed-rate collateral, home equity and personal loans to pay for the watercraft. Buying a used boat may be a good option for first-time owners who want to decide on the kind of watercraft they’re after and whether they will use it enough to justify the expense. The NMMA cites the benefits of buying new vs used, which we’ve summarized below:

New boats

In purchasing a new boat, there’s no reason to consider depreciation, wear and tear, and why the boat was put up for sale in the first place. New boats often come with warranties to cover repairs at local dealers. And owners can outfit their new watercraft with exactly the features they need.

Used boats

A marine survey can detect any or all items of concern with a used boat on the market. Buying a boat that’s five years old can stave off much of the depreciation. The NMMA reports that in buying a used boat, the new owner avoids the “25 to 33 percent depreciation” that occurs in the initial five years.

Where to shop for your loan

Boat loans are made by banks and credit unions, boat dealerships and financial service companies and consumers may benefit by comparison shopping among lenders. Each type of lender source comes with a unique set of considerations.

Banks and credit unions

Banks and credit unions may offer the widest selection of options for boat loans, from personal loans and home-equity products to collateral loans. They may also be more lenient on credit scores than other lenders. On the negative side, many of the largest banks in the country do not offer boat loans. The formal application procedure of traditional lenders can take longer than it does for online institutions. It’s wise to compare interest rates as well when it comes to bricks-and-mortar institutions vs. online lenders.

Boat dealerships

One plus of working with a dealership is that it may be able to offer discounts or rebate programs provided by manufacturers. The NMLA claims that specialized marine lenders can approve a loan in as little as “a few hours”.

Dealer-lenders may also allow financing that includes funds for electronics, navigation gear and extended warranties. On the downside, consumers may be restricted to the type of loan product offered by the dealer, rather than the wider options offered by banks or other lenders.

Like car buyers, boat customers should try to negotiate prices from dealers based on their own price research. “[Negotiating with dealerships] is occurring more and more in recent years,” Coburn says.

Financial service companies

Whereas banks and credit unions are savings and loan institutions, financial service companies just offer loans. NMLA membership is made of banks and credit unions, but also of major financial service companies offering financing on new and used boats. The NMLA claims its members provide applicants with faster credit decisions, longer financing terms and specialized help in securing used boat loans. A potential downside of some financial service companies lies in the variation of loan rates and terms based on location. They are licensed by the states in which they do business. However, financial service companies are regulated by The Consumer Financial Protection Bureau (CFPB).

What to expect on a boat loan application

Lenders establish their own guidelines for underwriting a boat loan. Depending on the type of loan, the lender and the total loan amount, applications may be made in person, online or over the telephone. Borrowers must give verbal (for telephone applications) or written authorization for the lender to pull a credit report. Be prepared to offer thorough information about the borrower, any cosigners and details about the boat. A customary application includes:

Borrower

  • Borrower’s name and address (owner or renter)
  • Driver’s license
  • Employment status and proof of income (may require immediate past two years of tax returns)
  • Financial assets and liabilities (cash on-hand, investments, outstanding debt and other loans)

Cosigner (for personal loans or with boat dealers accepting co-signers)

  • Name and address
  • Monthly house payment
  • Driver’s license
  • Employment status and proof of income

Boat information

  • Manufacturer, model and year
  • Length and hull number
  • Engine make/horsepower (if applicable)
  • Optional equipment
  • Intended use (pleasure, residence or charter)
  • Years of boat experience and/or previous ownership
  • Total cost to finance (price, sales tax, title and registration)

Part III: Understanding Your Boat Loan Contract

The Boat Owners Association of The United States (BoatUS), representing half a million members, recommends borrowers scrutinize potential sales contracts carefully since they are legally binding. A contract may only consist of written terms and agreements on a sheet of paper (for private sales) or a lengthy legal document prepared by attorneys representing a dealership. Here are key items commonly included in the sales agreement:

Boat description

Manufacturer’s Statement of Origin or a listing of the boat and engine, hull-identification number (HIN), complete listing of all equipment. It should also provide a seller’s statement that the boat has no existing liens and encumbrances.

Price

Listing of the purchase price including any down payments and/or trade-in credit.

Contingencies

For buyers without pre-approval on a loan, the contract should spell out contingencies that can include the buyer’s ability to secure financing and insurance. Other contingencies affecting the sale may call for satisfactory findings through a formal marine survey.

Watercraft condition on delivery

The seller should itemize all the features of the boat upon delivery. For a used boat, the seller should itemize add-on equipment/gear and remedies for any shortcomings that are discovered during the marine survey. Who is responsible for amending the condition: seller or buyer?

Delivery

The contract should set a delivery date and location upon completion of the sale.

Warranties or service plans

BoatUS recommends that the contract stipulate warranties on new boats or service contracts for used watercraft. Buyers should be meticulous in examining the details on the boat condition if there is no warranty and it is sold “as-is”.

Watch out for boat loan scams

Charles Fort, director of the BoatUS Consumer Protection Bureau, the nation’s largest organization representing recreational boaters, identifies red flags that indicate the seller may be engaged in a scam. Many scams, he says, are represented by bold-face lies and delivered via email.

Common red flags include:

  • Abysmal use of grammar and poor spelling
  • Vague language that doesn’t identify the boat for sale (current location and HIN number)
  • Absence of other forms of contacting the seller (especially no personal or business address)
  • Offer to sell the boat located abroad or nationally without offering an inspection
  • Request for payment via Western Union, PayPal, or MoneyGram
  • Request for a long-distance purchase secured by payments via a fictitious escrow service

Potential buyers sniffing out a scam should walk away from the seller immediately and file a complaint with the FTC’s Bureau of Consumer Protection.

