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Top 4 Personal Loans for an Engagement Ring

Editorial Note: 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 prior to publication.

Engagement ring

Updated November 08, 2017
Getting engaged is an exciting yet nerve-wracking milestone. You’re eager for your partner to say “yes” and hoping she’s impressed by what she sees when you open the box.

The best way to afford the ring of her dreams is planning early and saving up. Financing an engagement ring should be your absolute last resort. After all, there are other larger expenses that come after marriage including moving, buying a home or starting a family that you could spend that money on instead.

Still, if you decide financing is right for you, here are a few personal loans that provide funds for engagement rings:

Earnest

Rates from 6.99% to 18.24% APR

Earnest has the lowest interest rate of the loans on our list and no origination fee.Loan terms are from 36 to 60 months. Earnest will lend you $5,000 to $75,000. Other than your credit score, Earnest will look at your income, education, earning potential and other factors to decide if you’re eligible for the loan. There’s No origination fee and no prepayment penalty. There is, however, a Hard Pull of your credit report.

Earnest could be a good option if you have limited credit history, but an offer letter or current position that pays you more than enough money to cover loan payments. After submitting an application, you’ll get a response within 2 business days.

Earnest
APR

6.99%
To
18.24%

Credit Req.

650

Minimum Credit Score

Terms

36 to 60

months

Origination Fee

No origination fee

LEARN MORE Secured

on LendingTree’s secure website

Instead of offering credit-based loans, Earnest has taken a very nontraditional approach using a merit-based system.... Read More

LendingClub

Rates from 6.16% APR

LendingClub is a peer-to-peer loan marketplace where people who need to borrow money are matched up with investors. You can get a loan for 36 or 60 months. You can borrow up to $40,000. The origination fee is 1.00% - 6.00%. Your origination fee is assigned based on your credit profile. The higher your credit score the less you’ll pay for origination. You can check to see if you’re approved and your rate without harming your credit score.

After applying for LendingClub, peer investors will see your profile in the marketplace and hopefully fund your loan. Once your loan is funded by investors and your application documents check out, you’ll get the money wired to your account.

To get the very best rates through LendingClub you’ll need an excellent credit history, low debt-to-income ratio and a high credit score among other factors.

LendingClub loans are not available in Iowa or West Virginia.

LendingClub
APR

6.16%
To
35.89%

Credit Req.

600

Minimum Credit Score

Terms

36 or 60

months

Origination Fee

1.00% - 6.00%

LEARN MORE Secured

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

Karrot

Karrot is not currently offering new loans. Should you have an outstanding loan, Karrot states they are still servicing those loans.

Karrot gives out personal loans at a maximum of $35,000. Loan terms range for 60 months. The loan has an origination fee of 1.05% - 4.75% that’s non-refundable and deducted from the loan upfront. Karrot doesn’t charge prepayment penalties. Other than origination, fees will only come into play if you skip out on a payment, have a check returned or request copies of your loan documents.

Shopping for loan rates on the site won’t ding your credit score. Karrot doesn’t go into specifics about the credit score you need to qualify, but you do need to at least have a credit history and a bank account to verify your income.

Prosper

Rates from 6.95% APR

You can borrow as little as $2,000 and up to $40,000 from Prosper, another peer-to-peer lending marketplace. Loan terms are 36 or 60months. Prosper loans have a 2.41% - 5.00% origination fee, but no prepayment penalties.

At a minimum, you must have a 640 FICO score to qualify for Prosper. You also need to have a debt-to-income ratio less than 50%. Shopping for rates with Prosper won’t impact your credit score either.

Prosper
APR

6.95%
To
35.99%

Credit Req.

640

Minimum Credit Score

Terms

36 or 60

months

Origination Fee

2.41% - 5.00%

LEARN MORE Secured

on LendingTree’s secure website

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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.

Honorable Mention – LendingKarma

LendingKarma isn’t a lender. Instead, it’s a site that manages loans between people who know each other. As a rule of thumb, you should avoid borrowing or lending money to friends and family since involving money in relationships tends to cause drama.

But, if someone you know agrees to help out and you’re both on the same page, LendingKarma can make your life easier. LendingKarma takes care of the logistics of borrowing including the contract, payment schedule and friendly reminders. The fee for contract administration is paid one time and $50 to $100 per loan.

Final Thought

Financing an engagement ring is not something we recommend. It’s just not worth going into debt over. Explore all of your options instead. Here are a few:

  • Get what you can afford in cash now and upgrade when you have more money.
  • Try unclaimed diamond and discount jewelry stores to get a deal.
  • Skip the diamond altogether for gems that are a little more affordable like amethyst or sapphire. These gems are popular now anyway.
  • Buy a stone similar to a diamond like moissanite or a replica until you can get a real one. If you choose a “fake” starter ring, make the decision as a couple. You don’t want her to find out from another source that her ring isn’t a true diamond.

At the end of the day, an engagement ring is supposed to symbolize commitment. Sadly in some ways it’s morphed into a symbol of status. That doesn’t mean you should feel pressured to get a ring (or ask for a ring) you can’t afford. Do what’s best for you.

Advertiser Disclosure: The card offers that appear on this site are 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 card companies or all card offers available in the marketplace.

Taylor Gordon
Taylor Gordon |

Taylor Gordon is a writer at MagnifyMoney. You can email Taylor here

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Personal Loans

Personal Loans vs. Credit Cards: Which is Right for You?

Editorial Note: 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 prior to publication.

If you need to borrow money and pay it back over time, you may want to consider an unsecured credit card or a personal loan. Neither option requires you to put down collateral, and you can spend the money however you want.

Before you choose between a personal loan or a credit card, however, it’s smart to take a close look at both options to see which one might leave you better off. The best option for your situation will probably depend on how you plan to use the money, how much you need to borrow, and how long you need to pay your loan back.

How do personal loans work?

Personal loans allow consumers to borrow money with a fixed interest rate, a fixed monthly payment, and a fixed repayment schedule. This means you’ll know exactly how much you need to pay each month as well as the date you’ll pay your loan off.

Most personal loan companies let you borrow up to $35,000, although some companies do extend higher amounts to those who qualify. Generally speaking, these loans are best for individuals who need to borrow a large amount of money and pay it back over a longer timeline.

Personal loan benefits

Personal loans can work well for a variety of situations, whether you need to borrow money to consolidate debt, pay for a major home repair, or cover unexpected medical bills. The main benefits of personal loans include:

  • With a fixed repayment plan, you know exactly when you’ll pay your loan off.
  • Securing a fixed interest rate means you will never have to worry about interest charges ballooning out of control.
  • Having a fixed monthly payment can make budgeting for your personal loan easier.
  • Interest rates on personal loans can be lower than other forms of debt, depending on your credit score.

Drawbacks of a personal loan

Personal loans can provide you with the cash you need, but that doesn’t mean they’re perfect. These loans come with costs you need to be aware of as well as their own share of downsides. For example:

  • Personal loans often come with fees, such as an origination fee of 1% to 8% of your loan balance.
  • You may not qualify for the best interest rates if you have poor credit.
  • You have to borrow a set amount upfront, versus credit cards that offer a line of credit you can borrow against.

Qualifications for approval

To qualify for a personal loan with the best rates and terms, you usually need good or excellent credit. Some personal loan companies will accept consumers with credit scores as low as 580, but only if they pay a higher interest rate.

In addition to having the credit to qualify, you also need to be able to prove your ability to repay by presenting pay stubs or other proof of employment. Since lenders prefer to loan money to borrowers who aren’t overly strapped for cash, you’ll also need a debt-to-income ratio that isn’t too high.

Your debt-to-income ratio is determined by taking your total monthly debts and dividing them by your monthly income. If you have $2,000 in total monthly recurring debt and your monthly income is $4,000, your debt-to-income ratio would be 50%. According to Discover Personal Loans, consumers with debt-to-income ratios below 36 percent may qualify for personal loans with the best rates and terms.

If you don’t meet the criteria to qualify for a personal loan on your own, you may be able to qualify with the help of a co-signer.

When is a personal loan better than a credit card?

A personal loan may be better than a credit card in the following situations:

  • You need several years to repay your loan and prefer a fixed interest rate and monthly payment you can count on. While credit cards also let you borrow money to make purchases, most come with variable interest rates and monthly payments that can go up and down based on interest rates and the amount you owe.
  • You need to borrow money to pay expenses you can’t pay with a credit card, such as repaying a family member you borrowed money from. A credit card can be a valuable tool, but it’s not ideal if what you really need is cash. A personal loan is better if you need cash deposited in your bank account.
  • You want to consolidate debt at a lower interest rate but need several years to pay it off. Some credit cards offer 0% interest on purchases or balance transfers for up to 21 months, but the interest rate will be reset after the introductory offer is over. If you need more time to pay off debt at a lower interest rate, a personal loan could make more sense.

Where to find the best personal loans

While you can check local banks and credit unions to compare their personal loan options, an easy way to research and assess offers is by doing it online. MagnifyMoney offers a comprehensive list of the best personal loan offers that makes it easy to see how each one stacks up.

Remember that the best way to find your ideal personal loan is to compare offers from several lenders, not just one. Make sure to compare loan terms, fees, and interest rates to find the best deal. LendingTree, the parent company of MagnifyMoney, allows you to compare mutliple offers at once without hurting your credit score. Use our table below!

LendingTree
APR

5.99%
To
35.99%

Credit Req.

Minimum 500 FICO

Minimum Credit Score

Terms

24 to 60

months

Origination Fee

Varies

LEARN MORE Secured

on LendingTree’s secure website

LendingTree is our parent company.... Read More

How do credit cards work?

A credit card provides you with a line of credit you can use to make purchases, transfer a balance, or take out a cash advance. Credit cards usually come with variable interest rates, and interest is charged daily on your balance. If you pay your balance in full every month, however, you can avoid interest charges and use your line of credit over and over again.

Since the amount you borrow with a credit card will vary depending on the purchases you make, your payment can vary from month to month. However, you’re required to make a minimum monthly payment each month, which may be as low as 2.5% of your balance.

Benefits of a credit card

A credit card can be a valuable tool you can use to your advantage, particularly if you need to make a smaller purchase you can pay off in a short amount of time. The main benefits of credit cards include:

  • Some credit cards offer 0% APR on balance transfers and purchases for a limited time, usually 12 months or longer.
  • You pay no interest fees if you pay off the card in full every month.
  • Some credit cards offer rewards on your purchases, such as cash back or travel rewards.

Drawbacks of a credit card

Credit cards can be ideal if you get a 0% offer or can pay off a large purchase quickly, but there are downsides that come with them compared to personal loans. Some of the drawbacks include:

  • Even though some credit cards offer 0% interest for a limited time, credit cards charge an average interest rate of 15.5%.
  • Your monthly payment may be harder to plan for since it is based on a variable interest rate, as well as your credit card balance.
  • Some credit cards charge annual fees. You may be charged other fees as well, such as late fees, over-the-limit fees, cash advance fees, foreign transaction fees, and balance transfer fees.

