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Using a Personal Loan to Pay Off Taxes

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

Disclosure : By clicking “See Offers” you’ll be directed to our parent company, LendingTree. You may or may not be matched with the specific lender you clicked on, but up to five different lenders based on your creditworthiness.

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So you have a big tax bill to pay this April. Maybe you had too little withheld from your paychecks throughout the year or made more money as an independent contractor than you anticipated. Regardless of your circumstances, that outstanding debt can feel overwhelming — especially if you weren’t expecting it. Some borrowers may look into personal loans — generally used to consolidate debt, pay for home repairs or cover other big, planned-for expenses — as a way to pay back the IRS. But before you commit, learn more about whether these loans are the right choice for paying taxes.

Should you take out a personal loan to pay taxes?

The short answer: probably not.

“I can’t think of a time when it would be appropriate to take out a personal loan to pay income taxes,” Adam Funk, a CFP at Savings Coach in Troy, Mich., told MagnifyMoney.

Financial experts agree that, in general, personal loans shouldn’t be the go-to solution for unpaid taxes. One reason? It may cost more to take out a personal loan than to work directly with the IRS via one of their payment, installment or compromise plans. Interest rates for most personal loans range from around 6% to nearly 36% — and you’ll only qualify for the lowest rates if you have excellent credit.

By comparison, interest rates on outstanding taxes are the same for all borrowers and lower than most personal loans. The IRS updates interest rates on a quarterly basis. For underpayments, the rate is equal to the federal short-term rate plus 3 percentage points. As of Jan. 1, 2019, that rate is 6%.

Another benefit of working with the IRS, Funk told MagnifyMoney, is that you have more leverage to negotiate — and even have some or all of your debt forgiven — than you do once you pay off your bill and transfer the balance to a third-party lender.

In addition to interest, unpaid taxes will also incur monthly penalties — even if you have an agreement with the IRS. The IRS does note that paying via debit, credit or third-party loan may be less expensive than accruing these penalties on your outstanding bill, so you may want to explore all your options.

But before you use one of these alternatives, determine how much you’ll owe if you fail to pay off a credit card or loan balance in a timely manner. If your interest rate is high or you can’t tackle the total, you may be better off working directly with the IRS. Of course, simply failing to pay is the most expensive option.

Where to find a personal loan (if you need one)

If you do need to take out a personal loan, check with your bank first. A lender with whom you already have a relationship may be more flexible and open to working with you, especially if you have less-than-stellar credit. A local credit union may also be a good place to start — while you generally have to be a member to access personal loans and other financial products, credit unions often have lower interest rates and less strict qualification requirements for loans than traditional banks.

Online lenders may also have lower rates on personal loans than brick-and-mortar banks. With minimal overhead costs, these lenders are able to pass on savings to customers — though the best rates are reserved for borrowers with better credit.

Regardless of which type of lender you choose, make sure you shop around for the best rate. Start your research with MagnifyMoney’s personal loan marketplace, where you’ll find information about rates, terms, fees and requirements from a variety of lenders. You can also check your rates and offers directly — and see which lenders require a hard pull on your credit upfront.

LendingTree, which owns MagnifyMoney, also has a personal loan tool that may match you with lenders and loan offers. You do have to enter some personal information, including your address, employment status, and estimated income and credit score, before you receive any offers. Keep in mind: There’s no guarantee of offers using this tool.

LendingTree
APR

5.99%
To
35.99%

Credit Req.

Minimum 500 FICO

Minimum Credit Score

Terms

24 to 60

months

Origination Fee

Varies

SEE OFFERS Secured

on LendingTree’s secure website

LendingTree is our parent company

LendingTree is our parent company. LendingTree is unique in that you may be able to compare up to five personal loan offers within minutes. Everything is done online and you may be pre-qualified by lenders without impacting your credit score. LendingTree is not a lender.

Can’t afford your taxes? Consider these 4 alternatives

If you’re faced with a huge tax bill that you can’t afford outright, you do have options, including a number of payment plans and agreements you can negotiate directly with the IRS. Your specific tax situation will determine which alternative you qualify for.

1. Pay what you can, even if you request a filing extension

Tax returns and payments are generally due on April 15 (unless April 15 falls on a weekend or observed holiday). You can request a six-month filing extension directly with the IRS, which will push the deadline for your return to mid-October.

However, this extension does not apply to payments. If you don’t pay your estimated tax bill in April, you’ll owe penalties and interest on your balance. The IRS recommends paying what you can by the deadline to minimize these additional charges — from there, you can make a plan to pay the rest.

2. Apply for an installment agreement

If you can pay off your balance in 120 days or less, you can apply for a short-term payment plan. There’s no additional setup fee, but you will be responsible for any interests and penalties that accrue in addition to your outstanding taxes.

The IRS also offers a long-term payment plan, also called an installment agreement, which allows you to pay over 120 days or more. If you allow automatic withdrawals from your checking account, you’ll pay a fee of $31 for an online application or $107 to apply in person, by mail or over the phone. For other methods of payment (debit, credit, check or money order), the setup fees jump to $149 and $225, respectively. Interest and penalties apply.

3. Request an “Offer in Compromise”

If you can’t pay your taxes in full or via an installment agreement, you can apply for an Offer in Compromise. The IRS will look at your financial situation and may agree to settle your debt for less than what you owe. You may be eligible if your tax debt is inaccurate, you have insufficient assets to cover your bill or paying would cause economic hardship.

4. Request a collections delay

If paying any part of your tax bill would prevent you from meeting your basic needs, you can request that the IRS delay collections of your outstanding debt. You will have to provide information about your financial circumstances. Keep in mind: Delaying collections does not exempt you from your meeting your tax obligation, including interest and penalties. These will still accrue until you pay your full bill, and the IRS may still file a tax lien notice, which lets creditors know about your debt.

What happens if you don’t pay your tax bill

If you don’t pay your tax bill by the filing deadline in April — and don’t take any additional action — you’ll likely get hit with interest on your outstanding balance and a monthly fee for late payments. The late payment penalty is generally 0.5% of your unpaid taxes per month and can add up to 25% of what you owe.

There’s also a penalty for not filing your return. For 2016 tax returns, the minimum penalty for filing 60 days or more after the deadline was the lesser of $205 or 100% of the tax owed. According to the IRS, this penalty can be as much as 5% of your unpaid bill each month, up to a maximum of 25%.

