Personal loans may not generate as much hype as credit cards, probably due to their lack of rewards. Still, statistics shows more Americans are turning to this type of financing in their time of need. According to TransUnion, 15.69 millions consumers had an open personal loan on their credit files in 2015, an increase of 1.58 million since 2014 and 3.12 millions since 2013. And, the credit bureau found, 2.99 million personal loan originations took place in the first quarter of 2016.
But how exactly do you shop for the best personal loans or find the best personal loan companies? In short: you buff up your credit, do your research, talk to your financial institution and vet online personal loans very, very carefully. Let’s break it down further.
What Is a Personal Loan?
A personal loan is an installment loan. That is, unlike a revolving line of credit (think credit card), borrowers take out a certain amount of money than pay it back in predetermined monthly payments at a set interest rate over a specified period of time.
There are generally two types of personal loans: unsecured personal loans and secured personal loans. Unsecured personal loans, otherwise known as signature loans, let you borrow money without putting up any collateral. Secured personal loans require you toput up assets — like, say, a car you’re using the loan to buy — that the lender can seize, should you default on the loan. Given that collateral, secured personal loans tend to carry lower interest rates than unsecured personal loans.
Still, for someone who needs a little help staying disciplined or wants to put an official end date on the debts they owe, even unsecured personal loans can be viable borrowing alternative. Of course, you need to find the right offer.
Looking for a good deal on a personal loan? These tips will help you shop smart.
Know Your Credit Standing
Before you start shopping for a personal loan, it’s a good idea to take a look at your credit scores. Interest rates on personal loans vary widely by lender, how much you’re looking to borrow and what your credit looks like. Still, to give you an idea of what you might be working with, consider that one lender advertises rates from 5.983% to 28.99%, depending on your credit profile.
No matter what lender you’re looking into, however, to get the best deal and qualify for the lowest interest rate on a personal loan, you’ll need to have good or excellent credit. In fact, according to TransUnion, consumers in the prime or better risk tiers (meaning highly creditworthy borrowers) made up 36.4% of personal loan originations in the first quarter of 2016.
You can check your credit scores using Credit.com’s free credit report snapshot, updated every 14 days, which will also give you tips on improving your credit. So if your credit isn’t as high as you’d like it to be, you’ll know where to start.
If your credit scores are much lower than you expected, it’s a good idea to review your credit reports and check for errors. You can get free copies of your credit reports from the three main national credit reporting agencies — TransUnion, Experian and Equifax — once a year.
Ask About Credit Qualifications Before You Apply
Each personal loan application triggers an inquiry into your credit and each inquiry lowers your credit scores a little bit. Applying for short-term personal loans from several different lenders at the same time could really hurt your credit scores.
To help protect your credit, it’s a good idea to do your research on plenty of personal loans but to also limit the number you actually apply for.
Some lenders may list credit qualifications, such as minimum credit scores, on their websites. And you also may want to contact a lender directly and inquire about if your credit scores will qualify you for the best loan rate. It’s worth a phone call or scheduling an appointment with a loan officer to find out the answer to this and any other questions you may have.
Start With Financial Institutions That You Know
Check out personal loans available from your bank or credit union. Again, would your credit scores qualify you for a low interest rate personal loan? What rates and terms are available? Credit card companies offer personal loans as well and if you are looking to consolidate credit card debt this may be an option to consider as well.
Shop Online, But Cautiously
You may be able to qualify for a personal loan with an attractive rate from an online lender, but be on the lookout for scams. Some online lenders are nothing more than scam artists. They target people with bad or damaged credit by promising them loans without checking credit history. Steer clear of sites that make such promises and any lender that charges big fees or requests loan payments in advance. Remember, personal loans are different than payday loans, small-dollar, short-term (and often) high-cost loans intended to get a borrower from paycheck to paycheck. You can learn more about the difference between personal loans and payday loans here.
Jeanine Skowronski also contributed to this article.