what is a loan?

a loan is money a bank lends you in one lump sum. you can use the funds for any purpose. most personal loans aren’t secured to anything, such as a house or car, so you can get the funds quickly too.

most personal loans charge a fixed interest rate and term. this means your interest rate never changes, nor does your payment. instead, you pay principal and interest over the life of the loan, paying it off slowly each month while a portion of your payment covers the loan’s interest. still, the interest payment decreases each month as you pay the balance down further.

most personal loans are available in amounts of $1,000 - $100,000. the amount you can borrow varies based on your credit, current debts, and overall stability.

how much will a loan cost me?

personal loan lenders charge a flat fee, a percentage of the loan amount. the average fee is 1% - 5% of the loan amount. so, for example, if you borrow $5,000 and the lender charges a 3% fee, you’d pay $150.

most lenders take the loan fee out of the amount they distribute. using the $5,000 loan example, you’d receive $4,850, not the full $5,000.

always read the fine print, too, though. for example, lenders charge different fees, such as paper statements or late fees. know what the loan will cost before borrowing it to ensure you understand the bottom line.

what do i have to consider with a loan?

before borrowing a personal loan, consider its effects on your credit and finances. not only are you receiving the money to handle your financial needs or meet financial goals, but borrowing money has certain effects on your life.

first, it might hurt your credit. when you apply for the loan, lenders will pull your credit. first, an inquiry lowers your credit score by a few points. next, the new loan lowers your credit age or the average time you’ve had each credit line. the credit bureaus average the total length of your credit age, but a brand new loan will lower it.

your credit age is a small percentage of your credit score, but it can bring it down for a while. it doesn’t take long for it to increase if you make your payments on time, but temporarily, your rate will fall.

of course, you should also consider how much the loan costs. can you afford the payment each month? you must at least pay the principal and interest required and not miss a payment. if you miss a payment, it can hurt your credit score even further, so it’s important to budget carefully and not borrow more than you can afford.

what types of loans are there?

you can get secured or unsecured loans when you borrow a personal loan. secured loans aren’t as risky for lenders, so they have better rates and terms. this is because a secured loan gives lenders collateral. if you stop making payments, the lender can take possession of the collateral.

for example, if you use a loan to buy a car, the car would be the collateral. if you miss more than three payments, the lender can take possession of the car and sell it to make some of the money back.

unsecured loans, on the other hand, don’t have collateral. they are riskier for lenders because they have nothing to fall back on. if you don’t make your payments, they don’t have anything to take possession of and sell. this doesn’t mean you shouldn’t make your payments, though. missing payments or not paying your loan can hurt your credit significantly.

what requirements do i have to meet to get a loan?

each lender sets different requirements to qualify for a loan. it greatly depends on whether you’re applying for a secured or unsecured loan.

to get the best rates and terms, you should have a credit score of 690 or higher and a debt-to-income ratio no higher than 43%. this tells lenders you are a good risk because you pay your bills on time, don’t overextend your credit, and know how to keep your debts within a reasonable limit of your income.

if you have collateral to use for the loan, you’ll increase your chances of getting approved. if you don’t have collateral and don’t have perfect credit, consider finding a co-signer or someone with good credit who’s willing to go on the loan with you to guarantee that the loan will be paid.

how much loan can i get?

most lenders offer personal loans from $1,000 - $100,000. the amount lenders approve depends on your qualifying factors, especially how much you can afford to pay each month.

the better your qualifying factors are, the lower the interest rate a lender will charge, which means you’ll have lower payments. the lower your payments are, the easier it is to get approved because it won’t push your debt-to-income ratio too high.

most lenders stick to lower loan amounts, around $10,000, but plenty of lenders are available if you need more and have the qualifying factors for it.

which loan is the cheapest?

if you’re looking for the cheapest loan, apply for a secured loan. the collateral makes a big difference to lenders because they have a guarantee that they’ll get paid one way or the other.

if you can’t get a secured loan, maximizing your qualifying factors is the best way to get the cheapest loan. show lenders you have great credit and a low debt-to-income ratio. the less risk you pose to a lender, the more likely they are to give you great terms, making your loan as cheap as possible.

how can you get the most favorable terms?

to make your loan as favorable as possible, use these tips:

maximize your credit score

do what you can to have the best credit score. if you don’t know what your credit history looks like, visit www.annualcreditreport.com and get a free copy of your credit report.

look for any negative information, such as late payments or credit lines with over 30% of the balance outstanding. if you have collections or notice erroneous information, take care of it by discussing your options with the credit bureau or the creditor reporting the information.

the higher your credit score is the better rates and terms you’ll get from lenders.

keep your debt-to-income ratio low

don’t apply for a personal loan if you have a lot of consumer debt. the more debt you have, the harder it is to make your loan payments. while you might find a lender willing to lend you the money, it will be at a much higher rate and worse term if you have a high-debt to income ratio.

too much outstanding debt shows lenders you can’t control your finances and/or spending. so if you’re applying for more loans, they may wonder if you’ll be able to repay it.

stabilize your employment

your employment also plays an important role in your ability to get a loan. for example, an applicant with many jobs in the last couple of years poses a higher risk than someone who has had the same job for many years.

show that you’re a good risk by staying at the same job or in the same industry for a few years.

how quickly can i get the loan paid out?

the nice thing about personal loans, whether secured or unsecured, is you can get paid out rather quickly. unsecured loans can pay out on the same or the next business day.

if you apply for a secured loan, it might take a little longer to get paid out because lenders must ensure the value of the collateral is high enough.

when can i repay the loan?

when you borrow the funds, your lender will tell you the minimum payment you must make each month. this payment covers the loan’s principal and interest. however, you can repay the loan faster if you want. most loans don’t have a prepayment penalty, so you can pay the loan off as early as you need.

can you increase the loan amount?

if you find the loan wasn’t for a high enough amount, you typically can’t increase the loan amount. but, again, this is because it’s not a credit line – a personal loan is a fixed loan with a fixed loan amoun.

however, if you need more funds, you may either apply to refinance the loan and borrow more money, or you can apply for a new personal loan. however, getting approved for another loan might be harder when you have one outstanding.