Boat Financing FAQs

Daylong or vacation boat rentals are easy. Long-term boat leasing is offered by dealerships, boat charter clubs and through shared-leasing businesses. But leasing a watercraft over the long term can be costly since consumers rarely enjoy rate reductions based on boat depreciation.

Depending on the lender, using a cosigner can be advantageous if the buyer has less than good credit. Read about cosigner’s obligations at the Federal Trade Commission.

Live-aboard boats are financed through boat loans. If the craft is stationary and is not self-propelled, it can be considered a houseboat, requiring its own form of marine loan. Learn more about houseboat financing.

Dealers and lenders can include the cost of maintenance, liability insurance, electronics and specialized gear in the total loan amount.

Lenders base loan amounts on variables including income, credit and type of craft. Essex Credit, for example, has a $10,000 loan minimum on pleasure boats and $25,000 minimum on a live-aboard craft. Essex maximums are $5 million. At LendingTree, loan amounts range from $1,000 to no upper limit.

One score does not fit all. Better rates, lower down payments and affordable loans typically go to applicants with at least a 690 FICO score. A high credit score is not a requirement for all lenders. According to Coburn, people with scores from 500-550 can receive subprime loans strapped to a 12-19-percent interest rate.

Comparing rates and terms from multiple lenders is one way to find an affordable boat loan. The age of the boat also affects the cost of the loan. For instance, Essex publishes online rates for boats manufactured from 2007 to current models. For financing boats older than 2007, buyers need to contact the lender. Applicants can negotiate for the best cost for a loan by considering shorter terms that typically come with lower rates. At LendingTree, buyers can receive free competitive bids for new and used boats, or for refinancing.

Gabby Hyman
Gabby Hyman |

Gabby Hyman is a writer at MagnifyMoney. You can email Gabby here

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Earnest: Personal & Student Loans for Responsible Individuals with Limited Credit History

The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

Earnest - Personal & Student Loans for Responsible Individuals with Limited Credit History

Updated August 21, 2017

Earnest is anything but a traditional lender for unsecured personal loans and student loans. They offer merit-based loans instead of credit-based loans, which is good news for anyone just starting to establish credit. Their goal is to lend to borrowers who show signs of being financially responsible. Earnest is working to redefine credit-worthiness by taking into account much more than just your score.

They have a thorough application process, but it’s for good reason – they consider different variables and data points (such as employment history, education, and overall financial situation) that traditional lenders don’t.

Earnest*, unlike traditional lenders, says their underwriting team looks to the future to predict what your finances will look like, based upon the previously mentioned variables. They don’t place as much emphasis on your past, which is why a minimal credit history is okay.

Additionally, as their underwriting process is so thorough, Earnest doesn’t take on as much risk as traditional lenders do. With their focus on the financial responsibility level of the borrower, they have less defaults and fraud, which allows them to offer some of the lowest APRs on unsecured personal loans.

Personal Loan (Scroll Down for Student Loan Refinance)

Earnest offers up to $50,000 for as long as three years, and their APR starts at a fixed-rate of 5.25% and goes up to 12.99%. They claim that’s lower than any other lender of their type out there, and if you receive a better quote elsewhere; they encourage you to contact them.

Typical loan structure

How does this look on paper? If you needed to borrow $20,000, your estimated monthly payment would be $599-$638 on a three- year loan, $873-$911 on a two- year loan, and $1,705-$1,744 on a one-year loan. According to their website, the best available APR is on a one-year loan.

Not available everywhere

Earnest is available in the following 36 states (they are increasing the number of states regularly, and we keep this updated): Arkansas, Arizona, California, Colorado, Connecticut, Florida, Georgia, Hawaii, Illinois, Indiana, Kansas, Maine, Maryland, Massachusetts, Michigan, Minnesota, Missouri, Nebraska, New Hampshire, New Jersey, New Mexico, New York, North Carolina, Ohio, Oklahoma, Oregon, Pennsylvania, Tennessee, Texas, Utah, Virginia, Washington, Washington D.C., West Virginia, Wisconsin and Wyoming.

Get on LinkedIn

Earnest no longer requires that you have a LinkedIn profile. However, if you do have a LinkedIn profile, the application process becomes a lot faster. When you fill out the application, your education and employment history will automatically be filled in from your LinkedIn profile.

What Earnest Looks for in a Borrower

Earnest AppEarnest wants to lend to those who know how to manage and control their finances. They want borrowers to know the importance of saving, living below their means, using credit wisely, making timely payments, and avoiding fees.

They look at salary, savings, debt to income ratio, and cash flow. They want borrowers with low credit utilization – not those maxing out their credit cards and experiencing difficulty in paying.

Borrowers must be over 18 years old and have a solid education background. Ideally, they attended college or graduate school, have a degree, and have a history of consistent employment, or at least a job offer that gives them the opportunity to grow.

Overall, Earnest wants to make sure borrowers are taking their future as seriously as they are. After all, they’re investing in it! The team at Earnest knows that money often holds people back when it comes to being able to achieve their dreams and goals, and they’re all about helping borrowers get there.

For that reason, Earnest seeks to learn more about those that apply for loans with them. They review every line of your application, and they want to develop a lifelong relationship with their borrowers. They genuinely want to help and see their borrowers succeed.