Qualifications for approval

The qualifications to get approved for a credit card are typically the same as the ones for personal loans. You need good or excellent credit to qualify for a credit card with the best interest rates and terms, for example. You also need to be able to prove your ability to repay with proof of employment and a reportable income. Finally, you need to have a reasonable debt-to-income ratio since the bank won’t want to let you borrow more than you can afford. According to Experian, many lenders prefer a debt-to-income ratio below 36%.

If you’re curious to see whether you could get a credit card of your own, there are also several ways to check if you’re pre-qualified.

When is a credit card better than a personal loan?

While personal loans can make sense when you need to borrow money, there are times when a credit card can be a better deal. Examples include:

  • You can qualify for a 0% APR offer and repay your balance before your card’s introductory offer ends. If you only need to borrow money for a few months, a zero interest credit card can work as an interest-free loan.
  • You’re unsure how much you need to borrow and prefer a line of credit over a loan. Since credit cards only require you to repay amounts you borrow, they can make more sense if you need a line of credit to borrow against as needed.
  • You have the cash to repay your balance and avoid interest, so you want to rack up rewards. If you have the cash on-hand to repay amounts you borrow right away, a rewards card will let you earn points or miles for each dollar you spend. Keep in mind, however, that it’s a bad idea to pursue rewards if you plan to carry a balance, since the interest you’ll pay is likely more than the rewards you’ll earn.

Where to find the best credit cards

Credit cards are easy to apply for online, which is why it makes so much sense to start your research on the internet. MagnifyMoney breaks down the best credit cards in every category, which makes comparing cards and their benefits a simple task. Make sure to compare all factors before you decide on a card, such as the interest rate, 0% APR offer and terms, and any applicable fees.

Credit cards vs. personal loans

 

Credit Cards

Personal Loans

Average Interest Rate

The average annual percentage rate (APR) of credit cards is currently about 15.5%. However, credit card APRs can range from as low as 9.9% to as high as 29.99%

Personal loan rates can range from 5.99% to as much as 35.99% APR, depending on the borrower's credit history. For those with “good” credit (a FICO score between 680-720), APRs currently range from 10 to 13%.

Terms

Credit cards typically charge a variable rate. Credit card interest rates can change based on market rates and can change to a penalty rate if you miss payments.

Personal loans typically come with a fixed interest rate, fixed monthly payments, and a fixed repayment term.

Monthly Payments

Your monthly payment will depend on your balance and your interest rate. Formulas for minimum monthly payments differ among credit card issuers, but they can be as low as around 2.5% of the outstanding balance.

Your monthly payment is a fixed amount based upon the amount you borrow, the length of your loan, and your interest rate.

Average Loan Limit

Your credit limit depends on several factors, including your income and your debt-to-income ratio.

Many lenders offer personal loans up to $35,000, but some offer bigger loans to those who qualify.

Fees

Credit cards can come with annual fees. You may also have to pay late fees, over-the-limit fees, cash advance fees, and foreign transaction fees. Consumers who transfer a balance pay an average balance transfer fee of 3.46%.

Personal loans have an origination fee of 2% to 5% of the amount borrowed (some can go as low as 1% or as high as 8%). Not all lenders charge origination fees, however.

Personal loans vs. credit cards: Which one is right for you?

Before you decide between a personal loan and a credit card, think long and hard about why you need to borrow money and what kind of terms you’d require to pay it back. Some questions to ask yourself as you continue your research include:

  • What do you need the funds for? While personal loans can work better if you need actual cash to spend, a credit card could also work if you need a line of credit to make a purchase.
  • How much can you afford to repay every month? If you can only afford to repay a set amount of money each month, a personal loan with a fixed monthly payment could be ideal. To find out how much you could borrow and still get a monthly payment you can afford, check your options with this personal loan calculator.
  • Are you consolidating debt? If you’re consolidating debt, you need to be able to qualify for a lower interest rate than the average rate you’re paying now. Compare credit cards and personal loan offers to see which ones offer the lowest interest rates for your credit score and situation.
  • How much do you need to borrow? A personal loan could be better if you need to borrow a larger amount and pay it back over several years.
  • How long do you need to repay your loan? If you believe you can repay borrowed funds within the span of a year or slightly longer, a balance transfer card that offers 0% on purchases and balance transfers could work as an interest-free loan. Keep in mind, however, that you may need to pay a balance transfer fee if you transfer a balance, depending on the card you apply for.

The bottom line

Should you get a personal loan or a credit card? At the end of the day, only you can decide. Both options can work well in the right situation, but your specific financial needs will determine which one is best. As always, make sure you read through the terms and conditions along with the fine print before you sign up for any financial product.

Advertiser Disclosure: The card offers that appear on this site are 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 card companies or all card offers available in the marketplace.

Holly Johnson
Holly Johnson |

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

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Personal Loans

Understanding the Risks of Short-Term Loans

Editorial Note: 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 prior to publication.

If you’re in need of quick cash but might have trouble borrowing money through traditional means, a title or payday loan might sound like the light at the end of the tunnel — neither requires a stringent approval process and you can get the money quickly.

Although you can easily access these short-term loans, they come with a high level of risk. The biggest risk is that like many payday loan borrowers, you could end up in a nightmare debt cycle, having to pay fees and interest charges that would quickly eclipse the amount of cash you borrowed in the first place.

Keep reading to learn more about the risks and costs associated with some common short-term loans. Next, discover alternatives that can help you get through your financial crisis.

Common types of short-term loans

When you need financing quickly, there are several options to choose from. Before you take out a short-term loan, be sure you understand how long you have to repay the funds, how much you can borrow, and, of course, how much it will cost you.

Payday loans

Typical Term LengthAvg. Loan AmountAvg. Financing Charge

14 days

$500

$10 to $30 per $100 borrowed

Payday loans are high-cost, small-dollar personal loans that become due in a lump sum — typically on your next payday. You can find these types of loans from storefront or online payday lenders.

Many states set limits on the amounts of payday loans lenders can offer, according to Consumer Financial Protection Bureau, and the most common payday loan amount is $500. Loans are available above and below that, depending where you live.

Lenders generally require you to write a predated check for the amount you want to borrow — including fees — or they might ask you for authorization to electronically withdraw money from your bank account.

The lender gives you the funds, then holds the check until the loan is due. If you can’t repay it on deadline, the lender can cash the check or take money out of your account. You can choose to extend the loan term — but that’s when the debt trap begins. You’ll likely incur additional charges each time you roll over your debt for another payday period, making it that much more difficult to pay off the balance.

The average loan term ranges from two to four weeks. Many states have laws that cap payday loan fees, which generally range from $10 to $30 for each $100 borrowed. A typical, two-week payday loan with a $15-per-$100 financing fee translates to an annual percentage rate of almost 400%.

Check out this map by Center for Responsible Lending showing interest rates on the typical payday loan in each state. CRL is a nonprofit, nonpartisan research and policy group.

Stuck in a payday loan trap? Here are the ways out.

Short-term installment loans

Typical Term LengthAvg. Loan AmountTypical APR

Two weeks to several years

$1,291

197% to 369%

Installment loan borrowers typically get fixed-rate loans with fixed payment schedules.
Understand that many small-dollar installment loans are really high-cost payday loans in disguise. In recent years, payday lenders have moved into the installment loan business to skirt heightened regulations regarding payday loans. Instead of issuing high-cost payday loans, these lenders might offer installment loans, but charge high upfront fees to get around interest rate caps set by state regulatory bodies.

The CFPB reports that the average size of installment loans borrowers take is $1,291 and APRs range from 197% to 369%. Installment loan terms are longer than payday loans and can have terms of up to several years.

According to the Pew Charitable Trusts — an independent, nonprofit policy think tank — lenders in 19 states issue short-term, payday installment loans: Alabama, California, Colorado, Delaware, Idaho, Illinois, Kansas, Missouri, New Mexico, North Dakota, Ohio, Rhode Island, South Carolina, South Dakota, Tennessee, Texas, Utah, Virginia and Wisconsin.

Car title loans

Typical Term LengthTypical Loan AmountsTypical Financing Charge

15 to 30 days

$100 to $5,500
(25% to 50% of the vehicle’s value)

25% per month

A title loan is another kind of expensive, short-term loan, but it’s secured, which means you have to put up collateral to get the loan. For example, title lenders use your car’s title as a collateral.

You typically have to own your car outright to be eligible for a title loan, but some lenders offer them if you have equity in the vehicle or even a clear title — you just need to have enough car equity to cover the loan. Car title lenders usually make loans that equal 25% to 50% of the car’s value. Title loan term lengths generally run 15 or 30 days. On average, the loan amounts range from $100 to $5,500, but some lenders will issue these loans for $10,000 or more, according to the Federal Trade Commission.

Lenders charge an average of 25% as a monthly financing fee, which adds up to an APR of at least 300%, according to the FTC. You also might be on the hook for additional fees, depending on the lender.

Like payday loans, if you can’t repay a single-payment title loan on time, you might choose to extend your loan term, which will result in more fees. Some car title loans have longer loan terms and you can repay them in installments. Vehicle title installment loans are available in 18 states, some of which allow both single-payment and installment loan structures, according to the CFPB. If you can’t repay the loan at all, you risk losing your car — the lender can legally repossess to recoup the money you owe.

Pawn shop loans

Typical Term LengthTypical Loan AmountsTypical Financing Charge

30 to 90 days

$150

36% to 100%

Pawn shops offer collateral-based loans. You bring in something of value — think jewelry, musical instruments, tools or other household or personal item — and the pawnbroker lends you money based on the value of your collateral. He or she holds onto your collateral until you repay the loan.

The average pawn shop loan amount is $150, according to the National Pawnbrokers Association. Borrowers typically have 30 to 90 days to pay back their loans and get their items back. The cost of these loans varies, depending on state law cap rates and individual shops’ practices. Some pawn shops charge storage fees and insurance fees. Christopher Peterson, director of financial services and senior fellow at the Consumer Federation of America, estimated that on average, these loans’ APRs range from 36% to 100% — or more.

Peterson said pawn shop loans’ APRs are consistently lower than payday loans’, but well-above average credit card interest rates of 15.5%. If you can’t repay your pawn shop loan in full, you lose your collateral, but your loan will be marked as paid.

Learn more: Why are short-term loans risky?

You’re likely entering the danger zone if someone offers a short-term loan that comes with an APR higher than 36% — the benchmark for affordable small loans — no matter how the loan is structured.

Here are just a few reasons to be wary of short-term loans:

They can quickly balloon over time

Payday, title and payday installment loans are often called predatory loans because they are very different from healthy, small-dollar loans that provide wealth-building opportunities or income-smoothing possibilities — these risky, short-term loans are designed to profit based on borrowers’ inability to repay them. That way, high-cost lenders can keep charging fees.

“There’s no shortage of personal stories or accounts of individuals taking out a few hundred dollars, like $200 or $300, and actually end up paying over $1,000 just in fees,” said Scott Astrada, director of federal advocacy for CRL. “And their principal has never even [gone] down by a dollar.”