If you don’t file or pay, the IRS will levy a combined penalty of up to 5% per month. There are exceptions to late payment penalties, however: If you’ve requested a filing extension and have paid 90% of your outstanding balance, you’ll only owe interest until your bill is paid off. Similarly, the IRS may waive penalties if taxpayers can show reasonable cause for failing to file or pay on time.

The IRS will send you at least two bills for outstanding taxes. If you don’t pay after your final bill, the agency will begin collections actions. The IRS can apply your unpaid balance to future refunds or seize your property — including everything from wages and retirement savings to your home — to cover your tax debt.

The bottom line: File your tax return and pay your balance by the due date. If you can’t afford to pay in full, at least pay what you can and actively explore options to minimize fees and penalties.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Emily Long
Emily Long |

Emily Long is a writer at MagnifyMoney. You can email Emily here

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Pay Down My Debt

Should I Get A Debt Consolidation Loan with Bad Credit?

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

Disclosure : By clicking “See Offers” you’ll be directed to our parent company, LendingTree. You may or may not be matched with the specific lender you clicked on, but up to five different lenders based on your creditworthiness.

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Debt can feel overwhelming for anyone, but if you have bad credit, tackling it can seem nearly impossible. Keeping track of what you owe, finding the cash to cover your bills and making payments to a half-dozen creditors as you rack up interest each month may be discouraging, but there are options to help you through. Debt consolidation loans is an option when dealing with bad credit but are they the best choice?

Handling debt with bad credit – consider debt consolidation

If you have a bunch of outstanding bills with different minimum payments, penalties, and due dates, debt consolidation is one way to get organized and perhaps even reduce the interest you pay over time.

A debt consolidation loan may allow you to roll all your monthly bills into one payment. Not only does this simplify your finances, but it may qualify you for a lower interest rate than you have on one or more credit cards, which can save you money as you pay down your debt.

The most recent consumer credit data from the Federal Reserve found that the average credit card interest rate in May 2018 was 14.4%, while interest rates on 24-month personal loans averaged 10.31%.

Consolidation loans — unsecured personal loans are the most common type — are a more viable option than balance transfer cards for those with lower credit scores due to being able to qualify.  To qualify for a balance transfer credit card it’s best to have a credit score in the 700’s or higher.

Debt consolidation loans, on the other hand, can still be had with a bad credit score (580 or below). If you are able to secure a debt consolidation loan for bad credit, you’ll probably be dealing with fairly high interest rates. Before committing to a loan make sure you’ve budgeting so you don’t fall behind on your loan payments.

It’s best to compare loans regardless of your credit score to secure one with the best rates. Companies like LendingTree, the parent company to MagnifyMoney, allows those with a minimum of 500 credit score to compare up to five lenders to find the best option even when dealing with bad credit.

Use our widget below to find and compare the best debt consolidation loans for bad credit!



Compare Debt Consolidation Loans for Bad Credit

Is a debt consolidation loan a good idea for people with bad credit?

For borrowers without solid credit histories, a debt consolidation loan can be an option — but one that they should carefully weigh. Jonathan McAlister, a certified financial planner at Legacy Wealth Management in Memphis, Tennessee, said debt consolidation loans can help those with bad credit reduce their interest rates, pay down bills more quickly and keep better track of monthly obligations.

“However, it could have an unintended downside if the debt came from overspending and now the consolidation loan is being used to free up cash flow to continue an overspending habit,” he said.

Here’s a closer look at the pros and cons of getting a consolidation loan when you have poor credit.

Pros:

  • It’s easy to shop around for debt consolidation loans. Many lenders allow you to pre-apply, telling you if you’re likely to get approved for a loan and what interest rates you could get. This lets you quickly zero in on the best lenders to work with.
  • You can combine different debt accounts into a single installment loan. The loan will have a single monthly payment that will be the same each month, making it easier to budget around it.
  • A debt consolidation loan could give you a chance to lower your interest costs. This is especially true if you’re facing expensive debt such as payday loans or credit card balances, as these types of debt typically have higher rates than what lenders charge on debt consolidation loans.
  • You have a clear path to getting out of debt. You can even choose a shorter loan term to get out of debt faster and pay less interest. Consolidating debt and repaying it responsibly can help you build credit. Using this loan to pay off credit card balances could lower credit utilization ratios. Adding an installment loan could also improve your credit mix, which could boost your score.

Cons:

  • Getting approved for a debt consolidation loan can be tricky when you have bad credit. You might have to spend more time looking for a lender that will work with you or even add a cosigner to qualify for a loan.
  • Your new loan’s payments could be higher than previous minimum payments on credit card balances or other debt. If monthly costs are a concern, a longer loan term could be a wise choice — though it will increase what you pay over the life of the loan.
  • With bad credit, you won’t qualify for the lowest debt consolidation loan rates out there. Some lenders will also charge origination fees to set up a loan, which could add to what you pay. Compare all options to make sure you don’t wind up paying more.
  • A shorter term will get you out of debt faster, but you’ll need to pay more each month to make this happen. Check monthly payment estimates to be sure you can afford to do so. Some consumers might see their credit score temporarily dip after taking out a consolidation loan, McAlister said. You’ll also need to stay on top of your bills and always make on-time payments to avoid damaging your credit.

6 alternatives to debt consolidation loans for bad credit

1. Debt management plans

If you’ve already tried to manage your debt yourself with little success, or if you aren’t sure where to start, a debt management plan may be a good option. In a debt management program, you consolidate your payments through a nonprofit credit counseling agency, which in turn negotiates interest rates and fees with your creditors. Your debt stays with the original lenders, and the agency takes your single monthly payment and distributes it.

Pros:

  • You’ll make one payment each month rather than multiple to several creditors, which can simplify your debt.
  • You get help negotiating interest rates and fees down, so your debt is costing you less.
  • Ideally, you’ll pay your principal down more quickly and save on interest over time thanks to negotiated rates.

Cons:

  • Debt management programs aren’t free — expect to pay an enrollment fee between $25 and $35, plus a monthly cost in that same range. If you don’t have the cash flow to make minimum monthly payments on your outstanding bills plus these fees, debt management likely won’t be a good fit.
  • You can’t use debt management to consolidate secured loans such as an auto loan or a savings-secured loan.

2. Home equity loan

A home equity loan is a type of secured loan in which you receive a lump-sum payment in exchange for putting up your home as collateral, which the lender uses to guarantee that it’ll get its money back if you don’t pay. As a result, lenders are often more willing to work with those who have less-than-excellent credit and to offer lower interest rates than you might get on an unsecured loan.