The Fine Print – Are There Any Fees?

Earnest actually doesn’t charge any fees. There are no late fees, no origination fees, and no hidden fees.

There’s also no penalty for prepaying loans with Earnest – they encourage borrowers to prepay to reduce the amount of interest they’ll pay over the life of the loan.

Earnest states that one of its values is transparency (and of course, here at MagnifyMoney, that’s one of ours as well!), and they are willing to work with borrowers who are struggling to make payments.

Hala Baig, a member of Earnest’s Client Happiness team, says, “We would work with the client to make accommodations that are appropriate to help them through their situation.”

She also notes that if borrowers are late on payments, they do report the status of loans on a monthly basis.

What You Can Do With the Money

The $30,000 loan limit is enough to pay off debt such as an undergraduate student loan, medical debt, or consumer debt, relocate for a job, improve your home or rental property, help you fund a down payment, or further invest in your education.

Earnest’s APR is much, much better than you’ll receive on many credit cards, and it could be a viable way to decrease the burden of debt you’re currently experiencing.

The Personal Loan Application Process

Earnest does a hard inquiry upon completion of the application. They’re very open about this on their website, stating that hard inquiries remain on credit reports for two years, and may slightly lower your credit score for a short period of time.

Compared to Upstart, their application process is more involved, but that’s to the benefit of the borrower. They aim to underwrite files and make a decision within 7 business days – it’s not instantaneous.

However, once you accept a loan from Earnest and input your bank information, they’ll transfer the money the next day via ACH, so the money will be in your account within 3 days.

Student Loan Refinance

When refinancing with Earnest, you can refinance both private and federal student loans.

The minimum amount to refinance is $5,000 – there’s no specific cap on the maximum you can refinance.

We encourage you to shop around. Earnest is one of the best options, but there are others. You can see the best options to refinance your student loans here.

Earnest offers loans up to 20 years. Unlike other lenders,Earnest allows borrowers to create their own term based on the minimum monthly payment you’re comfortable making. Yes, you can actually choose your monthly payment, which means the loan can be customized to your needs. Loan terms start at 5 months, and you can change that term later if needed.

You can also switch between variable and fixed rates freely – there’s no charge. (Note that variable rates are not offered in IL, MI, MN, OR, and TN. Earnest isn’t in all 50 states yet, either.)

Earnest Fixed APRs range from 3.35% to 6.39%, and variable APRs range from 2.57% to 6.19% (this is with a .25% autopay discount).

If you refinance $25,000 on a 10 year term with an APR of 5.75%, your monthly payment will be $274.42.

The Pros and Cons of Earnest’s Student Loan Refinance Program

Similar to SoFi, Earnest offers unemployment protection should you lose your job. That means you can defer payments for three months at a time, up to a total of twelve months over the life of your loan. Interest still accrues, though.

The flexibility offered from being able to switch between fixed and variable rates is a great benefit to have should you experience a change in your financial situation.

As you can see from above, variable rates are much lower than fixed rates. Of course, the only problem is those rates change over time, and they can grow to become unmanageable if you take a while to pay off your loan.

Having the option to switch makes your student loan payments easier to manage. If you can afford to pay off your loans quickly, you’ll benefit from the low variable rate. If you have to take it slow and need stability because you lost a source of income, you can switch to a fixed rate. Note that switching can only take place once every 6 months.

Earnest also lets borrowers skip one payment every 12 months (after making on-time payments for 6 months). Just note this does raise your monthly payment to adjust for the skipped payment.

Beyond that,Earnest encourages borrowers to contact a representative if they’re experiencing financial hardship.Earnest is committed to working with borrowers to make their loans as manageable as possible, even if that means temporary forbearance or restructuring the loan.

Lastly, if you need to lower your monthly payment, you can apply to refinance again. This entails Earnest taking another look at your terms and seeing if it can give you a better quote.

Who Qualifies to Refinance Student Loans With Earnest?

Earnest doesn’t have a laundry list of eligibility requirements. Simply put, it’s looking to lend to financially responsible people that have a reasonable ability to pay their loans back.

Earnest describes its ideal candidate as someone who:

  • Is employed, or at least has a job offer
  • Is at least 18 years old
  • Has a positive bank balance consistently
  • Has enough in savings to cover a month or more of regular expenses
  • Lives in AR, AZ, CA, CO, CT, FL, GA, HI, IL, IN, KS, MA, MD, MI, MN, NC, NE, NH, NJ, NY, OH, OR, PA, TN, TX, UT, VA, WA, Washington D.C., and WI
  • Has a history of making timely payments on loans
  • Has an income that can support their debt and routine living expenses
  • Has graduated from a Title IV accredited school

If you think you need a little help to qualify, Earnest does accept co-signers – you just have to contact a representative via email first.

Application Process and Documents Needed to Refinance

Earnest has a straightforward application process. You can start by receiving the rates you’re eligible for in just 2 minutes. This won’t affect your credit, either. However, this initial soft pull is used to estimate your rates – if you choose to move forward with the terms offered to you, you’ll be subject to a hard credit inquiry, and your rates may change.

Filling out the entire application takes about 15 minutes. You’ll be asked to provide personal information, education history, employment history, and financial history. Earnest takes all of this into account when making the decision to lend to you.

The Fine Print for Student Loan Refinance

There aren’t any hidden fees – no origination, prepayment, or hidden fees exist. Earnest makes it clear its profits come from interest.