Here’s an example of what can happen with these types of loans: Say you need $500 today and you take out a loan with a $15-per-$100 finance charge. That means you owe $575, which is due on your payday in two weeks.

“A person who doesn’t have a $500 today is not going to have $575 in two weeks,” said Ed Mierzwinski, senior director of the Federal Consumer Program at U.S. PIRG, a grassroots consumer program.

If you keep rolling it over by paying another $75 every two weeks, three pay periods later you’ll end up incurring a shocking $225 fee on a $500 loan, which equates to a 391% APR. “That’s a debt trap,” Mierzwinski commented.

Installment loans might sound like a safer bet because you’re making fixed monthly payments over a set period of time. But they can also be unaffordable, Peterson said.

“You could have a 500%-interest-rate-two-week payday loan that you just pay the interest on and you roll over multiple times, or you can have a 500%-interest-rate-year-long installment loan where you just pay interest and never decrease the principle,” Peterson said. “If you just take the money and don’t pay attention to the labels or the ink on the paper for the contract, these are essentially the same loan.”

The CFPB study found that nearly a quarter of payday installment loans end up in default. Of all the short-term products, online payday installment loans have the highest default rate — 41%.

Your bank account might be at risk

Short-term loans might have a domino effect on your financial security.

“It’s not uncommon for the debt trap not only to threaten the financial security of the borrower, but to have far-reaching, devastating effects on the whole financial life of the borrower,” Astrada said.

To take out a payday loan, you have to have a bank account; often, you have to give lenders access to your bank account to withdraw your payments (or give them a predated check). Lender is entitled to cash your predated check if you don’t pay them back. That could lead to overdraft fees, bounced check fees, your bank closing your account — all of which could significantly damage your credit. Some risky loan borrowers even end up in bankruptcy.

You could lose your possessions

To get a short-term title loan, your collateral is your car. Keep in mind that you lender is within his or her legal rights to take possession of your vehicle if you default on the loan.

“For $200, $300 or $500 that you need, you are putting your car that could be worth $2,000 or $3000 at risk of being repossessed by the high-cost predatory lender,” Mierzwinski said.

Moreover, if a lender takes possession of your car, you won’t be able to get to work, which will eventually affect your ability to repay the loan. Approximately 22% of car title installment loans end in default, and lenders repossess about 8% of those, according to the CFPB.

When you take out a pawn loan, you might risk losing your collateral, but at least nothing will happen if you walk away from the debt. That’s why pawn loans are relatively safer than other high-cost short-term loans. Peterson suggested that if you want to take out a loan from a pawn shop you select the collateral that you can live without — think twice before you pawn a family heirloom.

When can short-term loans be a good idea?

There are countless reasons — many beyond your control — you might need money fast. Medical emergencies, unexpected job loss or car repairs can easily send your finances spiraling. Before you take out a short-term loan, first ask yourself whether it’s necessary to borrow some quick cash for the expenses. For example, it’s not a good idea to take out short-term loan for a want, rather than a need, like a lavish vacation.

“If you’re taking out small-dollar loans that just simply pushes the problem forward in terms of having more expenses and income, that’s a dangerous situation because then you’re not actually addressing the issue,” Astrada said.

You should consider short-term loans only when it’s absolutely necessary, such as for a true emergency. If you do decide on a short-term loan, avoid the high-cost, predatory ones. Instead, shop for the lowest APR you’re eligible for and borrow only as much as you need. Read on to find some better, safer alternatives options with reasonable interest rates.

Where to find a good short-term loan

Start with your local credit union or community bank

Plenty of community banks and credit unions offer personal loans or small-dollar loans with much lower interest rates than payday or title loans. In addition, these types of financial institutions are much better regulated than high-cost lenders.

For example, all federal credit union loans have an 18% interest cap, with one exception — Payday Alternative Loans, which have interest rates capped at 28%.

Look for credible, online lenders that offer lower-APR loans

Some banks and nonbank, online lenders also make decent installment loans, even for people with not-so-great credit scores. There are decent personal loans for people with bad credit. Online lenders typically offer loans to borrowers with minimum scores of 600. The higher your score, the better rates you’ll likely get. The exact products lenders offer you can depend on your credit score, credit history, income and where you live, but the APR should not exceed 36%.

Compare lenders on our personal loan marketplace.

When considering a short-term loan, there are a few things you must avoid. Because you don’t want to get into a bad cycle of debt, consider these points when you’re choosing a loan product:

1. The total loan cost
The main difference between a small-dollar loan that’s predatory and one that’s beneficial to a consumer is the interest rate. “Anything over 36% is very, very high-cost credit,” Astrada said.

2. How many questions the lender ask you
Risky loan lenders don’t ask for much information about your finances and the process is quick and easy. Legitimate financial institutions, however, have strong underwriting standards and typically access your personal and financial information to determine your ability to repay.

“[The lack of strong underwriting], where you can click three buttons online, walk through a store and walk out in five minutes. Yes, it’s more convenient, but it’s also like the bait of getting into one of those debt traps,” Astrada said.

3. Additional fees
Be wary of a host of tangential loan charges, such as prepayment, membership, convenience or origination fees. The loan itself might be small, but if a lender includes points and fees in the APR, your cost of borrowing can skyrocket.

4. Transparency
Steer away from products that don’t offer disclosure on rates and terms. If the lender is not transparent or ambiguous about additional fees, loan terms and your APR, consider it a red flag.

Alternatives to short-term loans

You might not have to take out a payday loan if you take certain actions. Consider these:

Contact your creditor to make a payment plan. If you know you might miss payments or have already missed some, don’t panic. Contact your creditors first. Some might work out a payment plan with you, especially if you have an emergency. For example, many utility companies and hospitals offer lower interest — even 0% — payment plans to make sure that you can pay past due balances over the course of several months.

Shop around for the lowest-cost loan. Check with credit unions and community banks to see if you qualify for a small-dollar personal loan. Also search for credible financial companies offering installment loans with lower APRs.

Ask friends and family for help. Don’t be embarrassed to ask friends or family if you need a quick, short-term loan. A Pew Charitable Trusts study found that many borrowers trapped in payday-loan debt cycles eventually got help from friends and families. You’re way better off asking for help from them instead of getting in over your head with a predatory loan.

Take a credit card cash advance. When you borrow cash against your credit card’s line of credit on your credit card, it’s called a cash advance. Unfortunately, cash advances often come with high interest rates and additional fees.

In fact, a cash advance APR is typically 5% higher than the APR for purchases. On top of that, you’ll incur a 3% or 5% fee on the amount of each cash advance you take. It’s not an ideal solution, but still likely cheaper than a payday or title loan in the long run.

Make a budget and save for emergencies. Look at your income and expenses and make sure you don’t spend more than you earn. Avoid unnecessary spending. At the same time, build some savings so that next time an emergency arises, you have a cushion to fall back on instead of turning to credit for help.

The bottom line

Say no to costly short-term loans. Don’t fall for the convenient, quick money — those predatory loans can cost you a great deal in the long run. If you do a need short-term loan, shop around for the lowest-cost one you can find. Try local banks, credit unions and credible financial companies. If you can’t secure a loan because your credit is bad, you have no income and you don’t own anything that qualifies for collateral at a pawn shop, you may need to seek alternatives as mentioned above, but a three-digit, payday or title loan isn’t going to fix your problem.

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Shen Lu is a writer at MagnifyMoney. You can email Shen Lu at shenlu@magnifymoney.com

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Is Getting a Personal Loan a Bad Idea?

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You’re in a pinch and in desperate need of money. You’ve already asked family members for help, but nobody can assist you. You’ve heard of a personal loan before, but is taking one out a good idea?

In short, it depends on your particular financial situation. If you’ve racked up high-interest credit card debt, for example, and you can take out a personal loan with a lower interest rate to consolidate and pay off that debt, a personal loan might be right for you. But if you have other assets you can borrow against that will have lower interest rates — such as a 401(k) loan or a home equity line of credit (HELOC) — you might want to consider pursuing those lines of credit instead of a personal loan.

Here’s everything you need to know about when a personal loan might be worthwhile, and when you might want to look elsewhere.

When a personal loan might be the answer

Personal loans can be taken out for a variety of reasons, such as to pay for car repairs or medical expenses, as well as to consolidate debt. Consider these ways you could use a personal loan.

You’re consolidating high-interest credit card debt

Taking out a personal loan is particularly common for people who have significant high-interest credit card debt and are interested in consolidating that debt and paying it off. Personal loans can allow someone with high-interest credit card debt to take out a loan with a lower interest rate than their credit cards. Also, many consumers like having to make only one monthly payment.

If you explore personal loans in our marketplace, you’ll find that they traditionally come with terms between 12 and 84 months.

Charles Adi, a financial advisor with Blueprint 360 in Houston, said the most common reason he advises his clients to take out personal loans is for the consolidation of high-interest credit card debt — particularly when the interest rates on clients’ credit cards are more than 15 percent.

“Because on the personal loan side, you’re probably looking at a 7 to 9 percent interest rate, so that savings is very helpful,” Adi said. (This rate, it should be noted, is likely for borrowers with excellent credit.)

In August 2018, the average interest rate on personal loans for people with excellent credit (760 and above) was 8.10 percent, according to data from our parent company, LendingTree. For those with good credit (680 to 719), it was 17.92 percent.

Josh Nelson, a certified financial planner and the CEO and founder of Keystone Financial Services in Fort Collins, Colo., said one benefit of using personal loans for the consolidation of high-interest credit card debt is that they push clients to begin using better financial habits.

“The nice thing about a consolidation loan is that it does force discipline,” Nelson said. “It forces people to have to make that higher monthly payment.”

In addition, Adi said many of his clients like the one monthly payment that accompanies a debt consolidation loan. “A lot of my clients get frustrated when they have to keep track of five or six different cards,” he said. “Consolidating it into one payment and [seeing] that balance going down steadily — it’s just a feel-good story.”

He adds that he doesn’t recommend clients take out personal loans for debt consolidation if they don’t have good financial habits already in place. He said he has seen a handful of times where clients take out a personal loan to pay off high-interest credit card debt, and then spend the personal loan on their lifestyle.

“That’s pretty much the only time where I don’t move forward with it because it makes no sense helping someone save a few thousand on interest if it’s going to lead to them making poor financial decisions,” Adi said.

You’re making home repairs and can’t access a home equity loan

Taking out a personal loan for home repairs only makes sense if you’re disciplined enough to pay off the loan quickly. It can also make sense if you’re going to refinance your home to pay off the personal loan.

Although many homeowners will make repairs or renovations using a HELOC, some will also take out a personal loan if they are unable to take out a home equity loan because they don’t have enough equity to qualify for a HELOC. “I’ve recommended [personal loans] for individuals who wanted to do some home repairs, but they couldn’t access money from their house via the traditional equity channels,” Adi said.