Here’s what you should know about consolidating debt with a home equity loan.

Pros:

  • You can get approved for a home equity loan even with bad credit. The loan is secured by the home, which lowers the lender’s potential risk and can make it likely to accept applicants with poor credit.
  • Home equity loans traditionally offer lower interest rates than unsecured loans. This can make a home equity loan a more effective way to consolidate debt in a way that lowers your costs.
  • Ideally, you’ll pay your principal down more quickly and save on interest over time thanks to negotiated rates.

Cons:

  • If you don’t own a home, a home equity loan won’t be an option — and if you do, you must have enough equity built up to qualify.
  • The lender can foreclose on your home if you default. If you already have poor credit and struggle to make payments on existing credit lines, a loan that puts your home at risk could add to your debt woes.
  • Home equity loans can have more upfront costs than personal loans, such as application fees, appraisal fees, brokers fees, and closing costs.

3. Home equity line of credit

Like a home equity loan, a home equity line of credit (HELOC) is secured by your property. But instead of a fixed-rate loan you pay back over time, a HELOC is a revolving credit line similar to a credit card — you pay interest at variable rates, but only on what you draw. In general, your “draw period” lasts between five and 10 years.

Pros:

  • You can borrow up to the credit limit on your HELOC, giving you more flexibility in how much and when you borrow.
  • A HELOC has similar qualification requirements as a home equity loan — and similar limitations. It might be easier to get a HELOC with bad credit than, say, a personal loan.
  • You’ll face lower closing costs on a HELOC than you would on a home equity loan. Some HELOCs even have discounted introductory rates that you can take advantage of to pay off debt faster.

Cons:

  • HELOCs often have a minimum draw or an amount you must borrow. If you don’t borrow at least that much you could face a fee.
  • Similar to credit cards, HELOCs have variable rates that can rise if market interest rates go up, meaning you could end up with a higher rate later.
  • If you don’t own a home, don’t have much equity built up or have a limited or difficult credit history, lenders are less likely to take that risk. Not paying off your HELOC balance can also put your home at risk of foreclosure.

4. Cash-out refinance

A cash-out refinance is a third way to leverage the equity in your home in which you apply for a new mortgage that exceeds the amount of your existing loan and receive the additional amount in cash.

Pros:

  • Unlike a home equity loan, a cash-out refinance is a first mortgage, so interest rates may be more favorable and poor credit less of a limitation.
  • A cash-out refinance can also be used to lower your current interest rate or improve the terms of your mortgage, such as switching from an adjustable rate to a fixed rate.

Cons:

  • You’ll need to have equity in your home to benefit from a cash-out refinance. You’ll also need to maintain a loan-to-home-value ratio under 85%.
  • As with a home equity loan, a cash-out refinance can bring in several fees and closing costs. This can add to what you owe or offset savings from a lower interest rate.
  • This option will likely lengthen your mortgage, keeping you in debt longer and increasing the interest you pay on your home.

5. Negotiating a debt settlement

Debt settlement sounds similar to debt management, but they are not equal. For-profit debt settlement companies help you negotiate and settle debt in collections using payment plans or a dedicated savings account.

Alternatively, some creditors may be willing to negotiate with you directly. If you have outstanding medical bills with a hospital or a physician’s office, for example, you may be able to reduce or even eliminate your debt. It doesn’t hurt to call your creditors to ask about your options.

Pros:

  • Successful debt negotiation can help you eliminate debt for much less than you owe.
  • If you can settle a debt, doing so can help you get rid of unaffordable debt and avoid bankruptcy.

Cons:

  • Most debt settlement companies will charge you a fee to negotiate debt on your behalf, but can’t guarantee a beneficial outcome. These can vary widely, so compare different services so you don’t end up overpaying.
  • Watch out for debt relief scams: If a company asks for fees upfront, makes any promises or pushes you to sign up for services, avoid it.

6. Bankruptcy

Bankruptcy is a debt relief option that can help you discharge your debt and start with a clean slate.

Under Chapter 7 bankruptcy, also known as liquidation bankruptcy, a trustee will sell off some of your unprotected assets to partially repay your creditors. The court will then discharge your remaining debt.

Pros:

  • Bankruptcy will discharge many of your debts, providing relief if you’ve accrued more debt than you can realistically repay.
  • Filing for bankruptcy will immediately bar lenders and collection agencies from pursuing payment from you.
  • You can keep certain assets through a bankruptcy, including retirement accounts, your home, and other essential personal property.

Cons:

  • Declaring bankruptcy will significantly lower your credit score and make borrowing difficult. A bankruptcy can be listed on your credit reports for up to 10 years. However, the impact lessens over time and the process can help you move on from your debt more quickly.
  • You’ll lose some of your property, which will be resold to satisfy your outstanding debts.
  • Some debt and financial obligations are very difficult to wipe out in bankruptcy, such as student loans or back taxes.

To qualify for Chapter 7 bankruptcy, you must also undergo a means test. If your income exceeds the threshold, you might be eligible for Chapter 13 bankruptcy. In this scenario, you get to keep your assets but will be required to repay your debt over three to five years.

What option should I use?

Debt consolidation loans are a good option but aren’t the be-all and end-all for those with bad credit. Before you commit to anything, determine what you’re eligible for, weigh all your options and calculate how much each will cost over time. And don’t be afraid to ask for assistance.

“Consumers should always approach debt with a plan to pay it off,” McAlister said. “Seek professional help from a financial planner if you feel in over your head.”

This article contains links to LendingTree, which owns MagnifyMoney.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Emily Long
Emily Long |

Emily Long is a writer at MagnifyMoney. You can email Emily here

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Prosper Personal Loan Review

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

Disclosure : By clicking “See Offers” you’ll be directed to our parent company, LendingTree. You may or may not be matched with the specific lender you clicked on, but up to five different lenders based on your creditworthiness.

APR

6.95%
To
35.99%

Credit Req.