There are also no late fees, but if you get behind in payments, the status of your loan will be reported to the credit bureaus.

Who Benefits the Most from Earnest

Those in their 20s and 30s who have a good grip on their finances and are just getting started with their careers will make great borrowers. If you’re dedicated to experiencing financial success once you earn enough money to actually achieve it, you should look into a loan with Earnest.

If you have a history of late payments, being disorganized with your money, or letting things slip through the cracks, then you’re going to have a more difficult time getting a loan.

Amazing credit score not required

You don’t necessarily need to have the most amazing credit score, but your track record with money thus far will speak volumes about how you’re going to handle the money loaned from Earnest. That’s what they will be the most concerned about.

What makes you looks responsible?

Baig gives a better picture, stating, “We are focused on offering better loan alternatives to financially responsible people. We believe the vast majority of people are financially responsible and that reviewing applications based strictly on credit history never shows the full picture. One example would be saving money in a 401k or IRA. That would not appear on your credit history, but is a great signal to us that someone is financially responsible.”

Conclusion

Overall, it’s very clear that Earnest wants to help their borrowers as much as possible. Throughout their website, they take time to explain everything involved with the loan process. Their priority is educating their borrowers.

While Earnest does have a nice starting APR at 3.20%, remember to take advantage of the other lenders out there and shop around. You are never obligated to take a loan once you receive a quote, and it’s important to do your due diligence and make sure you’re getting the best rates out there. If you do find better rates, be sure to notify Earnest. Otherwise, compare rates with as many lenders as possible.

Shopping around within the span of 45 days isn’t going to make a huge dent in your credit; the bureaus understand you’re doing what you need to do to secure the best loan possible. Just make sure you’re not applying to different lenders once a month, and your credit will be okay.

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Erin Millard
Erin Millard |

Erin Millard is a writer at MagnifyMoney. You can email Erin at erinm@magnifymoney.com

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SoFi Review: Personal & Student Loans with Low Rates and No Fee

The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

SoFi Review: Personal & Student Loans

Updated August 21, 2017

SoFi is an online loan company that offers student loan refinancing options, mortgages and personal loans. SoFi offers some of the lowest interest rates and the best consumer experience in the market. We have researched thousands of products from hundreds of companies, and SoFi is one of our favorites. However, they have strict credit criteria and target people with good jobs, good income, a proven ability to manage a budget and good credit history. If SoFi* approves you, you will probably have a difficult time finding a lower interest rate anywhere else.

In this post, we will review both Student Loans and Personal Loans. (They have just launched mortgages, and we will be updating this post later with a review of that product). For each, we will discuss:

  • The details of the product: how much can you borrow, and at what price
  • Approval criteria: how does SoFi underwrite, and who are they likely to accept

In addition, at the end we will give you more details of SoFi, including who funded them, how big they are and their reputation.

Student Loan Refinance (Skip Ahead for Personal Loans)

SoFi has just reduced the minimum loan amount. You can now refinance as little as $5,000 of student loan debt. There is no cap on how much you can refinance. Based upon your cash flow, SoFi will try to provide an option to refinance all of your student loan debt.

There is no origination fee and no prepayment penalty. It offers some of the lowest rates out there. Fixed APRs range from 3.35% – 7.125%*, and variable APRs range from 2.815% – 6.740%.* These rates are available so long as you enroll in auto-pay.* Given that interest rates are at an all-time low, you should think carefully before signing up for a variable interest rate. If you can pay off your loan in a short period of time, you could save a lot of money. If it will take you longer, you may not want to take the interest rate risk.

You can refinance on a 5, 10, 15, or 20 year term.

For example, if you borrow $30,000 on a 10 year term at an APR of 4.615%, your monthly payment will be $312.58. Under those terms, you’re paying back a total of $37,509.60 (120 payments). If you borrow the same amount, but have a 6.8% APR, your monthly payment is $345.24, paying back a total of $41,428.80. In this case, SoFi’s low rates have the potential to save you nearly $4,000.

SoFi will refinance both private and federal student loans. However, if you refinance a federal loan you will give up all federal protections and programs, including income-based repayment programs. SoFi is unique among private lenders because it offer unemployment insurance, free of charge. If you lose your job for no fault of your own (you can’t quit), SoFi will suspend your monthly payments until you find a new job. You can do this for up to 12 months. The interest that accrues during this period would be added to the loan.

SoFi also offers an entrepreneur program to help graduates who dream of owning a business.

Under this program, loans can be deferred for six months so borrowers can focus on growing their businesses. SoFi provides access to networking events, mentors, and investors.

Refinancing with SoFi isn’t an option for everyone. First, refinancing is currently unavailable to those residing in Nevada, and variable rate options aren’t available to those in Ohio or Tennessee.

Second, SoFi has a list of available schools and programs it services. If your school or program isn’t on that list, you won’t be eligible to refinance.

Third, SoFi typically requires applicants to have excellent credit. It occasionally accepts co-signers – you must call to review your situation with a representative. However, there’s no co-signer release if you move forward with one on your loan.

To be eligible to refinance your student loans with SoFi, you need to meet the following requirements:

  • You must be a U.S. citizen or permanent resident 18 years or older
  • You need to have a 4-year undergraduate or graduate degree from a Title IV accredited institution
  • You have to be employed or have an offer of employment starting in 90 days from the time you apply
  • You need to be in good standing on your current student loans
  • You should have a good, stable employment history
  • A strong monthly cash flow is a must
  • An excellent FICO score will improve your chances of being approved

The application process is straightforward and SoFi’s pre-approval should take you less than 15 minutes to complete. You likely won’t need most of the documents listed below until you’re ready to move forward with a loan, but they’re good to have on hand while you’re shopping around.

