A personal loan is a type of loan you can use in various ways. Borrowers use them for medical bills, emergency expenses, debt consolidation, payment of high-interest debts, business, investments, financing large purchases, home repairs and major life changes.
Lenders set different terms, fees and interest rates. That’s why it’s important to compare personal loans before taking one. Shopping around can help prevent certain consequences, like falling for a high-interest personal loan or one with hidden charges that would cost you a lot of money in the long run.
Flexibility, lower interest rates and easy applications make personal loans appealing to many Americans. In 2021, according to Experian, the average personal loan balance was $17,064. That's a 3.7% growth from the $16,458 average in 2020.
There are various factors to consider when comparing personal loans, including interest rates, fees and repayment terms.
The application process, approval and funding speed also vary per lender. Depending on your circumstances and urgency, these can play a significant role when choosing a loan offer.
Explore lenders and assess quotes by using loan comparison tools. Many lenders offer online tools, including calculators, that give you an idea of how much your monthly payments would be based on the terms and loan amount.
Look Into Interest & Fees
One of the factors affecting the cost of personal loan repayment is the interest. Depending on the loan amount and term, lenders have different annual percentage rates (APRs). Comparing interest rates on personal loans is a way for you to save money in the long run.
Finding personal loans with low interest rates prevents a higher total repayment amount over the life of your loan. The latest data from the Federal Reserve shows that the average APR for a 24-month personal loan is 8.73%.
You can find loan offers with lower interest rates. For instance, individuals with good credit scores can get interest rates as low as 2.49% from LightStream. Upstart may also be a good option as it offers a minimum of 3.5% interest rate.
Lenders calculate APR based on the years a borrower would take to repay the loan. Other factors affecting a loan’s APR include the borrower’s credit score, debt-to-income (DTI) ratio, income and employment history. One way of getting lower interest rates is to aim for an excellent credit score.
When comparing personal loans, it’s smart to look at the fees involved. Lenders may charge origination fees, application fees, late payment fees and prepayment penalties. All of these can affect the total cost of your loan.
The origination fee is often deducted directly from the loan sum you receive from the lender. Late payment fees and prepayment penalties can increase the total amount you pay.
Some lenders may have special offers that can help you save money. For instance, there are personal loans with no origination fees. That said, the origination fee is only one of the things you need to check. You should also compare other associated fees.
APR should play an important role when comparing personal loans. That’s because APR affects the total cost of your loan. The total cost of borrowing includes the interest rate and fees associated with the loan.
The APR can help you finalize your decision. For instance, lender A doesn’t charge an origination fee. However, lender B has lower interest rates. Comparing the respective APRs can help you calculate which is the better option, as it gives you an idea of how combined interest and fees impact the total cost of each loan.
See Flexible Repayment Terms
Repayment terms also matter when comparing personal loans. They help determine your monthly payments and the total cost of the loan, allowing you to plan your payments based on your financial situation.
Repayment periods refer to the time a borrower has to pay off the loan. Terms vary per lender and loan amount. Lenders usually offer repayment terms ranging from 12 to 60 months.
Lenders also use the repayment term to calculate monthly payments. So, it’s important to determine how much monthly repayment you can afford.
You can also find out if the lender charges prepayment penalties, which apply to borrowers who pay earlier than the predetermined time frame. If you’re planning to pay off your loan early, it may be best to settle for a shorter repayment period.
For some borrowers, a shorter repayment term is a better option. There are various benefits to choosing shorter periods. For instance, a shorter repayment term results in lower interest in the long run. Additionally, it allows you to pay off your debt faster.
There are also drawbacks you need to watch out for. Since you have a shorter time frame for repayment, monthly payments tend to be higher. You may also be subject to late fees if you fail to make timely payments.
A short repayment period may be ideal for borrowers who can afford higher monthly payments.
If you want lower monthly payments and more flexibility, a longer repayment period may be right for you. This option also allows you to free up cash for other important obligations.
However, a more extended repayment period also means interest will accumulate over time. Because of this, you end up paying more over the life of the loan. Additionally, it will take longer for you to remove your debt.