640

Minimum Credit Score

Terms

36 or 60

months

Origination Fee

2.41% - 5.00%

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Prosper is a peer-to-peer lending platform that offers a quick and convenient way to get personal loans with fixed and low interest rates. ... Read More


For example, a three-year $10,000 loan with a Prosper Rating of AA would have an interest rate of 5.31% and a 2.41% origination fee for an annual percentage rate (APR) of 6.95% APR. You would receive $9,759 and make 36 scheduled monthly payments of $301.10. A five-year $10,000 loan with a Prosper Rating of A would have an interest rate of 8.39% and a 5.00% origination fee with a 10.59% APR. You would receive $9,500 and make 60 scheduled monthly payments of $204.64. Origination fees vary between 2.41%-5%. APRs through Prosper range from 6.95% (AA) to 35.99% (HR) for first-time borrowers, with the lowest rates for the most creditworthy borrowers. Eligibility for loans up to $40,000 depends on the information provided by the applicant in the application form. Eligibility is not guaranteed, and requires that a sufficient number of investors commit funds to your account and that you meet credit and other conditions. Refer to Borrower Registration Agreement for details and all terms and conditions. All loans made by WebBank, member FDIC.

Prosper personal loan details
 

Fees and penalties

  • Terms: Loan terms are set at 36 or 60 months.
  • APR range: Rates range from 6.95% to 35.99%.
  • Loan amounts:Prosper will loan a minimum of $2,000 and a maximum of $40,000.
  • Time to funding: On average, borrowers will see funds deposited in their bank accounts within five days. However, investors have up to 14 days to fund loans.
  • Hard pull/soft pull: Prosper does a Soft Pull on your credit when you check your rates.
  • Origination fee: Origination fees range from 2.41% - 5.00% and will be deducted from the final loan amount.
  • Prepayment fee: Prosper has no prepayment penalties for paying your loan off early.
  • Late payment fee:You will be assessed a late fee of $15 or 5% of your unpaid monthly amount — whichever is greater — if you have not paid in full within 15 days of your due date.
  • Other fees:Prosper charges a check processing fee — the lesser of $5 or 5% of your monthly payment — as well as an insufficient funds fee of $15 for each returned or failed payment.

Eligibility requirements

  • Minimum credit score: To qualify, borrowers must have a score of 640 or above.
  • Minimum credit history: Borrowers must have at least three open trades on their credit reports.
  • Maximum debt-to-income ratio: A borrower’s DTI must be below 50%.

In addition, borrowers must:

  • Be 18 years of age
  • Have a bank account and a Social Security number
  • Have fewer than seven inquiries on their credit reports in the previous six months
  • Report an income greater than $0
  • Have not filed for bankruptcy in the last 12 months

Prosper is not available to borrowers in Iowa or West Virginia.

Applying for a personal loan from Prosper

To apply for a Prosper loan, start by filling out their online form to check your rates, which will trigger a Soft Pull on your credit — this does not impact your score. You’ll have to provide some personal information, including your physical address, birthdate, email, annual income, monthly housing cost and employment status.

You can also apply via phone.

Your loan offer is based on your Prosper Rating, a proprietary score assigned to you when you apply. This score indicates the level of risk you pose to lenders and is intended to create consistency in the evaluation and approval process. An AA rating indicates the lowest estimated annual loss (up to 1.99%), while an HR rating represents the highest (15% or more).

If you choose to accept the offer you receive, you can submit documents for verification via email to approval@prosper.com, or upload them within your Prosper account. The latter is recommended. Log in to check the status of your documents, application and the percentage of funding you’ve received. Once you accept an offer and request funding, Prosper will perform a hard inquiry on your credit.

Your loan will be listed for up to 14 days, during which investors commit funds, and Prosper completes the underwriting and verification process. The latter usually takes seven business days or less. If your loan is not funded after 14 days, your listing will be canceled and you’ll need to create a new one.

Once your loan application has been approved and your listing is funded, you can expect to see your money deposited in your bank account within 1-3 business days.

Pros and cons of a Prosper personal loan

Pros:

Cons:

  • Qualify with lower credit. Prosper will consider applicants with scores as low as 640, though the best rates are offered to those with excellent credit. Borrowers can receive funds in as little as one business day after loan approval
  • Check rates with a Soft Pull. Your credit won’t be affected when you check your interest rates with Prosper.
  • No prepayment penalties. Prosper offers longer terms of three and five years, but you won’t be penalized if you are able to pay your loan down early.
  • The origination fee. Prosper charges 2.41% - 5.00% to originate your loan, so consider whether this added cost makes sense for you.
  • Potential to go unfunded.Investors have to commit to your loan within 14 days of listing. If this doesn’t happen, you will have to create a new listing, which means more time before you receive your funds.

Who’s the best fit for a Prosper personal loan

If you have average credit, Prosper may be a good fit for you. With a minimum score requirement of Soft Pull, you’ll have slightly more leeway than you would with lenders who have stricter standards. However, you’re more likely to qualify for a better rate with a higher score — Prosper’s APRs go up to 35.99%, which is higher than other lenders with similar credit requirements.

Prosper is also a good option for those who want to reduce their monthly payments and pay down their loans over a longer period of time. Terms are set at 36 or 60 months — and if your financial situation improves and you are able to pay more quickly, there are no penalties to do so.

Checking rates at Prosper doesn’t impact your credit, so there’s no harm in gathering this information and comparing it with other lenders.

Alternative personal loan options

Here are several alternatives to Prosper:

Lending Club

APR

6.95%
To
35.89%

Credit Req.

600

Minimum Credit Score

Terms

36 or 60

months

Origination Fee

1.00% - 6.00%

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on LendingTree’s secure website

LendingClub is a great tool for borrowers that can offer competitive interest rates and approvals for people with credit scores as low as 600.... Read More

Like Prosper, LendingClub is a peer-to-peer lending platform funded by investors. The rates and terms are similar, and they won’t do a hard pull on your credit until after you’ve checked your rates and completed your application. LendingClub is a good alternative if you don’t meet Prosper’s minimum credit score requirement — they will consider borrowers with scores as low as 600. You will pay an origination fee of 1.00% - 6.00%, but there are no prepayment penalties. Expect to wait up to seven days to see your funds deposited.

Upgrade

Upgrade
APR

6.99%
To
35.97%

Credit Req.

620

Minimum Credit Score

Terms

36 or 60

months

Origination Fee

1.00% - 6.00%

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on LendingTree’s secure website

Upgrade is an online lender that offers fairly priced personal loans for a term of either 36 or 60 months.... Read More .

Upgrade is an online lender that offers similar personal loan rates and terms to both Prosper and LendingClub. You can check your rates without impacting your credit — sign up for autopay and get a better rate. Upgrade is a good alternative if you need to borrow more or less than what Prosper offers, as loans are a minimum of $2,000 and a maximum of $40,000 or if you need your money more quickly. Upgrade claims most borrowers can expect to see their funds within four business days of approval.

