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Best personal loans
Compare your personal loan options
A personal loan can be a less expensive way to borrow money or to manage your debt. Rates are usually cheaper than credit cards and the amounts you can borrow are usually higher, too. However, there are a ton (a ton) of loan providers out there, so you’ll want to do a little research to understand the process and compare what they offer.
You’ll notice that lending is full of banky language and that things like terms and interest rates can vary dramatically between providers. (Hint: The loan with the lowest interest rate isn’t the same as the lowest-cost loan). To help you get started, we’ve pulled together the most important info you need to know.
What is a personal loan and why would you get one?
A personal loan is a type of loan that you pay back in fixed monthly payments (installments), typically over the course of two to seven years. It’s usually unsecured, which is just a fancy way of saying that you don’t “secure” the loan with money you have elsewhere (like in a savings account or a certificate of deposit), which the loan provider can access if you don’t make your payments.
If you have a lot of high-interest loans or debt, like from credit cards or medical bills, getting a personal loan can be a helpful way to lower your current interest rates. If you pull everything you owe into one place (“consolidate it”), it’s also a lot easier to keep track of who you need to pay and when.
Pros and cons of a personal loan
What to Know Before Applying For a Personal Loan
1. What’s my credit score?
Your credit score is calculated based on your loan repayment history, credit card usage, and other financial factors indicate to lenders how responsible will likely be with repaying your debt and what default risk you are. There are loans for nearly every credit score. Typically, the higher your credit score the more likely you will be to receive loans with better terms. With a high credit score, you are considered less of a risk, your interest rates will tend to be lower. Here is a table with typical APR rates based on your credit score.
|Credit score rating||Credit score range||Average APR for market|
|Excellent||720 – 850||10.3% – 12.5%|
|Good||690 – 719||13.5% – 15.5%|
|Fair||630 – 689||17.8% – 19.9%|
|Bad||629 and below||28.5% – 32.0%|
2. How do interest rates work?
The interest rate is how much the lender charges a borrower for a loan. It’s one of the most important factors to consider when shopping for a personal loan. Even one percentage point makes a big difference in the overall amount you have to repay.
For example, here’s what it looks like if you take a $10,000 loan with an interest rate of 10%.
|Loan||Interest||Total interest charged||Total amount you repay|
It is expressed as a percentage of the amount borrowed. If you’re consolidating debt and the interest rate is still lower than your earlier loan, then you’re in good shape. If not, you need to examine if the interest rate makes the loan worthwhile for you.
3. What affects interest rates?
There are three main factors that influence interest rates.
- Your credit score: The better your credit the better the interest rate. Lenders will also look at your financial history for payment history including late or missed payments, foreclosures, and bankruptcies. Depending on the lender, income can be a greater factor and the amount of other debt you have outstanding.
- Variable vs. fixed loan: Variable loans may have a lower interest rate but it can be adjusted up by the lender if the market changes. A fixed-rate loan may be a bit higher, but it will stay the same rate until your loan is paid off.
- Length of repayment: The longer the loan pay off period, the more interest rate your lender gets to charge. Some lenders will offer a lower rate for a shorter period (but your monthly payment is higher). Other lenders require a minimum 24-month term no matter what, as their way of making the interest they need to on the loan.
4. What is an APR?
APR is an acronym for the annual percentage rate and is a better way to compare loans than interest alone because it also includes fees to tell you the total amount it’ll cost you per year.
The lower the APR, the less you’re going to pay in the long run. Most personal loan lenders charge between 10% and 35.99%.
For example, here’s what it looks like if you take a $10,000 loan with an interest rate of 10%.
|Loan||Fixed Interest rate||Annual fee||APR||Term of loan||Mo. Payment||Total charges||Total amount you repay|
|Fixed Interest rate||3.1%|
|Term of loan||60 months|
|Total amount you repay||$10,848|
5. How much can I get approved for?
This is where your budget comes in. Determine how much you can afford to repay per month and still live comfortably. If you’re consolidating your debt, compare interest rates or APR rates as noted above to see if you can reduce your monthly expenses through a lower interest rate and loan payment. Make sure this is significant or you have other good reasons for consolidating. The truth is, if you have good or better credit and a reliable income, you’ll find yourself a candidate for many loans — but that doesn’t mean you want them. You’re ultimately the best judge of this.