  • Existing student loan information (SoFi will need your account information for the loans you wish to finance)
  • Employment information – salary, offer of employment, length of employment
  • Most recent pay stubs as proof of income and employment (if you’re currently employed)
  • Diploma or transcript in the event SoFi needs to verify your graduation

It’s good to note SoFi accepts screenshots from your PC and pictures taken from a phone, so if you don’t have access to a scanner, there’s no need to worry.

If you’re ready to get started, you can apply for a refinance and check your rate by clicking the button below.

APPLY NOW Secured

on SoFi’s secure website

Details on SoFi’s Personal Loan

At SoFi, you can borrow between $5,000 and $100,000.

There is no origination fee, no prepayment penalty and no balance transfer fee. They are truly unique in this regard.

You can borrow the money for 3, 5 or 7 years.

In addition, SoFi offers unemployment protection. Unlike traditional personal loan companies, they are not looking to make money from unemployment insurance. Instead, they are offering it as a feature and a brand promise. And the insurance is generous. If you lose your job through no fault of your own, you will be given a payment holiday. Interest will continue to accrue on the loan (and be added to the balance), but no payment will be due and your loan will continue to be reported as current to the credit bureau. You can have 3 consecutive months of payments made at a time, and you can have up to 12 months of payments made during the life of the loan. That offers great flexibility. In addition, they offer job placement services to help you find a job.

Fixed interest rates range from 5.49% to 14.24%* – but you have to sign up for auto-pay in order to get these rates. In addition, SoFi offers variable interest rates from 5.19% – 11.34%* with auto-pay. The rates are based upon 1-month LIBOR and are capped at 14.95%.*

You can use the loans for almost any purpose: pay off credit card debt, home improvement, or anything else because the money can be deposited as cash in your checking account.

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on SoFi’s secure website

What Does It Take to Get Approved?

In order to be approved for a loan, you must at least meet the following requirements:

  • You are a US citizen or permanent resident
  • You are at least the age of majority in your state (typically 18)
  • You are currently employed
  • You have graduated from a selection of Title IV accredited universities or graduate programs (only for the student loan product. For personal loans, there is no university requirement).

Personal loans are not available to residents of the following states: Mississippi, Nevada and Tennessee.

If you fail to meet the above criteria, you will be rejected. However, just because you meet these criteria does not mean that you will be approved. SoFi will:

  • Perform an analysis of your ability to repay. They do a “cash flow analysis” looking at your income and expenditure, making sure you can pay
  • Perform an analysis of your history with credit. Missed payments and defaults will most likely get your rejected. You need to have a strong history of repayment. Although they are not a FICO-driven lender (because they look at education, employment and cash flow), the following people will likely have a difficulty getting approved:
    • People who do not have excellent credit. In particular, if you have missed payments or have rapidly built up debt, you could find it difficult to qualify.
    • If you have a “thin credit file”, you will still have a good chance of getting approved. A thin file means that you do not have much information in your credit report. Although that could be a problem with traditional credit scores, SoFi might still be willing to work with you.
    • People with collection items, judgments or other negative legal action

SoFi offers some of the lowest interest rates out there, and they are picky about who they approve. If you have a good degree, a good job and a history of making payments on time, you will likely be able to benefit from SoFi.

And here is the best news: you can check to see if you will be approved, and the interest rate you would receive, without hurting your credit score. SoFi uses what is called a “soft pull” to determine your interest rate and your loan amount.

Given how low the interest rates are at SoFi, if you have a college degree you should take the 3-4 minutes to see if you can be approved. The only cost is your time.

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Remember that you’re in no way obligated to take a loan once you apply.

Unless you accept the loan and go through with the hard credit inquiry, SoFi doesn’t hold you to taking the loans presented to you.

All About SoFi

You can trust SoFi. They are a very well funded start-up, having raised $164 million from some of the biggest and most influential venture capital firms in the Silicon Valley.

They have also built a very strong relationship with investors, and have funded more than $2 billion in loans to date.

SoFi has been created with a mission to revolutionize the way we borrow in this country. In particular:

  • They want to make it easy for people to shop for a loan, believing that you should be able to get your interest rate without hurting your score
  • They want to create an easy, seamless experience with a great user experience
  • They want to cut out the costs of the big banks, giving lower interest rates to borrowers and higher interest rates to lenders
  • They want to create a different type of borrowing experience, by providing unemployment insurance as a free benefit.

Their mission, and their personal loan product, align to the vision of MagnifyMoney. When we created MagnifyMoney, we hoped to find lenders like SoFi, and are pleased to award them an A+ Transparency Score.

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We only have one criticism: their underwriting criteria is very tight right now. Hopefully, over time, they will be able to expand the criteria and be able to provide the great experience to people who may have experienced some financial difficulties in the past.

Nick Clements
Nick Clements |

Nick Clements is a writer at MagnifyMoney. You can email Nick at nick@magnifymoney.com

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Personal Loans

Upstart Loan Review: Low Rates for Recent College Grads

The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

Upstart_lg

Updated August 18, 2017

Upstart is an online lender offering unsecured, fixed-rate personal loans. Although it started as a lender targeting recent graduates, it has become a lender that offers loans to a wide range of credit profiles.