Marcus by Goldman Sachs®

Marcus by Goldman Sachs®
APR

6.99%
To
24.99%

Credit Req.

Varies

Minimum Credit Score

Terms

36 to 72

months

Origination Fee

No origination fee

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on LendingTree’s secure website

Marcus by Goldman Sachs® offers personal loans for up to $40,000 for debt consolidation and credit consolidation. ... Read More

Consider Marcus by Goldman Sachs if you want a no-fee personal loan. This means No origination fee,no prepayment penalties, and no late fees — even if you miss a payment. Rates are slightly more favorable than those offered at Prosper and terms are 36 to 72 months, which gives you more flexibility to pay over time. However, you are more likely to be approved for a Marcus by Goldman Sachs loan and get the best rates with a credit score of 660 or above, so this alternative is best for those with higher credit.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Emily Long
Emily Long |

Emily Long is a writer at MagnifyMoney. You can email Emily here

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Personal Loans

Santander Personal Loan Review

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

Disclosure : By clicking “See Offers” you’ll be directed to our parent company, LendingTree. You may or may not be matched with the specific lender you clicked on, but up to five different lenders based on your creditworthiness.

APR

6.99%
To
16.99%

Credit Req.

680

Minimum Credit Score

Terms

24 to 60

months

Origination Fee

No origination fee

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on Santander Bank, N.A’s secure website

Santander’s personal loan might be a great option for you if you want to work with a traditional brick-and-mortar bank. ... Read More

Santander Personal Loan Details
 

Fees and penalties

  • Terms: Terms range from 24 to 60 months.
  • APR Range: Loan APRs range from 6.99% to 16.99%. If you do not elect ePay, your APR will increase by 0.25%.
  • Loan amounts: You can borrow a minimum of $5,000 and a maximum of $35,000.

  • Origination fee: There is No origination fee for Santander personal loans.
  • Prepayment fee: Santander has no prepayment penalties for personal loans.
  • Other fees: There are no application or annual fees.

Eligibility requirements

Although Santander doesn’t provide explicit credit requirements to qualify for its personal loans, it does state that borrowers must meet their “highest credit standards” — however, there is no specific credit score requirement listed. At many traditional financial institutions, you need a credit score of 680 or above to be considered for a loan and a 740 or higher to get the best loan rates.

When you apply, Santander will review your score and your debt-to-income ratio, among other factors, and your APR will vary according to your credit worthiness. You do not have to have a Santander checking account to be eligible for a personal loan, but without one you won’t qualify for the APR discount.

Santander also requires that you live in one of the following states: Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Pennsylvania, Rhode Island, Vermont, and Washington, D.C.

Applying for a personal loan from Santander

You can apply for a Santander personal loan at your local Santander bank branch or online. If you choose the latter, expect the process to take 10 to 15 minutes. You’ll need the following information to complete your application:

  • Social security number
  • Employment history
  • Income information

Santander does allow co-applicants on personal loans — you’ll be asked to provide that person’s information as well.

Pros and cons of a Santander personal loan

Pros:

Cons:

  • Low rates. Santander has lower starting rates than many lenders, although those rates are reserved for borrowers with the highest credit scores.
  • Minimal fees. There are no origination, application, or annual fees for personal loans. In addition, Santander doesn’t penalize you for paying off your loan early.
  • Term options. With terms ranging from two to five years, you have the option to pay your loan off quickly or over a longer period.
  • Limited to borrowers in certain states. Santander only serves personal loan customers in states that have — or are near — brick-and-mortar branches. If you live outside of the Northeast or Mid-Atlantic, you likely won’t qualify.

Who’s the best fit for a Santander personal loan

If you are looking for a lender you can meet with face-to-face, Santander is one to consider. Thanks to the residency requirement to apply for a personal loan, you won’t be far from a bank branch if you’re actually eligible for their services.

Santander’s loan terms (24 to 60 months) give borrowers a lot of flexibility to pay off their loans quickly or reduce their monthly payments by extending the term out longer. Many personal loans have terms of 36 or 60 months, so if you’re looking to minimize the time you carry this debt, Santander might be a good option for you.

Santander has reasonable rates compared to other lenders — their highest APR is set at 16.99% with the ePay discount — though you will need a good credit history to qualify. These loans are also good for those who want to avoid fees, as Santander doesn’t charge origination, application, or annual fees or assess prepayment penalties. Assuming you make your payments on time, you are unlikely to owe anything extra.

Alternative personal loan options

Here are several alternatives to Santander personal loans:

Upgrade

Upgrade
APR

6.99%
To
35.97%

Credit Req.

620

Minimum Credit Score

Terms

36 or 60

months

Origination Fee

1.00% - 6.00%

SEE OFFERS Secured

on LendingTree’s secure website

Upgrade is an online lender that offers fairly priced personal loans for a term of either 36 or 60 months.... Read More .

If you need your loan quickly, want to check rates without impacting your credit, or need to borrow less than Santander’s minimum loan amount, online lender Upgrade is a good option. Fill out an online form to apply for personal loans between $1,000 to $50,000 — you’ll receive a decision almost immediately and your money within four business days of approval. Loan APRs range from 6.99% to 35.97%, higher than many other lenders, and terms are set at 36 or 60 months. To be eligible for the best rates, you’ll need to sign up for autopay. Upgrade does charge an origination fee of 1.00% - 6.00% and may assess other charges and fees over the life of your loan.

Marcus by Goldman Sachs®

Marcus by Goldman Sachs®
APR

6.99%
To
24.99%

Credit Req.

Varies

Minimum Credit Score

Terms

36 to 72

months

Origination Fee

No origination fee

SEE OFFERS Secured

on LendingTree’s secure website

Marcus by Goldman Sachs® offers personal loans for up to $40,000 for debt consolidation and credit consolidation. ... Read More

The Marcus by Goldman Sachs loan is a no-fee personal loan — that means all you’ll pay is your loan principal and interest, even if you pay late or miss a payment. Rates range from 6.99% to 24.99% APR and terms from 36 to 72 months, and you can borrow up to $40,000. If your credit is lower or you choose a longer term, you will generally pay a higher rate. While there is no explicit minimum credit score, you’re more likely to qualify with a score above 660. If working with a traditional bank appeals to you, this may be a good alternative to Santander. Marcus does not currently allow applicants from Maryland

SoFi

SoFi
APR

6.99%
To
14.99%

Credit Req.

