Personal loans

What are personal loans?

Personal Loans are fixed-rate, unsecured loans. A fixed-rate loan means that the loan’s interest rate will not change over the life of the loan. An unsecured loan means no collateral is required. Car loans and mortgages, for example, are secured loans, as the car or home will be used as collateral if you cannot pay the loan back.

How do personal loans work?

Eligibility

In general, eligibility is based on various factors including existing debts, credit history, and income profile. Some lenders may consider additional characteristics like education and employment. The loans are most often used to cover larger expenses or for debt consolidation.

Payment terms

Payment for personal loans are generally due monthly but sometimes may be bi-monthly (twice a month). The typical payback period ranges from two to five years.

What to consider when you’re getting a personal loan

Determine if you really need a personal loan

Personal loans typically only make sense as part of a balanced personal financial plan and could be a valuable tool to consolidate debt, helping to bring down total interest payments. If they increase financial strain, it is generally worth considering other options.

Consider other borrowing options

You may consider borrowing options like getting a secured loan, such as a home equity line of credit loan. These loans are often significantly cheaper, but can be more complicated to get because there is collateral involved.

Compare your options

If a personal loan is right for you, consider shopping around. Rates and payments can vary by lender. Once you get a feel for rates and payments, see how these additional payments fit into your budget.

What do personal loans cost?

The interest rates on personal loans vary by lender and the lender’s prediction of your ability to pay back the loan based on your credit score, credit history, other debts, income, etc.. The monthly payment amount will vary based on the interest rate, the amount of the loan, and the time period. Generally, borrowers with the best credit scores will get the best rates and largest loan amounts. They will also have more lenders willing to give them a loan. Typically, FICO® credit scores above 600 are required for larger-sized loans and the lowest rates are only available to those with credit scores above 720.

A rough guide to rates based on credit history

Note: this is just a rough guide as the actual rate will vary by lender, loan amount, payback period, and other factors.

Who provides personal loans?

Traditionally, only banks and credit unions provide personal loans, but in the past few years, new players have been entering the space. Improvements in data capture, access, and technology has driven many of these changes. Some of these newer lenders are focused on people with specific credit backgrounds. Others are focused on online lending and process efficiencies. The increased competition gives borrowers more options and possibly better rates.

Direct lenders vs matching services

As you’re shopping around, you’ll come across direct lenders and matching services. A direct lender underwrites your loan whereas a matching service typically matches you with a direct lender.

The main advantage of using a matching service is that you only need to complete one application to apply to multiple lenders. Typically, the matching service takes your online application and attempts to find you a lender from its network. This can happen almost instantly. The downside to a matching service is that you won’t be able to pick which lender(s) to apply to, and therefore you won't get to shop around for rates or choose a specific lender. You can generally tell if a company is a matching service by looking at the fine print at the bottom of a website, which might say something like, "we are not a lender."

What’s the difference between a personal loan and a line of credit?

A line of credit is like a "renewable" personal loan. With a line of credit, a lender agrees to make a certain amount of money (a credit line) available to a borrower over a set period of time. The borrower is able to withdraw money up to the credit limit whenever they need to. The payback terms vary but typically there's a minimum monthly payment. When the borrower pays down the line of credit, the line continues to remain available to the borrower. There is no need to re-apply. A line of credit can be either a secured (e.g. home equity line of credit) or unsecured (e.g. credit card) loan.

Fees vary for lines of credit and can include unused line fees and application fees. Lines of credits do expire after a period of time and need to be renewed. Renewal often requires a new application. It’s important to review all terms before accepting a line of credit or any loan.

Looking for a personal loan lender?

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