But Luis Rosa, a certified financial planner with Build a Better Financial Future in Henderson, Nev., said most consumers looking to make home repairs will consider a HELOC before a personal loan.

“Typically, the home equity loan is going to be a lower interest rate than a personal loan because you have the home as collateral,” Rosa said. But consumers who take out a HELOC only get charged for interest as they use the credit line.

“If you needed a $30,000 home improvement project, you might draw $5,000 at a time, as opposed to the personal loan, where you get the whole $30,000 upfront and start paying interest on the full amount,” Rosa said.

You need a real estate bridge loan

Jeff Motske, a certified financial planner and president of Trilogy Financial in Southern California, said he has seen people use personal loans in real estate. For example, he had a client whose house was still in escrow, but the client wanted to buy a home in 30 days.

“Those are opportunities to get personal bridge loans to manage that gap and not have to deal with running a whole new mortgage you want to pay off because you’re moving into retirement or you don’t want debt on the house,” Motske said.

Ilene Davis, a certified financial planner based in Melbourne, Fla., said she rarely advises clients to pursue personal loans because of their high interest rates. In fact, one of the only situations in which she would recommend clients use them is for a bridge loan in which the client will only need the money for a short period and has the resources to pay it back quickly.

You’re making a large personal purchase (and have good financial habits)

Although it’s not ideal, Rosa said he has seen people take out a personal loan to finance a large purchase, such as an engagement ring or wedding. “You probably don’t want to buy a big-ticket item like that on credit, but I’ve seen people do that just because it was cheaper than credit cards,” he said. This only makes sense if you have excellent credit and can repay the loan back quickly.

Also, Rosa said he has seen people take out personal loans to pay for medical procedures. “If you’ve considered the alternative of financing through the doctor’s office or if that was not an option, then perhaps it makes sense because it would be cheaper than putting it on a credit card,” he said.

When a personal loan might not be the answer

A personal loan can be a great way to manage your debt or afford purchases. But weigh your options carefully. Taking on debt is a long-term decision — and you may have other options to consider.

You may qualify for a HELOC

Dennis Nolte, a certified financial planner with Seacoast Investment Services in Oviedo, Fla., said he typically recommends clients borrow against their own assets, such as their home, before pursuing a personal loan.

“Because [personal loans] are so expensive, and you have to jump through hoops to qualify, we try to find where they have assets and borrow against those assets first,” he said, adding that a HELOC is not as common as it used to be because the new tax law doesn’t allow deductions if the funds aren’t being used for real estate. “But most people who are going for a personal loan probably aren’t itemizing anyways,” he said.

Motske said he recommends a HELOC over both a 401(k) loan and a personal loan nearly every time.

“In particular, if it’s just a short-term or a manageable piece, because a home equity line usually has some tax benefits next to it, whereas personal loans and credit card loans not only don’t have those benefits, but also they come at much higher interest rates,” he said.

You have a 401(k) loan

Nolte said that despite the common lore that you should never borrow against your 401(k), it might be the last resort for young people whose only savings are in their retirement accounts. Nolte said the benefits of taking out a 401(k) loan over a personal loan are that you don’t have to qualify, you’re paying yourself back in interest and it’s your money.

“Basically, it’s your assets,” Nolte said. “If you’re just shifting assets on a balance sheet and you’re disciplined about it, that’s not a bad way to go. Rather than going to other sources that are going to charge you a lot more interest, a lot of times it makes sense to use your existing assets if you can.”

Sallie Mullins Thompson, a certified public accountant and financial planner based in New York City, said that although taking out a 401(k) loan is fine, people have to be extremely careful that they follow the guidelines set in place for paying it back.

You have to pay the loan back monthly, you have to pay it back within five years, you can’t get another loan on that 401(k) and if you leave the company before the loan is paid back, there are ramifications: The entire loan has to be paid back immediately, and, if it isn’t, you’re liable for the income tax on it as well as the 10 percent penalty if you’re under 59 ½, Thompson said.

“Plus, there’s the fact that you’re taking money from your retirement investment that’s no longer earning money,” she said. “And then you’re paying it back with interest.”

Adi has also recommended that his clients take out 401(k) loans in the past. “Depending on what the rates are, you could probably hit a 5 percent rate on a loan from a 401(k), and that interest is going back to yourself,” he said.

Be cautious of the idea that you’re “paying yourself back,” Mostke said.

“You’re really not,” Motske said. “You’re hurting your ability to grow that nest egg that you’re going to need for retirement.”

You’re consolidating student loan debt

Thompson said, typically speaking, it’s not wise to use a personal loan to consolidate and pay back student loan debt.

“The personal loan rates are usually under credit card debt rates, but they would not be under student loan debt rates, particularly with the various repayment programs you find these days,” she said.

Rosa said he doesn’t advise his clients to use personal loans for student loan debt either. “There are companies that do debt consolidation loans specifically for student loans, and you can do them through the government as well,” he said. “You can actually just consolidate it through studentaid.ed.gov, so you wouldn’t need to go to an outside lender for that.”

Shopping for personal loans

By shopping online for personal loans, you can compare more rates than you’d be able to compare by going to banks in person. Further, an online lender or member-owned credit union may be able to offer more competitive rates.

Where to find a personal loan

You might be able to secure a better personal loan interest rate through a credit union. Adi said he often advises his clients to look for personal loans at credit unions or even local banks because they tend to have better rates than larger institutions. If you already have a loan at the institution, that’s even better.

“Let’s say you have your car at a local regional bank, go back to the same institution looking for the personal loan as opposed to going somewhere else, because you want to have that history with the bank so that the next time you come back, you’re a preferred customer,” Adi said.

And if you have two financial products open with an institution, such as a car loan and a mortgage, you’ll be in even better shape. “Try to accumulate goodwill with the particular institution if possible,” Adi said.

Nolte said he advises his clients to look for personal loans at credit unions, too. “For interest rates on loans, they are generally cheaper, and they work with you a little bit more than some of the bigger banks,” he said.

And while credit unions used to have strict membership requirements to join, they may be more lenient nowadays, Nolte added.

How a personal loan affects your credit

If you’re shopping for a personal loan online, you’ll likely be submitting to soft credit checks, which don’t affect your credit. But if you find lenders that require a hard credit check each time you request a quote, that could hurt your score.

Regular on-time payment on a personal loan can boost your credit score, as it shows that you responsibly manage and pay back your debt.

One thing to be cautious of is taking out a personal loan for credit card debt consolidation, and then closing old credit cards. Rosa said consumers will often take out a personal loan and then close all their credit cards because they feel like they need a fresh start.

“But that might hurt them creditwise, because they might pay off a card that they’ve had for a very long time, which has helped them build that credit history,” he said. In addition, some people will open a new credit card at the maximum limit while they are still paying back their personal loan, which can lower one’s credit score, according to Rosa.

Personal loan pitfalls to avoid

When shopping for a personal loan, there are a few common pitfalls you should avoid.

  1. There’s a sales pitch at the end. Often at the end of closing for a personal loan, there will be a life insurance or unemployment insurance sales pitch. These policies might be beneficial for some people, but you should do your due diligence to figure out if either is right for you.
  2. There might be talk of precomputed interest. In short, precomputed interest is bad. Ask if it’s part of your loan, and do not pursue the loan if it is.
  3. There is an origination fee. You likely cannot avoid this, so just make sure you understand the fee and take a look at the APR of the loan, not just the interest rate, as the APR takes the origination fee into account.
  4. There might be a prepayment penalty. Most loans will not have a prepayment penalty, but you should check to make sure yours doesn’t before signing on the dotted line.

The bottom line

When considering whether to take out a personal loan, your financial habits, credit score and need for the money should all be taken into consideration.

In general, personal loans can be a good idea for consumers with excellent credit. But if you don’t have excellent credit, a personal loan might come with an interest rate so high that it’s more than some credit card rates. Make sure you know the interest rate before you take on a personal loan.

Nearly every financial adviser and planner interviewed warned against personal loans if the consumer didn’t have good financial habits already in place.

“Sometimes people do personal loans because that’s their last resort,” Motske said. “That can be a real dangerous path to run on.”

Nelson said he feels similarly. “I think it really depends on the psychology of the person — if they’re really trying to pay debt off, or if they’re looking for a quick fix,” he said. “And quick fixes don’t typically work.”

Thompson advises her clients take a good hard look at why they’re considering a personal loan in the first place.

“They really need to look at the reasons they got into that problem to begin with,” she said. “The personal loan is not the solution. You can get the personal loan, pay off your credit card debt and then you have an issue with paying off the personal loan.”

If her clients do take out personal loans, Thompson said she spends ample time educating them about personal finance. “I spend a lot of time talking to my clients about what they’re going to do differently this time so that they can pay off that personal loan and not get themselves right back into credit card debt again,” Thompson said.

But if you have the right discipline in place, a personal loan can be a good financial decision. Adi said one of the most satisfying personal loans he ever did was with a client who was in his mid-70s and had several store credit cards — including Dillard’s, Macy’s and Costco — racked with debt.

“We consolidated it into a personal loan, and he paid it off in three years,” Adi said. “The client told me, ‘I never thought I would be debt-free.’ I think it’s important for everybody to know that no matter your age, it’s possible to get a personal loan to pay off all of these debts.”

Advertiser Disclosure: The card offers that appear on this site are 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 card companies or all card offers available in the marketplace.

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Jamie Friedlander is a writer at MagnifyMoney. You can email Jamie here

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The Difference Between Pawnshop Loans and Personal Loans

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Managing rent, insurance and other monthly expenses can be overwhelming, especially when money is tight and you’re waiting on your next paycheck. Add an emergency into the mix and you may be looking for some financial help.

But you’ll want to be cautious about where you go for assistance. You may be weighing between a pawnshop loan and a personal loan, but these two products have some key differences. Here’s what to consider.

How do pawnshop loans work?

Securing a pawnshop loan is a different process from applying for a loan at a bank.

If you want a pawnshop loan, you have to bring in an item to use as collateral. The pawnshop will evaluate and appraise the item to determine the loan amount for which you qualify. Pawnbrokers will also consider their ability to sell the item.

The average pawnshop loan is $150, according to the National Pawnbrokers Association. But the value of your collateral and your state will determine the maximum amount of money you can borrow. You can expect a pawnshop loan to be for up to half the value of your collateral.

Once you’re approved for a pawnshop loan, you’ll receive a pawn ticket that will outline your loan terms and amount, as well as other information. When your loan term is up, you’ll have to repay the borrowed amount to reclaim your collateral. If you fail to repay your loan, your collateral will be seized and sold.

Pawn Shops Today reported that customers recover more than 80% of collateral that is used to secure a pawnshop loan.

When it comes to interest and fees, pawnbrokers are a far pricier option compared to personal loans. According to the National Consumer Law Center, between interest and fees, you could be paying upward of 200% APR. But pawnshops are regulated by the state in which they are located, so the interest rates and fees will vary.