680

Minimum Credit Score

Terms

36 to 84

months

Origination Fee

No origination fee

SEE OFFERS Secured

on LendingTree’s secure website

Advertiser Disclosure

SoFi offers some of the best rates and terms on the market. ... Read More


Fixed rates from 6.99% APR to 14.99% APR (with AutoPay). Variable rates from 6.26% APR to 14.10% APR (with AutoPay). SoFi rate ranges are current as of November 30, 2018 and are subject to change without notice. Not all rates and amounts available in all states. See Personal Loan eligibility details. Not all applicants qualify for the lowest rate. If approved for a loan, to qualify for the lowest rate, you must have a responsible financial history and meet other conditions. Your actual rate will be within the range of rates listed above and will depend on a variety of factors, including evaluation of your credit worthiness, years of professional experience, income and other factors. See APR examples and terms. Interest rates on variable rate loans are capped at 14.95%. Lowest variable rate of 6.26% APR assumes current 1-month LIBOR rate of 2.33% plus 4.175% margin minus 0.25% AutoPay discount. For the SoFi variable rate loan, the 1-month LIBOR index will adjust monthly and the loan payment will be re-amortized and may change monthly. APRs for variable rate loans may increase after origination if the LIBOR index increases. The SoFi 0.25% AutoPay interest rate reduction requires you to agree to make monthly principal and interest payments by an automatic monthly deduction from a savings or checking account. The benefit will discontinue and be lost for periods in which you do not pay by automatic deduction from a savings or checking account.

To check the rates and terms you qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull.

See Consumer Licenses.

SoFi Personal Loans are not available to residents of MS. Maximum interest rate on loans for residents of AK and WY is 9.99% APR, for residents of IL with loans over $40,000 is 8.99% APR, for residents of TX is 9.99% APR on terms greater than 5 years, for residents of CO, CT, HI, VA, SC is 11.99% APR, and for residents of ME is 12.24% APR. Personal loans not available to residents of MI who already have a student loan with SoFi. Personal Loans minimum loan amount is $5,000. Residents of AZ, MA, and NH have a minimum loan amount of $10,001. Residents of KY have a minimum loan amount of $15,001. Residents of PA have a minimum loan amount of $25,001. Variable rates not available to residents of AK, TX, VA, WY, or for residents of IL for loans greater than $40,000.

Terms and Conditions Apply. SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. To qualify, a borrower must be a U.S. citizen or permanent resident in an eligible state and meet SoFi's underwriting requirements. Not all borrowers receive the lowest rate. To qualify for the lowest rate, you must have a responsible financial history and meet other conditions. If approved, your actual rate will be within the range of rates listed above and will depend on a variety of factors, including term of loan, a responsible financial history, years of experience, income and other factors. Rates and Terms are subject to change at anytime without notice and are subject to state restrictions. SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income Based Repayment or Income Contingent Repayment or PAYE. Licensed by the Department of Business Oversight under the California Financing Law License No. 6054612. SoFi loans are originated by SoFi Lending Corp., NMLS # 1121636. (www.nmlsconsumeraccess.org)

SoFi has lower rates, longer terms, and higher loan amounts than many other lenders, and they don’t charge any fees. APRs range from 6.99% to 14.99%, and terms are set at 36 to 84 months for loans of $5,000 to $50,000. Like many lenders, SoFi offers the best rates to borrowers who sign up for automatic payments. SoFi will only do a Soft Pull pull when you check your rates with their online form, and you’ll never encounter origination fees or prepayment penalties. Another advantage to borrowing from SoFi: if you lose your job and apply for their unemployment protection program, they will suspend your payments without penalty and provide job placement assistance.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Emily Long
Emily Long |

Emily Long is a writer at MagnifyMoney. You can email Emily here

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Personal Loans

A Guide to Secured Loans

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

Disclosure : By clicking “See Offers” you’ll be directed to our parent company, LendingTree. You may or may not be matched with the specific lender you clicked on, but up to five different lenders based on your creditworthiness.

iStock

In this guide, we’ll talk about several different secured loans, and the pros and cons of each so you know exactly what to expect before you borrow.

Part I: Secured Loans 101

A secured loan is backed by an asset that you own outright, like a paid-off vehicle or the equity in your home. You put up that property as collateral, and a lender uses that collateral as assurance that they’ll get their money back if you don’t pay. In some cases, secured loans can be allotted for any purpose the borrower chooses.

Home equity loans (HELs) and home equity lines of credit (HELOCs), for example, use the equity a borrower already has in his or her home as collateral. These loans might go toward home improvements and repairs, but consumers also use them to pay for education or debt consolidation.

Each lender has different requirements for the type of collateral they will accept, though it’s most often some form of tangible property with substantial value: a home, car or boat, for example. Auto title loans allow you to put up your vehicle title, and payday lenders take future income — hence the term “payday” — and sometimes even small home appliances as collateral. If you are applying for a secured credit card, your own cash is used as collateral. You can even use a savings or investment account to secure a loan.

For some secured loans, like high-fee payday or title loans, the barrier to entry is very low. Lenders may not require a credit check, and you can walk out with cash in just a few minutes. These usually fall under the category of predatory loans, and although they are easy to obtain and have short loan terms, they are difficult to pay back and escape.

For home and auto loans, borrowers usually have to demonstrate a minimum level of creditworthiness. Secured credit cards are a unique type of secured loan in that they don’t usually require a good credit history and instead are used primarily to build or repair credit on a low-limit card.

The different types of secured loans

Secured card

A secured credit card is often used to build credit, either for consumers who don’t have a history, or those who are trying to recover from dings like bankruptcy or accounts sent to collections.

To obtain a secured card, the borrower must put down a minimum deposit as collateral. The line of credit available for use is usually equal to the deposit amount, though in some cases it can be higher.

The borrower can use their secured card just like a normal credit card — and in order to build credit and avoid interest, he or she should manage the balance and payments responsibly. Minimum deposits for secured cards range widely from $49 to $750, and some carry annual fees up to $50 or more.

HEL/HELOC

With a home equity loan or home equity line of credit, the borrower puts up the equity in his home as collateral — essentially, this means borrowing against the amount your home is worth minus your current mortgage balance.

HELs, like a traditional installment loan, are made in a set dollar amount with fixed payments over the life of the loan.