The founders of Upstart wanted to provide young adults that might not have a lengthy credit history with a way to lessen their debt burdens. To do this, it came up with an algorithm to determine creditworthiness based on education, career, job history, and standardized test scores. But Upstart is not only targeting young people with a limited credit history. If you have an excellent traditional (e.g. FICO) score, you should be able to find a good deal at Upstart as well.

Upstart is one of the few lenders who don’t focus entirely on your FICO score, which means its slightly more lenient when it comes to qualifying.

How Do Upstart’s Rates Match Up?

The APR range is 9.48% – 29.99% (the origination fee of 3.66% – 8% is included in the APR). Upstart is competitive with LendingClub*, (5.99% to 35.89% APR). However, if you have excellent credit, you should consider SoFi instead (read our full SoFi review here). SoFi has very low rates and charges no origination fee.

While the range is large, if you have a decent credit score, you should be able to obtain a loan with an APR less than what you’d normally get with a bank or credit card.

You can see our round-up of the best personal loans here.

Personal Loan Details

Upstart’s minimum loan amount is $1,000, and its maximum loan amount is $50,000.

A 3-year and 5-year term is available.

If you took out a $10,000 loan, and were able to obtain a fairly good interest rate (say, 7.55%), you would end up paying $311.29 monthly.

What Requirements Do You Need?

While Upstart prides itself on taking education, area of study, and job history into consideration, they still require a minimum FICO score of 640. They also look at your debt-to-income ratio, and you need to be in good standing on all of your accounts to qualify. You can’t have any accounts in delinquency or collections.

If you have insufficient credit history, Upstart will take your application into consideration.

There is no minimum income required to qualify, but you do need to have a debt-to-income ratio of less than 50%.

You also need to have a degree from an accredited institution or be graduating within the next 6 months. Otherwise, you must be accepted to a supported bootcamp starting within 3 weeks from when you apply for the loan, and be actively seeking employment upon graduation from the bootcamp.

Having a full time job (or a full time job offer starting in six months), or another source of regular income is recommended.

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The Fine Print: Fees

There are fees associated with Upstart. First, there is a loan origination fee, ranging anywhere from 3.66%-8%, depending on the grade of your loan. This fee is rolled into the APR.

Next, if you fail to make a payment within 10 days of your due date, you can be charged a late fee, which is the greater of 5% of the past due amount or $15. If you don’t make any payments within 30 days of the due date, Upstart will report your loan as delinquent to the credit bureaus.

If you prefer to pay by check, you will incur a $15 check processing fee.

If your check bounces, or you have insufficient funds in your bank account, you’ll incur a $15 fee.

There is no prepayment penalty.

What Documents Are Needed to Apply?

You’ll need the standard color photo ID, proof of employment, and proof of income. If you have regular sources of income from full time or part time jobs, you can upload your most recent paystubs.

If you earn any bonuses or commission, you need an offer letter that lists target bonuses or a commission structure that lists target commission levels.

If you have rental income, you’ll need your lease, which should show your full name, monthly amount, and lease term.

If you have side gigs (such as income from being an Uber or Lyft driver), you’ll need to have earned a consistent income for six months before Upstart can take it into consideration. If you meet that requirement, you just need to upload the proof of six months of consistent income.

If you’re self-employed and a sole proprietorship, you’ll need a copy of last year’s tax return and this year’s invoices. They’ll look at Line 31 of your Schedule C.

If you’re involved in a partnership or LLC, you’ll need last year’s personal tax returns that show your portion of income and this year’s invoices.

You might need to provide bank statements or proof of home ownership (if you own a home), but this will vary on an individual basis. Once you complete the application, Upstart will notify you of what you need.

Additionally, if you graduated within 4 years of your application date, you’ll also need your standardized test scores, which you can take a photo of, or take a screenshot of online, and a copy of your transcript.

Who Benefits the Most from Upstart?

Upstart is a great solution to those in their twenties who are finding it difficult to obtain a reasonable personal loan elsewhere. Their interest rates are competitive with the other peer-to-peer lending companies, plus they’re willing to lend to those who have thin credit histories, whereas many companies are not.

If you’re a young adult who doesn’t have a lengthy credit history, but has a decent credit score, and are looking to pay off debt (credit card, medical, auto, or student loans), or finance a larger purchase (such as a wedding or travel), then Upstart’s personal loan is a good fit.

Lastly, if you fit this profile and need a loan quickly, accepting your loan before 5pm ET means you’ll have the funds in your account the next business day (unless you’re paying off private student loans). The entire process is efficient and done completely online.

Remember: if you don’t accept the loan, you won’t receive a hard inquiry on your credit report, only a soft one. In any case, borrowers typically have a 45-day window to shop around for personal loans. Credit bureaus recognize that you’re attempting to get the best rate possible, and will count all inquiries during this time as one inquiry.

If Upstart doesn’t sound like the right fit for you, then explore other personal loan offers with our customizable table.

Erin Millard
Erin Millard |

Erin Millard is a writer at MagnifyMoney. You can email Erin at erinm@magnifymoney.com

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Personal Loans

Avant Loans: Review These Rates Before You Apply for a Loan

The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

Avant Loans Review

Avant* is a personal loan platform willing to accept borrowers with less than perfect credit scores.

The interest rates are between 9.95% – 35.99% and loans are as small as $2,000 and as high as $35,000.

