Shopping for Personal Loans
Compared to the complexity of credit cards, personal loans are much simpler products. You borrow a fixed amount of money for a fixed period of time. In most cases, the interest rate is also fixed. You know the interest rate before you sign the dotted line, and the proceeds are given to you in cash. Personal loans are becoming increasingly popular, because online personal loan companies are making the application process much simpler.
Here are some of the advantages of a personal loan:
- The proceeds are cash. You can only use a credit card where it is accepted. On certain projects, especially related to home improvement, it can be very difficult to find contractors who accept credit cards. Being able to write a check can be a big benefit.
- Interest rates are usually much lower than credit cards. As you can see from the list of providers on this page, people with excellent credit can now borrow for as low as 4%, with no origination fee. But the savings are just as good for people with lower credit scores. Lending Club has shown that their interest rates are 31% lower than credit card rates, on average.
- The application process is much simpler. With most online lenders, you can do a short application to see if you will be approved. This short application uses a “soft pull,” which means your credit score will not be hurt. You will be able to see your interest rate and the amount that you can borrow. That makes it very easy to comparison shop and find the best deal. And with most lenders, you are able to finish everything online.
- You will not end up in debt for 30 years. With a credit card, far too many people end up paying just the minimum due. Most personal loans are 36 or 60 months. You would not be able to borrow for 30 years.
- Personal loans help your score, especially if you are paying off existing credit card debt. 10% of the FICO score relates to having different types of credit, like a personal loan. In addition, by paying off your existing credit cards, you are reducing the utilization and improving the score.
- You can prepay at any time, without a penalty.
- Personal loan companies are willing to accept people with much lower credit scores, on average, than credit card companies.
However, personal loans are not perfect. Here are some of the disadvantages:
- The up-front fee, when charged, is not refundable. So, if your loan has a fee and you pay it off early, the APR (annual percentage rate) that you pay will end up much higher.
- You will be tempted to use your credit cards again, once the personal loan is used to pay off the debt. Far too many people use a personal loan to consolidate debt, only to run up their credit card balances again.
- Interest rates will vary depending upon your credit score. Borrowers with credit scores below 600 could end up paying very high interest rates. If you have a short-term emergency, a personal loan could fill that gap.
- Many personal loan companies will ask for income verification. They will also complete employment verification. The increased documentation and verification requirements means that getting your personal loan can take a lot longer than applying for a credit card.
When shopping for a personal loan, make sure you compare the APR of the different offers. The APR will include the interest rate and the fees. And you should only compare the APR at the same term.
There are many different places to shop for personal loans, and the choices for consumers continue to increase. Today you can find loans at traditional banks, credit unions, branch-based consumer finance companies and online startups.
Personal Loans From Banks
In general, you should avoid personal loans from traditional banks. At most banks, you do not have the ability to check your interest rate without hurting your credit score. That is because banks (like Citibank) use a hard credit bureau inquiry when you apply for a loan. Each inquiry can result in a hit to your credit score of 10 points or more. In addition, banks tend to have higher interest rates. Wells Fargo, for example, does not even disclose the range of APRs that it will charge in its marketing. Banks have not been built to compete on price in personal loans, and you should beware before visiting a local branch.
Personal Loans from Credit Unions
Credit unions tend to offer excellent interest rates. In the table of personal loan providers above, PenFed offers 9.99% interest rates on its loans. Credit unions can offer lower interest rates because they do not have shareholders. Instead, credit unions are owned by their members. However, credit unions do have some challenges. You have to join the credit union before applying. In the case of PenFed, that means you would need to make a contribution to a charitable organization and fund a savings account before you can apply for the loan. In addition, credit unions in general do not have the best digital experience. Some credit unions look like they are using web designs from the 1990s. If you already belong to a credit union, you should check with your local branch to see if they offer a personal loan. You may be pleasantly surprised by the rates. However, if you are not already a member, you may want to apply to one of the new online lenders first.
The Silicon Valley has been funding many "marketplace lenders." These are online businesses that are looking to shake up the consumer lending market in America. By creating digital-only businesses, they are able to keep their costs low. And their business model is simple. They want to give lower interest rates to borrowers and provider their investors with higher returns. And they are able to do this because of their low cost-base and superior analytics. Businesses like Prosper and Lending Club created this revolution. Recent businesses like SoFi and Earnest have built very impressive franchises as well. For consumers, this means that you might be doing business with a name you have never heard of before. However, you shouldn't worry about that. These businesses are looking to disrupt financial services and give you a much better deal in the process. It is a great time to be a consumer looking for a low interest rate, because these businesses are competing aggressively. If you look at the personal loan table above, you will see that the newest names have some of the lowest interest rates.
Even better, you can shop around for your rate without hurting your credit score. You should not worry about applying to as many of these lenders as possible, because you can find the best deal and your score will not suffer as a result.
Branch Based Consumer Finance Companies
The branch based consumer finance businesses are Springleaf and One Main Financial. However, they are now one company, because Springleaf bought One Main (and will use the One Main name going forward). The advantage of these businesses is that you can visit a branch and get you money on the same day. Unfortunately the interest rates tend to be much higher. If you are willing or able to wait for your money and shop online, you will likely get a much better deal by going online. And some online lenders are even able to get you the money within 1 business day. Avant and Lightstream, for example, offer rapid loan disbursement if you have all of your documentation and information available.
Competition continues to heat up with personal loan providers. That is good news for borrowers. Just make sure you don’t borrow too much money. Only borrow what you need and keep that budget discipline.
If you have questions, you can set up a free consultation to discuss your options. You can arrange your appointment on our Customer Service page. We look forward to hearing from you.