For example, in Wisconsin, pawnbrokers are not allowed to lend more than $150 to a customer, and the interest rate cannot be more than 3 percent per month. In Texas, pawnbrokers can lend up to $2,500. While you won’t pay interest, you may have to pay a pawn service fee up to $300.

Risks of pawnshop loans

  • Loss of collateral: A loan that requires collateral is always a risk. If you don’t repay your loan, you could lose your collateral. With a pawnshop loan, however, your risk is greater since you can only get a loan for up to half the value of your collateral.
  • Unreasonably short terms: A pawn loan typically is between 30 to 90 days. That could make it difficult to pay back your loan.

Benefits of pawnshop loans

  • No credit check: Most lenders run credit checks on their applicants. Besides a review of the applicant’s employment and income information, a credit check is used to help a lender determine the likelihood of the applicant being able to repay the loan. Since you’ll put down collateral, a pawnshop loan won’t require you to have good credit to qualify.
  • No impact on credit score: With a personal loan, your lender will report your payments to the major credit bureaus. If you struggle to make on-time payments, your credit score could take a hit over time. Pawnbrokers do not report any information on loans or payments to the credit bureaus, so a pawnshop loan will not affect your credit.

Pawnshop loans vs. personal loans

As a rule of thumb, you should avoid pawnshop loans. Their high rates and fees mean you pay a high cost for a small amount of money. Although personal loans are harder to qualify for, they’re a safer loan product. Here’s more information on the two.

Pawnshop loans

  • Loan amounts: Pawnshops are not the place to go if you need a significant amount of money since pawnbrokers can only offer small loans.
  • Collateral: You’ll need collateral to secure a pawnshop loan. The amount of the loan is based on a percentage of the value of the item.
  • Repayment: Repayment of a pawnshop loan is not required, although it’s highly recommended. If you don’t repay the debt, the pawnbroker could seize the collateral.
  • Terms: Pawnshop loans tend to have short terms, typically between 30 and 90 days.

Personal loans

  • Application: To secure a personal loan, you’ll work with a bank, credit union or online lender. An application must be filled out online, in person or over the phone. You’ll submit to a credit check and provide some income and employment information.
  • Credit check: A traditional lender will assess your creditworthiness and have a minimum credit score it’ll approve. But you may be able to find personal loans for bad credit.
  • Loan amounts: Personal loan applications have access to various loan amounts.
  • Collateral: Collateral is not a requirement for all personal loan lenders, but it is not unusual for lenders to request it.

Alternatives to pawning

A pawnshop loan may be easy to qualify for, but it comes with a lot of risks. Between high rates and fees and the potential to lose your collateral, a pawnshop loan can leave you in worse shape than you started.

Consider these alternatives:

  • Auto title loans: An auto title loan is secured by the value of your car. Similar to a pawnshop loan, an auto title loan typically does not require a credit check and the amount is based on the value of the collateral. But you get to continue using your car during repayment.
  • Payday loans: A payday loan is a short-term loan or cash advance that requires you to write a check to the lender or agree to an electronic payment that will be used to repay the loan once the term has expired, which is typically on your next payday. Payday loans have high rates, though, and lead you into a debt trap.
  • Personal line of credit:A personal line of credit is an unsecured loan available through banks and credit unions. It is similar to a credit card since you’re provided with a credit limit and are required to make monthly payments with interest (if there is an outstanding balance). You may only be able to access a personal line of credit through your bank.

Don’t panic if you run into financial trouble. You have various options for managing your money. But be wary of pawnshop loans. They can leave you in a worse financial position if you’re unable to repay them.

Consider your alternatives. A personal loan may be a safer choice. And if you have friends or family who could help, don’t shy away from reaching out to them.

Advertiser Disclosure: The card offers that appear on this site are 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 card companies or all card offers available in the marketplace.

Kristina Byas
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What Is a Personal Line of Credit?

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When you need to borrow money, you may think to borrow a personal loan or get a credit card or home equity line of credit (HELOC). But there’s a lesser-known financing option you may not want to overlook: a personal line of credit.

Don’t confuse a personal line of credit with a credit card. It isn’t a piece of plastic you can whip out and swipe at the grocery store. Instead, it’s a line of credit from which you can draw cash that’s often offered by banks and credit unions to existing customers who meet certain requirements. Here’s what you need to know about this financial product.

What is a personal line of credit?

A personal line of credit is a loan you can use and pay back as needed. The terms of the product can vary from one lender to another.

Interest rates: In most cases, personal lines of credit come with variable interest rates. But they can come with a fixed interest rate. You can find rates starting at around 8%, but they may be as high as 20% or more.

Costs: Aside from the interest rate, personal lines of credit may have other costs. Take care to read through the fine print of the terms for these potential fees:

  • Application fees: This is the cost to apply for the account. Many financial institutions don’t charge for applications, but it’s a good idea to double-check.
  • Annual fees: This is a fee charged each year you have the account. For example, Wells Fargo and TD Bank charge $25 annually for personal lines of credit. Some banks will waive fees as long as you have an open bank account. Check the terms for details.
  • Cash advance fees: This fee may be charged each time you withdraw money from your credit line. Many financial institutions don’t charge this fee.

Credit limits: Credit limits for personal lines of credit can vary. Credit limits can be a few thousand dollars to well over $1 million.

Unsecured vs. secured personal lines of credit: What’s the difference?

As you research personal lines of credit, you’ll find that they can come secured or unsecured. An unsecured personal line of credit doesn’t require collateral. A secured personal line of credit, on the other hand, requires collateral and may be backed by the balance in a savings account, certificate of deposit or investment account.

Collateral reduces the risk for the financial institution lending you money. As a result, secured personal lines of credit generally have lower interest rates.

But a secured line of credit comes with a higher risk to you. If you fail to repay your debt, you could lose your collateral. And you may not have access to the collateral you use to secure the credit line until the debt is repaid.

Where you can find a personal line of credit

Personal lines of credit are marketed less widely than other products, but there are several available from small and large banks and credit unions. The first place to shop for a personal line of credit is the financial institution you use for banking.

Some banks, such as Citibank, only take applications from existing customers. Others, such as Santander Bank and TD Bank, will waive fees for their customers.

The requirements to qualify for a personal line of credit vary from one lender to the next. For a Citibank personal line of credit, you need to have a deposit account with a balance over $500 and a, Citibank mortgage or Citi credit card that’s at least 3 months old.

Some financial institutions may not require you to have a checking account to qualify for a personal line of the credit. Be sure to comparison shop to find a personal line of credit that makes sense for you.

How a personal line of credit works

Obtaining a personal line of credit starts with the application.

The creditor may check your debt-to-income (DTI) ratio, credit score and credit history. You may have to turn in pay stubs, W-2s, tax documents and other supporting information for the application. If you already have accounts with the financial institution, it may also dig into the history to see if you have any overdrafts or other signs of misuse that could impact their decision.

Once approved, you get the terms of the agreement to sign at a local branch or online. You will likely get access to the funds within a few days.

To use the credit line, you may be able to:

  • Transfer cash from the credit line into a bank account
  • Get an advance from a physical bank location
  • Write a credit check to yourself or someone else

Some personal lines of credit give you a draw period that lasts a couple of years. During this draw period, you can draw up to the credit limit. After the draw period, the repayment term begins, and you need to pay the money back.

A monthly minimum payment is typically required. Wells Fargo’s minimum payment for an unsecured personal credit line is 1%. The Wells Fargo CD or savings secured personal line of credit has a minimum payment that’s 1/120th of your principal balance. Additional fees may apply.

Some personal lines of credit offer an interest-only payment option. With this repayment option, you’re only required to pay the interest incurred on your credit balance for a certain period. Be careful about getting into the low-cost, interest-only payment trap. Making interest-only payments can lead to much larger payments down the line when you need to start repaying principal and interest.

What can a personal line of credit be used for?

You have the freedom to choose how you use a personal line of credit. You could pay for home repairs, education expenses, unexpected bills or debt consolidation.
The benefit of a personal line of credit is that it can cover unpredictable costs. In comparison, a personal loan gives you a set amount of money with a set repayment period.

Who is a personal line of credit best for?

Personal lines of credit are generally for borrowers who have at least decent credit with some savings socked away.

A solid credit history and savings could qualify you for the best rates and avoid the need for you to put up collateral. But even if you’re opting for an unsecured credit line, a bank may ask to see additional verifiable assets.

Citibank extends its lowest interest rates to elite Citigold and Citi Priority customers or regular account holders with balances of over $200,000. To be a Citigold customer, you must maintain a balance of over $200,000 in eligible accounts. Citi Priority customers must maintain a balance of over $50,000 in checking, retirement and investment accounts at Citibank.

The products above are tailored to high-net-worth clients. Borrowers without six figures in the bank may still be able to qualify for a personal line of credit, but the rate and terms may be less competitive. Compare financial institutions to find which one benefits you the most.

Alternatives to a personal line of credit

Not sure if a personal line of credit is right for you? Consider these alternatives:

Personal loan

A personal loan is an installment loan. You can use the funds from a personal loan for a variety of reasons, from car repairs to medical procedures to weddings. Consolidating debt is a popular reason for taking out a personal loan.

These loans can offer a low fixed interest rate on a fixed term. If you’ve had trouble managing credit lines before, a personal loan gives you a set payment to keep up with until the debt is paid off.

Personal loan amounts can range from about $1,000 to $100,000.

How it works

You can apply for personal loans online through banks, credit unions and online lenders. Each will consider your credit, income and other variables to determine your eligibility for a loan. After you’ve been approved for a loan, the funds will be deposited into your bank account.

Who personal loans are best for

Personal loans are a product for almost anyone. There are personal loans available for people with stellar credit, as well as those who have less-than-perfect credit.

The best interest rates are usually given to borrowers with good to excellent credit scores — generally 640 and above. The good news is you can shop for personal loans to check rates without a hard inquiry for most lenders.

HELOC

A home equity line of credit (HELOC) is secured by your home. HELOCs usually have a variable interest rate that can start out fairly low if there’s an introductory period. Be sure to ask about introductory rate expirations and rate caps to get a clear picture of costs.

How it works

HELOCs are offered through banks, credit unions and other lenders. You may be able to borrow up to 80 percent to 90 percent of your home equity value.

When you apply for a HELOC, your credit score, DTI ratio and the amount of equity you have in your home will be considered.

Some HELOC products allow for interest-only payments. That could be a perk if you need to settle other obligations. But it does come with the risk that you could be stuck in debt longer than you’d like.

Often, HELOCs have a draw period where you’re able to use the line of credit as needed. You may be able to renew the credit line after the draw period ends. If you don’t renew it, you’ll no longer be able to draw money and the repayment period will begin.

HELOCs may have closing costs, annual fees and prepayment penalties. Take care to read the interest rate and fee terms to avoid any surprises.

Who it’s best for

A HELOC is going to be best for borrowers who have sufficient equity in their home and decent credit. You may need a credit score of at least 620 to qualify. A score of 680 or above could make it easier to get approved.

