A personal loan is a loan for a relatively short period of time, usually ranging between two and five years. The tenure of the loan is fixed and cannot be extended, unlike a credit card. Personal loan amounts may vary but rarely go higher than USD 50,000. The amount disbursed depends on the need and credit score of the applicant. Each lending institution has its own set of rules on how much they will lend for a personal loan.
Loans provided are of two types – secured and unsecured. A secured loan has collateral attached to it such as a house or land which the lender can seize if payment is not made. An unsecured loan has no such collateral attached to it. A personal loan belongs to the latter category without any collateral. There are many different types of lending institutions who offer personal loans from traditional banks to online lenders.
Personal loan and credit score the detailed sync
Taking out a personal loan means your credit score will be scrutinized. There may be a soft inquiry which is an inquiry which happens when a person or company verifies your credit history as part of a background check, for example when the credit score is verified. Soft inquiries may happen without your consent. The other type of scrutiny is a hard inquiry where a lender evaluates your credit score before coming to a decision about providing you a loan.
If you default on the payment of your monthly installment then you risk defaulting on the loan and causing harm to your credit. Failure to repay the loan could damage your creditworthiness. This will make it more difficult for you to be eligible for a loan in the future.
What is required to avail a personal loan?
- Satisfactory credit score– Almost all lending institutions require that the applicant has a decent credit score when they seek a personal loan. Lenders do not follow any general rule about which FICO score they consider as exceptional, good, average and bad but they all have internal benchmarks which an applicant has to meet. In general, a FICO score between 580 and 669 is considered as fair and 670 and 739 are considered as a good credit score.
- Spotless credit history– Those who have defaulted on loans previously or declared bankruptcy are unlikely to be the recipient of a personal loan. In the unlikely case that they have approved, it is very likely they will be charged a usurious interest rate.
- Regular employment– When you receive a loan it is important that you be able to pay it back with interest every month. That can only happen if you are employed and receive regular paychecks. Stable employment is a standard prerequisite of a personal loan.
- Identification papers– A lender will likely verify your name and address of residence with identification papers such as a driver’s license or a passport. The reason is identity theft has become extremely commonplace and fraud has to be avoided at all costs.
The importance of a good credit score
Various lenders provide loans at APR rates which vary widely – from just above 2% to as high as 36%. A lower interest rate is usually due to a better credit score. The reason is simple – a better credit score means the loan is less risky and therefore interest yield on it can be lower. Usually, a credit score of about 680 is needed to qualify for a personal loan. FICO scores lower than that may require another person to guarantee the repayment.
Not only the credit score but other details about your life are important too – where you are employed, your earnings, other liabilities, your savings all play a crucial deciding factor.
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How to choose a personal loan company?
Types of lenders – There are essentially two types of lenders, banks and peer to peer lenders. Earnest and Light Stream are examples of banks offering personal loans and Upstart, Lending Club and Perform.
Peer-to-peer loans, which are commonly known as the P2P lending market, bring together borrowers and lenders via an online platform thus eliminating traditional banking protocols. P2P platforms enable the loan process but do not have any own funds to lend. P2P lenders usually have less strict need for high FICO scores than banks. On the other hand, P2P lenders charge higher interest rates and provide a lesser amount of loan.
Type of interest rate – Interest rates may be fixed or variable. A variable rate changes depending on market conditions and Federal Reserve policy. The change may happen as often as every few months. A fixed rate as the name implies will remain the same during loan tenure.
Terms of the loan– Each lender has their own specific conditions regarding the borrower's payment time and restrictions on the use of the funds.
The lenders also have a minimum and maximum tenure period over which the loan can be repaid. The lenders usually have a loan period of at least two years and seven years. The longer the loan period, the lower your payments will be, but you will pay more interest. If you can pay a higher monthly installment, choose a shorter rental period to save a considerable amount of interest.
Some lenders may restrict the reason for which the loan is used. The payoff will only allow its loans to repay credit card debt. On the other hand, LightStream does not allow its lending to be used for college tuition fees. One must never speak untruthfully about the reason for which the loan is required since that constitutes loan fraud. Most lenders would disburse the amount within five days.
Best personal loan providers in the USA
LightStream is the consumer banking division of SunTrust Bank. It is present in the Southeast United States.
LightStream puts some restrictions on the purposes for which a loan can be used. Using it for college tuitions and business are excluded. Other than this it can be used for any purpose from vacation to home renovation to medical needs.
The amount of loan can be as high as USD 100,000 for applicants with good credit score and stable income. The maximum tenure allowed for repayment is seven years.