HELOCs, on the other hand, operate like credit cards. The borrower is approved for a dollar amount that he can draw against and pay off with a variable interest rate. These loans are often spent on home repairs but can be used for other major expenses like education, weddings, debt consolidation or in case of emergency.

In some cases, borrowers carry a zero balance for most of the life of their HELOC but feel secure knowing it’s available if the need arises. If the borrower defaults on a HEL or HELOC, the lender has the right to repossess and sell the home.

Payday loan

Payday loans are a form of lending in which a cash-strapped borrower receives cash with the promise of repaying the loan plus a fee on their next payday.

In this case, a postdated check for the total of the loan amount and fees or authorization to access the funds in your bank or prepaid account serves as collateral for the loan.

These small-dollar loans usually run on two- or four-week terms and although they are often for $500 or less, they carry an average 391% APR. This often traps borrowers in a debt cycle. According to recent research from the Pew Charitable Trusts, 12 million Americans take out these loans every year and spend $9 billion on fees alone.

Title loan

Title loans require the borrower to turn over their car title in exchange for fast cash.

Most lenders don’t require a credit check, and though terms and requirements vary widely, these loans come with hefty fees and interest rates. If the borrower fails to pay back the loan, he or she can either take out another loan with additional fees, or risk having the lender repossess the car.

The Consumer Financial Protection Bureau found that between 2010 and 2013, 20% of borrowers had their vehicles seized by lenders, and more than half of borrowers took out four or more consecutive loans to repay their initial amount.

Mortgage

A mortgage is used to purchase a home, which in turn serves as the collateral to secure the loan. Unlike some other types of secured loans, existing — and healthy — credit is important for securing a mortgage.

If you have poor credit, you’ll see higher interest rates and monthly payments, which means you could owe tens of thousands of dollars more over time than if you had a higher score. Lenders also consider your debt-to-income ratio, the size of your down payment, employment history and the size of the loan. If you fail to make mortgage payments, the lender has grounds to repossess your home.

Auto loan

Like a mortgage, with an auto loan the borrower uses the property they are buying — a vehicle — as collateral to secure the loan.

The lender, usually a bank, credit union or dealership, holds a lien on the car until the loan is paid in full. Monthly payments vary widely depending on the price of the car, the length of the loan contract and the APR you receive.

Similar to a mortgage, if you are late on auto loan payments, the lien holder can repossess your car and, in some states, do so without going to court.

Part II: Secured loans vs. unsecured loans

Whereas a secured loan is made using collateral a borrower already owns, an unsecured loan is offered based on a lender’s trust that you’ll pay back what you owe. The lender takes a bigger risk with an unsecured loan because they don’t have any collateral to claim if the borrower defaults. As a result, unsecured loans may come with higher interest rates and fees.

This isn’t always the case, however — rates and terms vary widely depending on the lender and type of loan as well as the borrower’s credit history. For some, an unsecured loan may not even be an option, as lenders may offer only a secured loan to a consumer who is considered high risk. Borrowers may also prefer to put up collateral and get more favorable terms offered with a secured loan over an unsecured loan.

Unsecured loans include credit cards and student loans as well as personal loans. Like cash from some secured loans, personal loans can generally be used for any purpose — according to data from LendingTree nearly 34% of personal loans are intended for debt consolidation and just under 33% are targeted toward credit card refinancing.

With both secured and unsecured loans, it’s important to know that nonpayment has serious consequences for your financial well-being. In addition to seizing collateral put up for a secured loan, lenders can send your unsecured loan debt to a collections agency and take legal action to recoup losses. Default puts your credit rating and access to future loans in jeopardy.

LendingTree
APR

5.99%
To
35.99%

Credit Req.

Minimum 500 FICO

Minimum Credit Score

Terms

24 to 60

months

Origination Fee

Varies

SEE OFFERS Secured

on LendingTree’s secure website

LendingTree is our parent company

LendingTree is our parent company. LendingTree is unique in that you may be able to compare up to five personal loan offers within minutes. Everything is done online and you may be pre-qualified by lenders without impacting your credit score. LendingTree is not a lender.

 

Secured

Unsecured

Examples

  • Secured card

  • Mortgage

  • Auto loan

  • HEL/HELOC

  • Payday loan

  • Title loan

  • Personal loan

  • Student loan

  • Credit card

Collateral required?

Yes

No

Credit required

Varies. Title lenders may not require a credit check, while an auto loan or mortgage lender will

Yes — history and score vary by product and lender. Most federal student loans don’t require a credit check, however.

Cost of loan (APR, fees etc.)

Varies with loan type. Interest rates for auto loans go as low as 5.2%, while rates for title and payday loans can hit triple digits. These also come with fees for rolling over to another loan at the end of a term. Secured cards have APRs ranging from 9% to 21.99% and annual fees of $0-50

Personal: Around 4%-35.99% APR with origination fees ranging from zero to 8%
Student: Federal interest rates range from 4.45% to 7% plus fees between just over 1% and just over 4%. Private loans have variable rates, some high as 14.24%.
Credit: APRs start around 6% and hit upward of 25%. May also have annual fees

Pros

Opportunity to build credit and to borrow more than you might be approved for with an unsecured loan

Don’t have to put up collateral, helpful in emergencies, can be used for any purpose — especially to consolidate higher interest debt

Cons

Risk of default and loss of collateral plus additional money and property, negative impact on credit

Higher APR and fees, risk of overspending and creating loan dependency, damage to credit if you can’t afford payments

Best for (what type of consumer)

Depends on loan. Secured cards help build (or rebuild) credit history, while payday and title (predatory) loans are not recommended

Consumers looking to consolidate high-interest debt or purchase big-ticket items they’ve planned for IF they can afford the monthly payments

Learn more

The pros and cons of secured loans

Secured loans — aside from predatory payday and title loans — are available from a variety of lenders. If you already hold accounts at a bank, this would be the first place to look. Credit unions also offer secured loan services, though you must be a member to access their products. Finally, look at online, nonbank lenders who focus on loans without offering traditional banking products. No matter what type of loan you’re looking for, shop around to ensure you get the best rates and terms.

When it comes to choosing a secured loan over an unsecured loan, there are some benefits and risks to weigh.

Pros

Secured loans may allow you to get more money with less credit.
Lenders are often more willing to lend higher sums to consumers if the loan is secured by collateral because they have something tangible to repossess or foreclose on if the borrower defaults, according to Andrew Chan, a financial adviser at Locker Financial Services, LLC in Little Falls, N.J. Because this is a lower risk for lenders, they may also be more willing to forgive lower credit scores.