Like a personal line of credit, a HELOC is a product for borrowers who have a history managing available credit responsibly. But a HELOC is secured by your home. If you fail to repay your debt, you could lose your house.

If you’re interested in shopping for a HELOC, you can compare products at the LendingTree marketplace. (Note: MagnifyMoney is owned by LendingTree.)

Credit card

A credit card is a form of credit with which you’re probably pretty familiar. A credit card is a line of credit you can use on the fly. Some credit cards also offer rewards for transactions. You could, for instance, get cash back or earn miles toward free flights with a credit card.

Credit cards are offered by banks, credit unions and other financial institutions.

How it works

You can apply for credit cards online within a few minutes. Your financial information will be taken into account, including your credit history. If approved, the credit card issuer will provide you with a variable interest rate, spending limit, and any other fees associated with the card offer.

A minimum payment is due each month on your account. Over time, your rate can rise or fall. Depending on the card for which you apply, you may be responsible for paying an annual fee. Expect to pay fees for late payments and cash advances as well.

Who it’s best for

You can find credit cards for bad credit, but the best rewards programs and rates are reserved for those with excellent scores.

One major advantage to credit cards is sign-up promotions. Some cards offer a cash reward or bonus miles for signing up. You could even score an introductory 0% APR on purchases and balance transfers for periods of 15 to 20 months. Pay off your balance within that promotional period, and you essentially had a no-interest loan.

Credit cards are best for borrowers who are committed to using plastic and paying it off each month. That’s how you avoid interest charges. If you’ve had a problem with credit cards before, adding a new card to the mix may not be the best idea.

Making the right move for your finances

A personal line of credit has its merits. But you should weigh your options carefully. You may find a personal loan, HELOC or credit card is a better fit.

Ultimately, the right product for you will depend on your goals and financial situation. The best way to find the most competitive product for your needs is by shopping around and considering which products and features matter most to you.

Advertiser Disclosure: The card offers that appear on this site are 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 card companies or all card offers available in the marketplace.

Taylor Gordon
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Taylor Gordon is a writer at MagnifyMoney. You can email Taylor here

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How to Finance a New Air Conditioning Unit

Editorial Note: 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 prior to publication.

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There are many reasons homeowners choose to replace their existing air conditioning or HVAC unit, including a desire for greater energy efficiency or better functionality. Homeowners wishing to sell their properties may also want to consider upgrading their HVAC system first — especially if it’s old. Six percent of real estate professionals who participated in the 2017 Remodeling Impact Report from the National Association of the Remodeling Industry (NARI) and National Association of Realtors noted that an upgraded HVAC system recently helped them close a sale.

While it’s obvious a new HVAC system can lead to greater comfort in your home and perhaps even a more attractive resale proposition for buyers, there is one problem that comes with replacing your HVAC — the cost.

While the NARI remodelers estimated that replacing an HVAC unit ran consumers approximately $7,475 nationally in 2017, you may pay more (or less) depending on the size of your home and where you live. For example, HVAC system company Trane quotes a standard XR Series HVAC system for $5,600 to $7,800 (including installation) if you live in central Indiana and have a home that’s 2,000-3,000 square feet. If your ZIP code is 90210 and you live in Beverly Hills, Calif., on the other hand, the same system is estimated to cost $8,800 to $12,000. For a smaller-sized home — less than 1,000 square feet in this example — you would pay considerably less, however. In central Indiana, Trane estimates an HVAC system would set you back $4,600 to $6,600. In Beverly Hills, you would pay $6,800 to $9,400.

With these costs in mind, you may be wondering about the best ways to pay for a new HVAC system. Should you save up the cash or pull from your emergency fund? Or, would financing with a credit card or personal loan leave you better off?

At the end of the day, the right way to pay for a new HVAC system depends on your goals and your personal finances. Consider these loan and financing options as you move forward with your research.

Credit cards

A credit card can be a valuable tool when used with careful thought and consideration. It can make sense to finance an HVAC unit with a credit card in many situations, including ones where you can qualify for a low interest rate or even an introductory 0% APR on purchases.

Some consumers who have the cash to pay for their HVAC unit in full may choose to use credit for additional reasons such as earning cash back or travel rewards. If a consumer uses a cashback card that earns 2% back to purchase a $7,475 HVAC unit, they would pocket $149.50 in rewards with little effort on their part.

What to watch out for

While it could be smart to use a credit card to pay for an HVAC unit, there are several pitfalls to watch out for. Risks include:

  • Length of introductory 0% APR offers: If you’re using a card that offers an intro 0% APR on balance transfers or new purchases, you’ll want to read the terms of your offer to see how long it lasts. Once your introductory 0% APR offer ends, the regular purchase APR will apply to any balance remaining after the end of the intro period. Some credit cards charge deferred interest, meaning you have to pay interest on the remaining balance and interest that would have been charged to the amount you paid off during the 0% APR period.
  • High interest rates on rewards cards: While earning rewards on your HVAC system can make sense if you have the cash, it is not a smart move if you plan to carry a balance. Considering the average credit card APR is 15%, the rewards you earn would be dwarfed by the interest you’ll pay over the long run.

What to look for in a credit card when financing an HVAC unit

If you’re looking for a credit card to cover your HVAC purchase, it makes sense to consider your goals first. Are you hoping to secure 0% interest on purchases to save on interest?

If you’re seeking a card that offers 0% on purchases, you’ll want to understand how long the interest offer will last as well as any applicable fees. You can compare credit card offers right here on MagnifyMoney.

Personal loans

A personal loan is another option you can use to finance an HVAC system. This financial product offers many benefits that can be advantageous if you need some time to pay for your HVAC unit, including fixed interest rates, a fixed repayment schedule and a fixed monthly payment.
Depending on your credit score, a personal loan may also offer a lower interest rate than you might receive with a credit card or other types of financing.

What to watch out for

While a personal loan could be ideal if you need to borrow money for a new HVAC system, there are several details you’ll want to watch out for and understand:

  • Fees: Some personal loans come with fees such as an origination fee. However, not all personal loans come with this fee or any upfront fees, so make sure to check.
  • Precomputed interest: Precomputed interest is a complicated interest scheme that may leave you paying more interest than you would with a loan that doesn’t precompute interest — especially toward the beginning of your loan. You should avoid personal loans that compute interest this way.
  • Prepayment penalties: Some personal loans may charge fees if you pay your loan off early. You should avoid personal loans that employ this “gotcha.”

What to look for in a personal loan when financing an HVAC unit

How much you’ll pay to access a personal loan depends on the interest rate and the fees you’re charged. With that in mind, you should compare offers to find personal loans with the lowest interest rate and lowest fees (or no fees). Also, make sure your personal loan doesn’t have a prepayment penalty so you won’t suffer financial consequences if you pay your loan off early.

Finally, make sure your personal loan comes with a monthly payment and repayment timeline you can live with. To compare loans and estimate the costs of borrowing, you can browse here.

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Home equity loans

A home equity loan works similarly to a personal loan in the fact that both offer fixed interest rates, fixed monthly payments and a fixed repayment timeline. However, personal loans are unsecured loans, whereas home equity loans are secured by the equity in your home. Another option is a home equity line of credit (HELOC), which is a revolving line of credit secured by your home. HELOCs have variable interest rates, and you only pay interest on the amount you borrow, so your monthly payments will vary.

— Read more on the differences between a Personal Loan vs. Home equity Loan here!

The amount you can borrow with a home equity loan is typically limited to 85% of your home’s value. For this reason, this option may not work for you unless you have considerable equity in your property. On a positive note, the interest rate you can qualify for may be lower than other financial products because the loan is secured by the value of your home. The interest you pay on your home equity loan may also be tax-deductible.

What to watch out for

Before you apply for a home equity loan, make sure you understand both the advantages and any potential pitfalls. Here are some downsides you’ll want to be aware of:

  • Fees: Home equity loans come with many of the same fees as a traditional mortgage, including application fees, loan processing fees, origination or underwriting fees, lender or funding fees, appraisal fees, document preparation and recording fees, and broker fees. If these fees are wrapped into the cost of your loan instead of being charged upfront, you’ll pay more interest to finance them. HELOCs may have low (or no) closing costs.
  • You could lose your home: Because home equity loans are secured by the value of your home, you could lose your home to foreclosure if you don’t repay the home equity loan.
  • You may not qualify: These loans are intended for consumers who have considerable equity in their homes, which is why you can only borrow up to 85% of your home’s value in most cases. If you don’t have a lot of home equity, you cannot qualify for a home equity loan.
  • Unpredictable costs: With a HELOC, your interest rate could change at any time. And because you don’t have fixed monthly payments and can carry a balance, you could end up with a hefty bill when it comes time to repay what you’ve borrowed.

What to look for in a home equity loan when financing an HVAC unit

If you’re considering a home equity loan to finance your HVAC purchase, you’ll want to shop around to find a loan with the lowest interest rate and fees you can find. The Federal Trade Commission (FTC) also notes you should ask if you’re paying any points (a fee you can pay to secure a lower interest rate), since points and other finance charges can lead to higher costs upfront.

The FTC also suggests comparing several loan offers to ensure each lender or broker is competing for your business with the best loan terms possible. Fortunately, you can compare home equity loans online with our parent company, LendingTree.

Company or contractor financing

Because some consumers need to borrow money to purchase a HVAC system, many companies that manufacture and install HVAC units offer their own financing plans. In most cases, they partner with a lender to offer in-house loans. While the terms of these offers vary, company financing can be a good deal if you can secure a low interest rate or 0% APR financing for enough time to pay your HVAC unit off.

What to watch out for

While financing your HVAC system through the company you purchase it from may sound convenient, there are several potential downsides. Watch out for:

  • Short introductory offers: While some HVAC companies may be able to offer 0% APR on their products for up to 60 months, not all companies will offer zero-interest terms that long. Make sure you understand how long your 0% APR offer lasts, as well as how high your interest rate will be once it resets.
  • High interest rates: Like other loans, the terms of your HVAC loan will depend on your credit score and income. Make sure to compare offers to find the best interest rate possible, whether that comes with company financing or another type of loan.
  • Fees: Make sure to ask about any fees you may be charged for your HVAC loan.

What to look for in a company financing when financing an HVAC unit

If you decide you want to compare company financing for an HVAC unit with other financial products, you’ll probably want to call around and ask HVAC vendors in your area. You can also research HVAC companies that offer in-house financing online. If you decide to dive into this option, make sure to ask specifically about financing plans, interest rates and any fees you’ll have to pay to secure a loan. Since HVAC vendors use different banks to fund their consumer loans, the terms of these offers can vary widely.

Fortunately, it’s a lot easier to find information on credit cards, personal loans and home equity loans online. A quick internet search can pull up a treasure trove of information that can help you compare loan and financing offers to find the best deal. Having your HVAC financing lined up before you shop, you can be choosy when it comes to selecting an HVAC unit and the company you want to install it.

Will my credit score take a hit?