Avant does not charge a prepayment fee.

Origination fees range from 1.50% – 4.75%, which may be lower than the competition.

They also emphasize speed, and can get the loan to you by the next business day if you have all of your documentation.

What credit do you need?

In general, you will have a much better chance of being approved if your score is above 600, and you can apply for a loan here. Avant is available in all states except: Colorado, Iowa, West Virginia and Vermont.

If you have excellent credit, you may be able to get an interest rate as low as 4.82% with another lender and should definitely shop around.

While Avant* can offer access to competitive rates, you should make sure you compare their rates to other providers. And if you are willing to borrow at 35.99%, you should put together a plan to build your credit score over time so that you can get lower cost options. We can help you get started with our debt guide.

Have you tried these lower rate options?

More and more lenders are willing to work with responsible people who have less than perfect credit.

You may qualify for a low rate credit card to pay off your other bills. If your credit score is above 680, you will mostly likely be able to qualify for a low interest rate credit card. You can check to see if you are approved for a credit card without hurting your score. We have a list of where and how to check for your PRE-APPROVED and PRE-QUALIFIED credit card offers.

There are other personal loan companies with lower rates. We keep a list of companies that offer good personal loan rates to people with less than perfect credit. Unlike a lot of other sites, you won’t get calls from a bunch of loan companies.

You only get in touch with the ones you’re interested in dealing with. And many will tell you your rate without doing a hard pull of your credit report or requiring a phone call.

 See our list of low rate personal loans you might qualify for

You should apply for several you feel comfortable with so you have several rates to compare and you can get lenders fighting for your business.

Are you trying to build your credit score?

Don’t use a loan through Avant (or any loan) just to build your credit score.

Yes, a loan through Avant is reported to the major credit bureaus and paying one on time is a good thing for your credit report.

But there’s a much cheaper way to improve your credit and have a bigger impact.

Get a secured credit card. Even with really bad credit you can get approved – and some have no fees at all.

Using one to build credit is simple – we have a guide here.

You just charge a small amount on the secured card every month, and pay the bill on time and in full each month. After about a year or so of doing that you could see a substantial rise in your score if you make all your other payments on time.

There is no need to get a loan simply to improve your score.

Done all of that?

Avant can be a very good option for borrowers, given its transparency and speed. You can check your rate without hurting your score by clicking on the link “Apply Now” below.

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It’s better than most options you’ll find from payday loan shops because:

It’s a real installment loan. You’re given a real monthly payment, and your payments pay down the loan itself, not just interest, so you have at least a shot at paying it all off if you keep up the payments.

You can check your rate without impacting your credit score. Avant will use a soft pull to provide you with a rate. We applaud this, because it enables consumers to shop for the best loan for their needs without worrying about harming their credit score. Many traditional lenders do not offer this.

Reviews of their customer service are decent. No one likes paying high rates, and Avant is not a place for really low rates. But they do get decent reviews online for their customer service and treating people with decency

But make sure you get a secured credit card as well so you can more quickly build up your credit profile. That will help you graduate to lenders who can offer you much more reasonable rates, or get a lower rate through Avant.

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Brian Karimzad
Brian Karimzad |

Brian Karimzad is a writer at MagnifyMoney. You can email Brian at brian@magnifymoney.com

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Auto Loan, Featured, Personal Loans

5 Things You Should Do Before You Buy a Car

The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

When it comes to buying a car, whether used or new, the real work should happen before you even set foot on the lot. Taking the time to go through a few crucial steps will make your time at the dealership a breeze. To top that, a few pre-checks could save you money, time, and the hassle of dealing with a bad auto purchase in the future.

When you finally get to the dealership, Jack Nerad, executive market analyst at Kelley Blue Book, says it will pay off to come with a price in mind and all of the legwork done. The salesperson is going to ask you questions like what you’re looking for, how soon you’re going to buy, if you’ve looked at other dealerships, and what you do for a living, because they want some sense that they aren’t wasting their time with you.

“Demonstrate to them in your answers that you know about your own finances and that you know largely what you want in terms of a vehicle, and it will go pretty well for you,” says Nerad.

 

Step 1: Set a budget

When you get to the lot you should already know your credit score and how much you can afford for a car. Make sure to set a budget, and stay under your budget if you can. Unless you’re paying cash for your car, you’ll likely finance or lease your vehicle, so you should figure out how much you can afford in a monthly payment. Generally, all your monthly debt payments — credit cards, auto loans, student loans, and mortgage — should not exceed 50% of your monthly income.

Outside of the value of the car, you should budget for the taxes and any other one-time costs such as title fees and dealer fees. It could also be beneficial to create some space in your personal budget for costs such as gas and insurance. You may also want to open an alternate savings account to allocate separate funds to recurring costs such as ongoing maintenance, car insurance, and any future repairs.

“They are going to try to sell you more stuff like the insurance, treatments, etc. Most of that stuff is not worth nearly what they are selling it to you for,” says Nerad. “It could hurt the deal that you’ve worked hard to get. Just say no to most of it or do it aware of the financing.”

Don’t forget to weigh your savings options. Consider putting down a larger down payment if you can. If you won’t need it anymore, selling or trading in your current vehicle can help you come up with extra funds for a down payment. You could also consider a less-expensive vehicle, cut back on the add-ons and features, or improve your credit score, to save on the overall cost of the vehicle.

Step 2: Get pre-approved for financing

Shopping for an auto loan is another tedious process, but you should have already completed the first step in setting your budget.