6. What loan term should I take?
Most importantly, you want to make sure you lock in a monthly payment you know you can afford to make. This goes back to you and your budget. If you take a shorter-term loan the amount of interest you pay will be less — ideally you do this if you can. Less of the hard-earned money you pay on interest, the better. However, if you spread it out over a longer loan term, your monthly payments will be lower, but the overall interest you pay will be higher.
The Types of Personal Loans
- Unsecured loan: A personal loan is an amount of money loaned to an individual typically without any pledged as security, also known as collateral, for repayment. In this personal loan type, the lender is taking a bigger risk on you and typically will assign you a higher interest rate and possibly a shorter repayment term.
- Secured loan: A secured loan requires you or your cosigner pledge an asset that the bank can seize if you default, like a car, boat, or house.
- P2P loans or peer-to-peer lending provides opportunities for borrowers. Also known as “social lending” or “crowdlending,” P2P connects borrowers and lenders directly with one another online. It’s a solid option if you have less than great credit. Watch out for fees as they can range from 0.5% to 5% of the loan. Late fees can also be expensive if you don’t make your payments on time. In addition, as unsecured loans, the interest rates tend to be around 15% or so.
- Line of credit: This type of personal loan lets you draw on the credit as you need it, so you only own and pay interest on what you spend. They are typically unsecured, so the interest rates tend to be high, though not as high as a credit card.
- Cash advances: A cash advance is an alternative to a loan, where you take credit on your credit card. Carefully compare the fees in addition to the potentially higher rate you’ll pay on the balance.
- Installment loans: This is just a term that means you’ll repay the loan over a set period of time with set payments. A mortgage and a car loan are good examples of installment loans.
How to Apply for a Personal Loan
Steps to getting your loan approved
- Compare personal loans online to identify a good match for you.
- Fill out the online application including your reason for the loan and personal information like your credit score range, the amount you want and your income.
- Get pre-approved: Based on this information, the lender will do a soft credit pull, which won’t affect your credit rating like a hard credit pull to determine how much to loan you and under what terms and interest rate.
- Loan completion: Once your application has been pre-approved you will be put in touch directly with the lender who will need the following from you to finish your loan processing:
- Drivers license or passport
- Proof of residence (utility bills, rent agreement, etc)
- Pay stub from work
- Bank account information
- Get your funds and spend wisely.
Before getting a loan from any lender, it’s important to do your homework and compare a few different lenders. Remember, pre-approval is not a guarantee of funds until you finish the funding process. It’s also important to make sure you are taking money from a lender with a good reputation and solid financial foundation. Check their online reviews, and Better Business Bureau and Consumer Financial Protection Bureau for complaints and scams.
Types of Lenders
- Direct lenders: This a company or bank that loans directly to you. No middleman matching.
- Marketplaces: This type of company doesn’t lend personal loans but instead, facilitates loans between borrowers and lenders, by creating an online marketplace where borrowers can apply to all types of lenders at the same time, typically with one simple application.
- Peer-to-peer (P2P) lenders: Are private lenders who lend directly to you online. They benefit by investing some money in small-scale loans, typically spread out across a large number of borrowers, in order to offset the default risk.
- Credit Unions: If you have your checking and savings account with a credit union, this might be your best source for low-cost loans and credit cards. Credit unions are not-for-profit organizations that reinvest profits into their members. Because of this, credit unions are often able to offer their members as much as 1-2% lower interest on loans than other lenders.
- Banks: This is the best way to get a loan in theory, but the least likely source for a renter if you don’t have great credit or some form of collateral.
How to Choose a Lender
1. Determine how much you need
Create a monthly budget if you haven’t already to see where your money goes. Don’t do this in your head. You’ll benefit from having it written down and being able to look at it with different scenarios. Make sure you’re clear on why you need it and how much you can afford.
2. Compare several personal loan lenders
This may go without saying, but don’t settle on the first lender you find. Make sure to cast a wide net and really invest your time comparing as well as reading reviews. Write the information down or put it in a spreadsheet table to compare.
|Personal Loan 1||Personal Loan 2||Personal Loan 3|
|Maximum loan amount|
|Simplicity and speed|
3. Make sure the personal loan lender is legitimate
Take a few minutes to review how long they’ve been in business, who backs them and if they have a good reputation with their customers. Most every lender will have a few negative reviews, but are the majority positive?
4. Check interest rates, fees, and other charges
Always check for fees when you compare. Common fee types to look at include origination fees at the start of the loan, as well as late fees, processing fees, and the like. Do the terms you agree to match the loan type and offer you thought you were signing up for?
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