Several factors make up your credit score, including ones that can be impacted when you make a large purchase. “New credit” makes up 10% of your FICO score, for example, and opening new lines of credit in a short amount of time can make you seem like a greater risk. As a result, you may see an impact to your credit score if you open a new credit account to pay for your HVAC system.

How much you owe in relation to your credit limits makes up another 30% of your FICO score, and this figure will skew higher if you charge an HVAC system to an existing revolving line of credit (like a credit card). Many experts recommend keeping your credit utilization below 30% to keep your credit score in the best shape possible.

The bottom line

If you know you need to replace your HVAC system and don’t want to wind up suffering without heat or AC while you research loans, time is of the essence. To find the best HVAC financing options for your needs, make sure you read through the terms and conditions of any loan you’re considering and compare more than one loan option at once.

HVAC units aren’t cheap by any means, but you can avoid overspending if you can secure financing with a low interest rate and favorable terms.

Advertiser Disclosure: The card offers that appear on this site are 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 card companies or all card offers available in the marketplace.

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

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How to Protect Yourself from Personal Loan Scams

Editorial Note: 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 prior to publication.

If you need some extra cash or want to pay off debt, taking out a personal loan can be a smart way to get the money you need. Personal loan interest rates can be lower than credit cards if you have decent credit and a personal loan can help you raise your credit score. In addition, there are dozens of online lenders to choose from, some of which offer an easy application process and funding in just one business day.

Along with the pros, of course, come cons. Personal loan scams are not uncommon, so it’s important to proceed with caution when vetting personal loan companies. Find out how to protect yourself from falling victim to fraud.

Warning signs of a personal loan scam

Personal loan scams typically come with at least one red flag that should signal something isn’t right. Jeramy E. Genaway, a financial advisor from Pittsburgh, Penn., shared these six warning signs of a personal loan scam:

1. Unsolicited loan offers

Traditionally, when you want a personal loan, you seek out a lender. Scammers, however, often turn the tables by approaching consumers with bogus offers.

“Oftentimes, personal loan scams start in a very similar manner as phishing — email — or phone scams,” Genaway said. “If you receive an email with an offer for a personal loan and the message contains spelling, punctuation or grammar errors, it can be an immediate red flag.”

2. Pressure to make a decision quickly

“If you receive a phone call with an offer for a personal loan and the caller is rushing you to make a quick decision or you ‘risk the offer being rescinded,’ it’s often a red flag as well,” Genaway said.

Taking out a personal loan is a big decision that you shouldn’t make quickly. Legitimate financial institutions want you to feel comfortable with your choice, so you’ll never be pressured to make a move before you’re ready.

3. Guaranteed approval

If you have no credit or a less-than-stellar credit score, a personal loan with a guaranteed approval is bound to catch your eye. Don’t get too excited though, because it’s likely too good to be true. Legitimate lenders never promise your application will be approved. Extending a personal loan is a risk, so trustworthy lenders always review background information on consumers before offering money. If you have poor credit, check out list of the best personal loans for bad credit here.

4. Money transfer requested prior to receiving the loan

When you take out a personal loan, you should be the one receiving the funds. If you’re asked to pay money out of your pocket for your loan, that’s a problem.

You should never make payments for a loan directly to an individual, according to the FTC. The agency also advises against using a wire transfer service or sending money orders to pay for a loan, because a legitimate lender wouldn’t make a request like that.

5. No credit check required

Beware if the lender loans money to those with a poor credit histories, Genaway said. If your credit is poor, a lender not interested in your creditworthiness might seem like a dream come true, but it’s likely a scam.

The FTC notes that advertisements containing wording such as “Bad credit? No problem” or “Get money fast,” are often telltale signs the lender is trying to swindle you. It might not be what you want to hear, but legitimate lenders typically verify credit information prior to approving a loan.

6. Hidden fees required to obtain the loan

Legitimate lenders are open and honest about any fees associated with your loan. If you’re immediately hit with charges before getting your funds, something isn’t right.

Application, appraisal and credit report fees are standard, but the lender usually deducts the fees from the amount you borrow. If a lender asks you to pay upfront fees for services like insurance, processing or paperwork, don’t move forward with it.

“It’s important to remain diligent in an uncertain situation where these red flags may be present,” Genaway said. “Most importantly, keep in mind, the scammer is not only trying to potentially obtain money from you, they could also be attempting to obtain personal information such as social security numbers, bank account numbers, address or any other confidential personal information, which could be used for fraudulent purposes.”

Is applying for a personal loan online safe?

The possibility of falling victim to a scam might make you hesitant to apply for a personal loan online, but it’s actually very safe if you exercise proper due diligence. Jeffrey Brown, a financial advisor in the St. Louis area, said applying for a personal loan online is common practice these days, but he advises consumers to do it the right way.

“People get panicked and they make poor decisions because they’re trying to deal with the short term, but they get themselves in trouble in the long term because they haven’t made a wise decision with their loan,” Brown said.

Genaway agreed that applying for a personal loan online is generally safe, thanks to technology advances.

“It has become almost commonplace to skip working directly with a banker or visiting a local branch in lieu of obtaining financing online,” Genaway said.

Consumers can identify potentially fraudulent websites a couple different ways, according to Genaway. First, make sure a lender’s site is secure — the URL on secure sites start with “https” — and look for a padlock symbol in the address bar on any page you’re asked to provide personal information.

“If the perceived lender’s website is not secure or does not have a padlock symbol, do not enter any additional information” said Genaway. “There is no reason a legitimate lender would not have a secure website, meaning the site you are on is unsecured and could potentially be a fraudulent website.”

Brown reiterated the importance of entering personal information only on a secured website, and also suggested checking with the Better Business Bureau to review the lender’s ratings.

What to look for when searching for a lender online

Beyond looking for a secure website, make sure the lender has a physical address.

“If there’s an address listed on the website, double check the address via your favorite online map service to see if there is a building there, and preferably, with their name on or around the building,” Genaway said. “Often times, fraudulent lenders will have addresses that are actually vacant lots or buildings that would not normally contain operating businesses.”
He also said online lenders are required to register in the states where they do business, so see if you can verify that the proper licenses are in place.

“The lender’s website should list any states in which it is allowed to conduct business, and if it doesn’t, the lender might be fraudulent,” Genaway said.

He also advises researching a lender’s online reviews and ratings to learn more about other customers’ experiences.

Brown emphasized the importance of researching the lender you’re dealing with, and recommended covering all the bases by specifically searching for unfavorable information on the lender. Do a Google search and include the lender’s name and key terms associated with a negative personal loan experience.

What if you’ve been scammed?

If you’re conned into a personal loan scam, Genaway said to contact your local police department. He also advised reporting it to your State Consumer Protection Office and the Federal Bureau of Investigation Internet Crime Complaint Center.

Speaking up promptly can help authorities catch the scammer quickly. The faster they’re shut down, the less time they’ll have to target innocent consumers.

Where to find the best personal loans online

Shopping around is the key to locating the best personal loans online. LendingTree, which owns MagnifyMoney, has a personal loan comparison tool that connects dozens of reputable lenders with consumers in need of financing. By completing one online form, you could receive multiple personal loan offers in a matter of minutes. This is an easy way to find lenders you can trust, without your credit taking a hit — LendingTree performs a soft credit pull that won’t impact your score. Find your loan today with our table below.

LendingTree
APR

5.99%
To
35.99%

Credit Req.

Minimum 500 FICO

Minimum Credit Score

Terms

24 to 60

months

Origination Fee

Varies

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When you do it correctly, finding a personal loan online is a safe way to get a competitive rate. Now that you’ve learned about personal loan scams, be on the lookout for red flags. In some cases, they’ll be obvious, but sometimes the signals are harder to spot. Always trust your instincts and never proceed with a lender that doesn’t feel quite right.

Advertiser Disclosure: The card offers that appear on this site are 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 card companies or all card offers available in the marketplace.

Laura Woods
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Laura Woods is a writer at MagnifyMoney. You can email Laura here

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How to Get Approved for a Bank Loan

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If you’ve ever been in a position where you need a loan for either a home purchase, car, home improvements, debt consolidation or other things, you may wonder how to get approved for a bank loan.

Banks, by definition, are typically risk-averse, so they will have stringent requirements for borrowers. As a result, bank loans are not a quick and easy resource if you need money right away, as they tend to thoroughly vet borrowers.

Although the paperwork and requirements for a bank loan can seem overwhelming, they are usually straightforward. Banks tend to verify every detail possible regarding your personal information so that they can assess how likely you are to pay off your loan, as well as where to find you should you fall behind on payments.

We’ll explain what it takes to get approved in this post.

Bank loan options

There are generally two types of personal loans offered by banks — an unsecured loan and a secured loan. Each has its own merits and requirements. If you’re someone with a solid credit score and good income, you should have no problem qualifying for an unsecured loan. But if your credit is less than stellar or you don’t have a steady income, a secured loan may be your only option.

Unsecured personal loan

An unsecured personal loan is a fixed loan amount that doesn’t have any collateral or asset tied to the loan. You don’t have to pledge assets like a home or a car to be approved for the loan. Typically, these loans are approved based on creditworthiness and your ability to repay the loans.

Many people use unsecured personal loans to consolidate debt, improve their homes or cover expenses like a wedding or vacation. With this type of loan, you should know about lenders’ fees, prepayment penalties and the interest rates when shopping around for the best rates on personal loans.

Secured personal loan

A secured personal loan requires you to pledge property (collateral) such as a home, automobile or money in a savings account or certificate of deposit (CD) in order to borrow money. In this scenario, you are borrowing against the value of an asset.

You may need a secured loan if your credit profile is not strong enough to qualify you for an unsecured loan. In this scenario, if you fail to make timely payments on the loan, the property you pledged could be seized by the lender. So think carefully if you are 1) able to make timely payments on this kind of loan 2) willing to put your assets at risk in case you cannot make payments on time.

Requirements for a bank loan

Credit score and history

Banks are in the business of getting solid returns on the money they lend to customers. For this reason, they will do everything they possibly can to prevent losses caused by borrowers who default on loans.

Banks will scrutinize every loan application against strict criteria that consider, among many things, your credit score and history. This information can be found in your credit report. Some banks may not extend personal loans to borrowers with a recent bankruptcy on their files, for example.

Some lenders have specific minimum credit score requirements. To get the best personal loan rates, you’ll need to have a score in the high 700s, but you may be able to qualify with a score below 600 at some lenders. If you want to know what constitutes a good credit score, here are the five components of your credit score:

Consistent and sufficient income

Banks want to know that you have sufficient income to service your debt. They will verify your employment history to make sure you have a consistent history of working. (Being a freelancer, running a business, or making multiple job changes in a short span of time can signal to banks that you have inconsistent income.)

A solid debt-to-income ratio

Banks want to know how much outstanding debt you have because it will affect your ability to repay your loans. In order to figure out what constitutes as “too much” debt, banks will calculate your debt-to-income ratio (DTI.) This number is the sum of all your monthly debt payments divided by your monthly (gross) income.