Your next step will be to shop for the best used-auto loan rates and get pre-approved for the best offer for which you are eligible. What’s better, you won’t need to leave your computer to shop for an auto loan. A growing number of online-only banks, such as LightStream, PenFed, and Capital One, offer competitive interest rates on auto loans. Your best bet is to get pre-approved for financing before you get to the dealership. Coupled with your budget, getting pre-approved will help you have an idea of what your monthly payment will be.

When shopping online for a used-auto loan, the application process will look like that of a brick-and-mortar bank, but more streamlined. You should have the following information at hand:

Your contact information: Name, address, phone number, email address

Vehicle information (if known — required for lenders that do not offer online pre-approval): Make, model, mileage, VIN, dealership information

Your financial information: Employment information, gross income, and expenses

While you’re at the dealership, negotiate the price of the car before telling the salesperson that you are approved for financing. When the salesperson tries to get you to finance the purchase through the dealership’s affiliated lender, you can show them your pre-approved financing offer. There is a good chance they will try to beat your pre-approved offer, which could save you thousands of dollars in interest over the life of the loan. If they can’t beat it, you’ve already found your lowest rate and can continue your vehicle purchase.

Step 3: Choose your vehicle

Research and make a decision regarding what kind of car you want. You can use websites like Kelley Blue Book, Edmunds, and TrueCar to figure out a fair purchase price.

During your search keep in mind all of the specifications that are most important to you. You should think about how you intend to use the vehicle, not just how cool you’ll look in it. If you have a long commute to work, fuel economy may be important to you. If you have small children, having enough space for a car seat could possibly weigh in your options. If you live in the city, you might want to consider how much parking parking space you’ll have access to. Get the picture? A few other considerations:

Do you want a new car or a used vehicle?

Do you want to lease or purchase?

Do you need all-wheel drive?

Do you need a lot of cargo capacity?

How many passengers do you need to carry?

What type of driving do you do: highway, surface streets, off-road?

What safety features are important to you?

Will you drive in ice and snow?

Will you be doing any towing?

Again, think about what you need in addition to what you want.

When it comes to add-ons, remember anything you add — line items such as tire treatments, insurance, etc. — will be factored into the total purchase price and financing. The salesperson at the dealership may try to get you to purchase more than you bargained for, so come in knowing what you want to add on and where your line is drawn in your budget.

Step 4: Pick the right dealership

Next, you should find out who has the car you want within your budget. Back in the day, you would have combed through newspaper advertisements or had to visit several dealerships in person to see the cars you’re interested in. Now, with the internet, you can view multiple cars at several dealerships in your area and set filters to make sure they have what you want, for the price you want.

“More often than not the sales process is going to depend on the dealership and training of the salespeople there. If you come in knowledgeable, then you are going to be in a way better position,” says Katherine Hutt, director of communications at the Better Business Bureau.

After you get a healthy list of the dealerships in your area that have the car you want, you should check out their ratings on the Better Business Bureau website. Search for auto dealers in your area to find out which ones are BBB accredited, then look at the company’s profile to see if and why they have had any complaints filed against them.

Checking the dealerships for any serious complaints regarding their sales tactics or a negative rating will help you decide which ones are worth visiting.

Step 5: Run a background check on the car you want

Consumers for Auto Reliability and Safety (CARS) is a consumer advocacy group for the auto industry best known for leading the nationwide adoption of the lemon law, which entitles consumers to reimbursement or compensation if they are sold a vehicle that fails to perform as it was expected to within a certain amount of time.

Founder Rosemary Shahan encourages consumers to check the vehicle’s background by getting a vehicle history report through resources such as the National Motor Vehicle Title Information System, CARFAX, and AutoCheck.

In the vehicle history report you should check…

Name and description

Check the name and description that pops up to make sure the car you are looking at is the same as the car in the report. This will help you avoid VIN cloning, a type of vehicle fraud that involves using a VIN from another registered car and putting it on a stolen or similar vehicle, as well as other forms of vehicle fraud. Check for the name, color, and even details like the engine type to make sure you have the right car.

Number of owners

The number of owners a vehicle has had should be weighed cautiously in your consideration. You can’t be sure that each owner was a responsible and caring car owner like you, but the chance that the car has had a bad owner rises with the number of owners it has had. However, there is no magic number of owners that will disqualify a used car. Overall, you should place more import on the vehicle’s mechanical condition and how it has been cared for than on the number of owners it’s had.

Routine maintenance

Check to see that the car was regularly serviced. If it was, it will usually last longer and may be more expensive in general. The details about the vehicle’s maintenance may also help you answer any questions you may have about its repairs or servicing. If you know where its other owners took it for servicing, you can call up those locations and ask them if they can clear up anything that concerns you.

Anything suspicious

Be sure to ask about records that don’t quite line up. For example, if you see any records of body work but no reported incident, you should look into why the vehicle got work done. It’s not often that owners want a new side door and coat of paint just to spruce up the vehicle. It’s more likely that there may have been an accident that prompted the body work.

Finally, have the car looked at by an unaffiliated mechanic before buying no matter who you choose to purchase from. You can use a resource like Car Talk to find a mechanic in your area.
When you’ve checked off these steps, pay attention to what the salesperson tells you to make sure you get the best deal.

Brittney Laryea
Brittney Laryea |

Brittney Laryea is a writer at MagnifyMoney. You can email Brittney at brittney@magnifymoney.com

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