That said, a longer repayment term is best for some individuals. For instance, if you can only afford low monthly payments, then this may be the better option for you.
Explore the Application Process
The application process for a personal loan may vary per lender. The qualification requirements, approval time and funding also differ. When comparing personal loans, it’s important to explore the application process based on how fast you need the money. While applying for a personal loan may take some time, some lenders may offer easy applications.
There are different lending institutions offering personal loans. You can get a loan from a bank, credit union or other private lenders. There are also online lenders offering quick funding.
Before applying, it’s important to determine whether you qualify for a loan. While specific requirements vary per lender, there are common factors lenders consider. These include the following:
- Credit score
- DTI ratio
- Employment history
When evaluating creditworthiness, lenders may conduct a hard credit inquiry. This will have an impact on your credit score. So, avoiding applying for too many loans at once is important. When comparing personal loans, it may help to look for lenders offering prequalification as this typically only involves a soft credit inquiry.
Some lenders offer online applications for personal loans. This can make the whole process easier and faster. That said, not all lenders offer this. Some smaller institutions only allow in-person applications.
For online applications, you generally only need to fill out a form and provide the necessary information. This may include personal details, annual income, employment status, the loan amount and how you will use the money.
For more detailed information on online loan applications, you can check lenders' websites.
In-person loan applications are when you visit the physical office of a lender. Some lenders only offer this option.
Qualification requirements and necessary documentation may vary. Typically, you would need your Social Security number, identification, proof of income, proof of address and a completed loan application form. Due to in-person processing, this method of applying for a loan may take longer.
That said, in-person loan applications may be ideal for some individuals. For example, this may be the right option for you if you prefer structure and traditional assurance.
To avoid delays, check with the lender to find out what documentation is required when you apply. Prepare in advance and bring everything you need when submitting your application.
Determine Funding Timeframe
The funding timeframe for a personal loan depends on the lender. This is an important factor to consider as it determines how soon you’ll get the funds. For emergencies and immediate needs, you may find lenders offering next- or same-day funding. That said, it’s still important to compare personal loan offers and terms.
Various factors may affect how quickly the lender approves and releases your loan funds. Generally, online applications are automated. That means the approval and funding speed tend to be faster. This option is usually best for borrowers with excellent credit.
In certain instances, the lender may take longer to disburse funds. For example, if issues are seen in a borrower’s credit report, the lender may decide to evaluate the loan application more thoroughly.
You can find personal loans with instant approval, but only if you qualify based on the lender’s requirements. Submitting all necessary documents and providing the needed information can help prevent delays.
Credit score requirements for personal loans vary depending on the lender. However, having good credit can speed the process up. It can also increase your chances of getting a loan application approved and help you get better offers.
A low credit score doesn’t automatically disqualify you from getting a personal loan. You can search for lenders that cater to individuals with bad credit.
If you want to know your credit score, you can request a free copy from AnnualCreditReport.com.
Before you submit your loan application, it’s wise to read the fine print. Make sure you understand all the terms included in the loan agreement. Take note of the associated fees, such as origination, late payment and prepayment fees.
You may also want to ask if the lender accepts auto payments or payments automatically withdrawn from your account. Some lenders offer discounts for this, and auto payments can prevent late charges.
Frequently Asked Questions About Personal Loans
Understanding how personal loans work and the factors involved can help you compare lenders and offers. MoneyGeek answers some frequently asked questions to assist you in making well-informed decisions.
- AnnualCreditReport. "Request Your Free Credit Reports." Accessed August 4, 2022.
- Experian. "Average Credit Score Hits New High, While Debt Balances Rise." Accessed August 3, 2022.
- Federal Reserve System. "Consumer Credit - G.19." Accessed August 3, 2022.
The content on this page is accurate as of the posting/last updated date; however, some of the rates mentioned may have changed. We recommend visiting the lender's website for the most up-to-date information available.
Editorial Disclosure: Opinions, reviews, analyses and recommendations are the author’s alone and have not been reviewed, endorsed or approved by any bank, lender or other entity. Learn more about our editorial policies and expert editorial team.