Secured loans often have lower interest rates and fees than unsecured loans.
Because secured loans pose less risk to the lender, the borrower may be offered lower rates, fees and payments, says Chan. This may give you access to the cash or credit that you need but may not otherwise get — if you use it responsibly.

Cons

The collateral you put up is always at risk.
Even with the best-laid plans, taking on a secured loan means that your personal property may be repossessed. If you default, your lender can take your collateral, sell it and repay the loan with the proceeds. As the borrower, you lose amount you already put into the loan plus valuable property that may be difficult to replace.

Lenders may trap you with prepayment penalties and other fees.
Even if you want to get out of your secured loan and have the ability to pay off what you owe, you may get hit with prepayment penalties — fees that lenders charge borrowers who repay loans before they are due. If you do pay off a loan early, the lender makes less in interest, so they may try to keep you in a costly loan by making it too expensive to leave. With predatory lending, loan fees can quickly add up each time the borrower tries to extend the loan.

Under the Truth in Lending Act, lenders must disclose all charges and fees associated with a loan, so you should know ahead of time if prepayment penalties will apply.

Staying safe with a secured loan

An important part of taking on any loan or form of credit, secured or not, is knowing that you can handle the payments over the life of the loan and continue to afford other financial obligations. Here are five factors that may impact your ability to manage your loan:

Job security. Some secured loans, like HEL and mortgages, are long-term commitments (20 to 30 years) . Even if you have the income to cover your loan payments and still live comfortably now, think about whether your current career and employer offer enough stability to do so down the line, as well as whether you have marketable skills to find other opportunities next month, next year, or far in the future if necessary.

Cash flow. Just because you are able to put up property as collateral doesn’t mean you’ll be comfortable making payments on your secured loan. Look carefully at your income and expenses to determine if the monthly payments, interest and fees on your loan are actually within your budget, both now and (as much as possible) in the future.

Lifestyle. Even if you have the cash, the burden of taking on a loan could impact your ability to live the way you want to, says Johnna Camarillo, assistant vice president of equity processing and closing at Navy Federal Credit Union.

“Make sure that you don’t put yourself in a situation that according to the numbers, I can comfortably make my payments, but I can’t take a vacation or I can’t go out with my family as much as I’d like,” she told MagnifyMoney. “People should really look at their total lifestyle and look at how much disposable income they want.”

Future expenses. If you have kids (or plan to) and want to pay for college, aspire to buy a home or are close to retirement, this may impact your ability to continue to make loan payments. Plus, if you default on a secured loan, lose your property and damage your credit, it will likely be difficult to restore your financial situation to the point where you can afford these investments.

Total interest and fees. When you shop around for a secured loan, look at the total cost you’re on the hook for over the life of the loan — especially when you put up collateral you don’t want to lose.

“Sometimes people get attracted to a low monthly payment, and they’ll stretch it out over 15 to 20 years, but they don’t realize the impact that has on the amount of interest that they pay,” Camarillo said. She recommends looking carefully at interest rates, transaction and maintenance fees, as well as any fees associated with entering and exiting your loan.

MagnifyMoney has a personal loan comparison tool that compares rates and requirements for unsecured loans and a calculator to show monthly payments and interest paid over the life of a loan to help you understand the commitment you are taking on.

When it comes to managing a secured loan, having all the information and planning carefully for the long term is key. Don’t jump on what seems like a good deal without shopping around and budgeting, and don’t sign for a loan without understanding the risk to your property and your overall financial health.

What happens if you can’t pay?

If you get in over your head with any kind of loan, the first thing to do is talk to your lender. If you are a member at a credit union or a long-time customer at your bank, your loan officer may be able to help you with a plan to get back on track. Even payday lenders may be willing to work out an Extended Payment Plan (EPP), which allows borrowers extra time to cover their outstanding debt without added fees or risk of being sent to collections. You can also find ways to free up funds in your budget by cutting expenses large and small.

If you aren’t able to make payments and your loan goes into default, however, there are serious consequences.

Your credit takes a hit.
Payment history is the single most important factor in your FICO credit score — it accounts for 35% of the total. It is also considered “extremely influential” in the VantageScore model. Scoring models take into account bankruptcies, foreclosures and missed/halted payments, and having any of these in your credit history can have a long-lasting impact on your ability to apply for credit in the future. Even secured cards, which are primarily used to build and improve credit, can backfire if not managed properly.

“A lot of people fail at secured cards,” said Lauren Saunders, associate director of the National Consumer Law Center in Washington, D.C. “A lot of people end up defaulting, and their credit score is worse than when they started.”

You end up on a debt spiral.
Defaulting on a loan can quickly put you into a cycle of debt that is difficult to break, especially if you are caught in a predatory lending situation. These lenders operate by charging interest rates and fees so high that the borrower is unable to make a dent in the loan principal and continues to take out additional loans just to pay the excess that accrues.

Auto title loans are “incredibly dangerous” because borrowers continue to pay fees to extend and end up paying out far more than they expected or planned for, says Saunders. “They’re not getting out of debt, and eventually many people not only lose all that money they paid but they lose their car.”

In 2017, the CFPB issued a rule requiring payday and auto title lenders to verify a borrower’s income, expenses and ability to repay before issuing a loan, a move that in theory would protect consumers from entering an endless cycle of payday and title loan debt.

You lose your collateral—and possibly more of your assets.
If you default on a secured loan made with physical property as collateral, there’s a good chance you’ll lose that item at the very least. A lender may repossess your car, foreclose on your home or come after the boat, motorcycle or other valuable property you put up. If it’s something that diminishes in value, what the lender sells it for may not cover the full amount of the loan, in which case they may come after you for the difference, says Chan.

“Although the lender may be willing to offer higher loan amounts with a secured loan, consumers still need to make sure that they can afford the monthly payments associated with the higher loan amount,” he added.

Experts agree that the biggest risk with a secured loan is losing property you already own. When you put your home, car, paycheck or savings on the line, you must understand the consequences of default — especially if you are already in a difficult financial situation.

“The overarching theme is, ‘Can you afford to lose the collateral?’” said Saunders. “How catastrophic would it be for you if you lose the collateral? You shouldn’t put it at risk if you can’t afford it. You shouldn’t pawn your wedding ring, but you might be willing to pawn a TV.”

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Emily Long
Emily Long |

Emily Long is a writer at MagnifyMoney. You can email Emily here

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