The minimum loan amount is USD 5,000 which comes in the way if you want to borrow only USD 3,000. Unless you enable autopay from your bank account on your account they add 0.5% interest rate. This removes the control that some may wish to have over their loan installment repayment date.
It is best for those who have high credit scores (they accept a minimum FICO score of 660) and good income. The applicant needs to have at least five years of credit history with few or none delinquencies.
SoFi offers loans which can be as high as USD 100,000. However, the applicant must have good credit scores and a stable income. It is an online loan company which offers among other things personal loans for student loan refinancing.
The drawback is that the average credit score of borrowers has to be above 700. Like Light Stream, SoFi will only provide loans USD 5,000 and above. It is best for people who need a large lump sum amount and has a good employment history. The average income of borrowers is above USD 100,000. SoFi has an autopay discount of 0.25%. SoFi personal loans have APR rates that are between 5.81% and 15.37%
Like SoFi, Earnest is also an online lender. They utilize a loan algorithm which judge’s applications based on a number of factors including but not limited to their credit score. Earnest also evaluates its customers based on their education and savings habits.
Clients are allowed to decide how much they wish to repay each month and based on that amount Earnest provides the APR rate. This is a good strategy to weed out default by allowing the customer to decide how much payment each month they are comfortable with.
Earnest charges between 6.99% and 18.24% as APR which is low compared to their competitors some of whom charge as high as 36%. The main drawback of personal loans from Earnest is the relatively short tenure that is allowed of only 3 years.
The minimum loan amount is USD 2,000 and the loan cannot be used for college tuitions or real estate or as business capital.
Upstart is an online loan company whose founders used to work at Google. Upstart is willing to provide loans to borrowers with limited credit history and work experience. Upstart processes its applicants based on their education and area of specialization. They require a very modest FICO score of 620 and an annual income of only USD 12,000. Upstart would front the money to cover technical education like coding even if one does not have a regular source of income.
The highest loan amount is USD 50,000 and lowest USD 1,000 making it suitable for all types of needs. APR rates range from 7.73% to 29.99%. The maximum loan tenure is 5 years.
Upstart charges more APR than SoFi and Earnest but provides loans for more relaxed FICO scores. It is very suitable for those who have a good education background and for some reason need a loan at the start of their work life.
LendingPoint which is based in Georgia has its operations in 32 states. They offer personal loans for applicants with average and less than average credit scores mostly for purpose of debt refinancing.
LendingPoint requires a FICO score of only 600 but other factors which are at play includes job history and debt-income ratio. They have zero restrictions on the purpose for which the loan can be used which makes them a perfect lender if you need an emergency amount to repair your home or pay for IVF.
The maximum loan amount which they offer is USD 25,000 and minimum is USD 2,000. They have very high APR rates ranging from 15.99% to 35.99%. At least USD 20,000 annual income is required. The maximum loan duration is 4 years.
- Lending Club
Lending Club is a P2P lender platform. The amount you borrow is actually borrowed from different individuals and does not belong to Lending Club.
Lending Club has a low credit score requirement of 600. This means those borrowers with less than perfect credit scores who do not qualify for a loan from other borrowers may avail loan from Lending Club. They require high income with an average income of recipients being USDD 79,000.
APR rates are low between 6.16% and 35.89%. The maximum tenure for repayment is five years and the maximum amount disbursed is USD 40,000.
Like Lending Club, Peerform is a P2P lending platform. The company facilitates interaction between lenders and borrowers. It is suitable for those who have a low credit score and have only a year of credit history. They offer up to USD 35,000 for debt consolidation and up to USD 25,000 for any other purpose.
The APR rate ranges from 5.99% to 29.99% and repayment tenure can be stretched to five years. Peerform requires at least USD 10,000 of annual income to provide a loan.
Staying with our list of P2P lenders the next well-known name is Prosper. Prosper requires a minimum FICO score of 640 and provides loans up to USD 35,000 which can be paid off over a maximum of 5 years. APR rates vary between 6.95% and 35.99%
Although personal loans are quite easily available if one has a FICO score between 640 and 700 and an income above USD 70,000 every year one must keep in mind that debt is only to be taken as a last resort. Personal loans have a very high-interest component and should be used only if there is extreme urgency. Avoid the impulse of availing a personal loan for frivolous expenditures such as going on a vacation or buying a new car.
In this time of job uncertainty, increased expenses due to medical care and rising prices, personal loans have become a necessity and help us to tide over difficult periods. While it might not be very wise to use a personal loan for a vacation to Hawaii, we all have emergencies from time to time which requires a cash injection and it is there that personal loans play an important role.