For example, let’s say that your total monthly debt obligations add up to $2,000 and your monthly take-home pay is around $4,500. This means that your DTI is around 44%.

Each bank has its own thresholds for debt-to-income ratios based on the type of loan you are getting and a number of other factors. However in most cases, if your debt-to-income ratio is too high, you could be denied a bank loan. The bank may believe that lending you more money could cause you to be financially overextended and eventually default on one or more of your loan obligations, including theirs.

Aim for a DTI of 36% or less to have the best odds of approval for a personal loan.

Assets

Your assets typically only come into consideration when you are applying for a secured personal loan. If you will be borrowing against the value of your home, car or any savings, you could be required to give detailed information to the bank about the value of these assets.

In the case of a car title loan, for example, the bank will determine how much you can borrow by assessing the value of your vehicle.

A cosigner

If you have poor credit, a cosigner can help you get approved for a bank loan or secure a lower rate than you might have normally. This is a big risk for the co-borrower, so don’t ask this of anyone lightly. If you are unable to repay your debt, the bank will go after them to recoup the debt.

Pre-existing relationship with the bank

Credit unions and community banks are known for working closely with their customers to help them find the best financial resources for their needs. They may be more willing to work with borrowers who have poor credit, low income or negative marks on their credit files if that borrower is an existing member of the bank.

What you plan to use the loan for

More often than not, most bank loans will have an explicit and specific purpose. For example, a mortgage loan can only be used to purchase a home. A car loan can only be used to purchase a car and a private student loan is designed to cover educational expenses, and so on.

In the case of some personal loans, you are able to use the loan for a long list of needs — from weddings to debt consolidation. There are a few exceptions such as gambling or other illegal activity. Though you may be able to get away with using loan proceeds for prohibited purposes, your lender could try to seek out this information. It’s best to comply with the terms of the loan agreement and use the loan funds as you indicate on your application.

Why it’s important to shop around for a bank loan

Trying to find the best rate for a bank loan can seem daunting but it’s worth it. If you are able to find a bank with just slightly lower interest rates, it could save you hundreds or even thousands of dollars in interest and fees down the line. For this reason, you should compare your loan options and shop around to get the best rate possible.

Bottom line

If you’re handling your finances correctly, you probably hope that you’ll never have to borrow much money — because it can be such a frustrating experience. In the case that you do borrow money, make sure that you research your options and work with a bank that will extend the best terms and even better customer service.

It also doesn’t hurt to keep your personal credit profile intact in case the need to borrow money does come up. With a good credit history and plenty of research under your belt, you should have no problem finding the best personal loans for your needs.

At the end of the day, it’s important to understand your borrowing needs and find the best financial institution that will lend to you in an affordable and responsible manner.

Advertiser Disclosure: The card offers that appear on this site are 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 card companies or all card offers available in the marketplace.

Aja McClanahan
Aja McClanahan |

Aja McClanahan is a writer at MagnifyMoney. You can email Aja here

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Personal Loans

Best Debt Consolidation Loans

Editorial Note: 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 prior to publication.

Best Debt Consolidation Personal Loans

Updated September 01, 2018

Are you stuck under an overwhelming pile of consumer debt? Do you feel like it might be impossible to get out? Fortunately, there are tools that can help you get out of debt faster.

Debt consolidation loans could be a good answer. With a debt consolidation loan, you would use the loan proceeds to pay off credit card debt, medical debt or any other form of debt. You would then have a loan at a fixed interest rate and a fixed term.

Note: If you have a credit score less than 640, struggling to make monthly debt payments and would like to explore your options to reduce your debt by up to 50%, then please click our option below to customize a personal debt relief plan.

Custom Debt Relief Plan

Debt consolidation provides three benefits:

  1. Make payments simple: If you owe a lot of lenders and are having a tough time keeping track of all the payments, then consolidating will make your life easier. You’ll only owe one lender and have to keep track of one due date. There’s less of a chance of anything falling through the tracks.
  2. Lower your interest rate: This is where you have to run the numbers to see if debt consolidation makes sense for you. What’s the average interest rate you’re paying on your debt? If it’s quite high (which is likely if you have a lot of consumer debt), you may benefit from consolidating under better terms. Just remember to only use a personal loan if the interest rate is lower than the one you are already paying.
  3. Improve your credit score: If your credit cards are currently maxed out, your credit score will suffer. When you pay off your credit card debt with a personal loan, you will often receive a boost to your credit score, so long as you don’t start using your cards again. LendingClub did a study and determined that there is an average score increase of 21 points within three months for people who use loans to eliminate credit card debt.

If you think debt consolidation makes sense for your situation, we have a list of the best debt consolidation loans you can use to refinance your consumer debt. Read on for our recommendations.

Personal Loans to Consolidate Credit Card Debt

Start Shopping Here – LendingTree

At LendingTree, you can make dozens of personal loan companies compete for your business with a single online form. When you fill out the form, LendingTree will do a soft pull – which means your score will not be negatively impacted. Dozens of lenders will compete and you may be matched with lenders who want your business. You may be able to compare and save in just a few minutes. We recommend starting here. You can always apply directly to other lenders – but many of the lenders we recommend already participate in the LendingTree personal loan online tool. (Note: LendingTree owns MagnifyMoney)

LendingTree
APR

5.99%
To
35.99%

Credit Req.

Minimum 500 FICO

Minimum Credit Score

Terms

24 to 60

months

Origination Fee

Varies

LEARN MORE Secured

on LendingTree’s secure website

LendingTree is our parent company.... Read More

Below are some leading lenders you could also consider:

SoFi – Excellent, Good Credit Required

You can borrow between $5,000 and $50,000, which is the most out of the personal loans recommended here. The fixed APR ranges from 6.99% to 14.87% if enrolled in autopay. You can choose a term of 36 to 84 months. Variable interest rates range from 6.26% – 12.55% APR. Although SoFi does not use FICO, you need to be “prime” or “super-prime” to qualify. That means you must be current on all of your obligations and must never have filed for bankruptcy. There is No origination fee or prepayment penalty associated with a personal loan from SoFi.

SoFi
APR

6.99%
To
14.87%

Credit Req.

680

Minimum Credit Score

Terms

36 to 84

months

Origination Fee

No origination fee

LEARN MORE 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 6.990% APR to 14.865% APR (with AutoPay). Variable rates from 6.255% APR to 12.555% APR (with AutoPay). SoFi rate ranges are current as of September 1, 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 6.255% APR assumes current index rate derived from the 1-month LIBOR of 2.08% plus 4.425% 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)

Some of the leading lenders for people with less than perfect credit include:

LendingClub – Minimum FICO of 600

This is a peer-to-peer platform, which means individual investors are contributing to your loan. You can borrow between $1,000 to $40,000
with LendingClub, and its APR ranges from 6.16% – 35.89%, depending on the type of loan grade you’re eligible for. Be aware there are origination fees (ranging from 1.00% - 6.00%) associated with this personal loan, but there are no prepayment penalties. You can borrow on terms 36 or 60 months. The minimum credit score needed is 600. LendingClub is not available in Iowa or West Virginia.

LendingClub
APR

6.16%
To
35.89%

Credit Req.

600

Minimum Credit Score

Terms

36 or 60

months

Origination Fee

1.00% - 6.00%

LEARN MORE Secured

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

Prosper – Minimum FICO of 640

Prosper offers loans from $2,000 to $40,000, and APR ranges from 6.95% to 35.99% . It offers loans terms of either 36 or 60 months. Your APR is determined during the application process, and is based on a credit rating score created by Prosper. Your score is then shown with your loan listing to give potential lenders an idea of your creditworthiness. Origination fees range from 2.41% - 5.00% and are based on your Prosper score. In order to qualify, you must:

Prosper is a flexible alternative with a low-end APR that usually beats a credit card.

Prosper
APR

6.95%
To
35.99%

Credit Req.

640

Minimum Credit Score

Terms

36 or 60

months

Origination Fee

2.41% - 5.00%

LEARN MORE Secured

on LendingTree’s secure website

Advertiser Disclosure

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.

[Check out other Personal Loans on Our Comparison Table Here]

A Loan or a Credit Card to Consolidate Debt?

Personal loans can be an excellent way to consolidate your debt. Personal loans are best when you have a lot of debt or your credit score isn’t perfect. However, if you have a smaller amount of debt and a great credit score, you can get rates as low as 0% with a balance transfer. If you do have a good credit score, you should apply for a 0% interest balance transfer credit card.

Wait: I Have Student Loan Debt

If you’re thinking about refinancing or consolidating your student loans, there are a couple of things to know.

First, what’s the difference between refinancing and consolidating?

  • Private Loan Consolidation: This involves combining all your loans into one loan so you only owe one lender and have to make one simple payment.
  • Federal Loan Consolidation (Direct Consolidation Loan): Only have Federal student loans? You can combine them through a Direct Consolidation Loan with the government. According to studentaid.ed.gov, “The fixed rate is based on the weighted average of the interest rates on the loans being consolidated.” This doesn’t save you much money, but your payments will be more manageable. For a complete list of Federal loans that can be consolidated, check here.
  • Refinancing: This is when you apply to a completely new lender for new terms – you’ll have a new loan, and your new lender will pay off your old loan.

The difference isn’t all that big – when you consolidate private (or private and Federal) student loans, you’re essentially going through the refinancing process.

If you currently have Federal loans, you need to be aware refinancing or consolidating means giving up certain benefits that come with federal student loans.

That means income based repayment, deferment, forgiveness, and forbearance options disappear. A few of these benefits are forfeited even with the Direct Consolidation Loan. These benefits could get you through an otherwise rough time, so make sure refinancing makes sense beforehand.

If you do have federal student loans, and you’re thinking of refinancing or consolidating, first see if you’re eligible for deferment or forbearance. There’s no reason to go through the process of having your credit checked if you can lessen your student loan burden another way.

If you have private student loans, you can also check with your lender to see if it offers payment assistance. Many lenders are making improvements to their student loan refinance programs and including forbearance and deferment options.

Also, once you consolidate or refinance your student loans, there’s no going back. This applies to the Direct Consolidation Loan as well.

Okay, still think refinancing or consolidating is right for you? You can shop for the best lender to refinance your student loans here.

Shopping Around is a Must When Consolidating or Refinancing

The goal of refinancing or consolidating is to ultimately make your debt less of a burden on you. That means getting the best rates and terms offered. The easiest way to accomplish this is to shop around with different lenders. If you do so within a 45-day window, FICO will not punish you for shopping around. All of your student loan inquiries in the 45-day period will only count as one inquiry. Plus, there are many lenders out there who will give you rates with just a soft credit inquiry (though a hard inquiry is required to move forward with a loan). Always put yourself first, as you’re never obligated to sign for a loan you’re approved for.

promo_refi_studentloans_lg

Advertiser Disclosure: The card offers that appear on this site are 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 card companies or all card offers available in the marketplace.

Erin Millard
Erin Millard |

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

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