Need access to extra cash for a big expense? A personal loan is a great tool to cover the cost. The modern-day personal loan comes from the Industrial Revolution in the mid-18th century.
Today, there’s an endless array of banks and financial services companies who claim to provide the best personal loan available. But most loans with the best terms for the borrower are often reserved for those with prime credit scores. With an overwhelming number of options and limitations due to subprime credit, it’s hard to know the best way to get a loan.
We’re here to help! As a compassionate capital provider, we want you to spend less time stressing about how to pay for your expenses and more time celebrating financial wellness milestones.
Most personal loans are unsecured with fixed rates, payments, and payback terms. However, other types of personal loans may work better for you – even if you have bad credit!
Variations of personal loans include:
- Unsecured
- Secured
- Fixed-rate
- Variable-rate
- Debt consolidation loans
- Co-signed and joint loans
- Personal line of credit
- Buy now, pay later loan
- Payday loan
Before applying for a loan, do your homework to find the best option for you. First, you want to make sure you find the best lender for your financial situation and personal preferences. Some lenders are more trustworthy than others. Make sure that your lender is working in your best interest–this will save you headaches later.
Next, learn about the loan process. What does it take to apply for a loan? Running through this exercise ahead of time will empower you to find the best possible loan option for you.
Best Places to Get a Loan
Finding a lender you trust and enjoy working with is vital when searching for a loan. The best loan relationships include a supportive lender that provides the level of service you deserve.
We’ll start with the three most common lenders– banks, credit unions, and online lenders– and touch on a few alternatives for those who are in a pinch with your credit history and finances.
FDIC-Insured Banks
When consumers think about finding a loan, an FDIC-insured bank is probably the first place they’ll look. Banks – especially larger commercial banks – often offer some of the most competitive interest rates. In early 2022, the Federal Reserve reported a 9.09% average interest rate for personal loans.
Of course, that is for the 20% of Americans with a very healthy credit score. For the rest of us 80%, if you get approved, rates will be much higher. However, there are select smaller community banks that have more flexible requirements to access good rates.
Pros of Borrowing from Banks:
- Competitive interest rates
- Current customers more likely to get approved
- Higher borrowing limits
- Money arrives faster
Cons of Borrowing from Banks:
- May find lower interest rates elsewhere
- Fees and penalties can be high
- Need good or excellent credit for approval
- Higher monthly payments than credit cards
If you already have a good relationship with your bank with checking and savings accounts, using the same bank could be the easiest way to get a loan. This is because banks tend to be more likely to lend to consumers they already have a relationship with. However, if you have a low credit score or a history of missed payments, you may need to consider an alternative to a bank loan.
Credit Unions
In contrast to banks, credit unions are not insured by the FDIC and operate as not-for-profit institutions. Credit unions take their profits and turn them into “member” benefits such as lower fees, better interest rates, new locations, and more.
At the end of 2021, the National Credit Union Administration reported an average interest rate a whole point lower than banks. The average credit union borrower with very good or excellent credit can get a loan with 8.83% interest.
These financial institutions are focused on uplifting their communities through their financial services – which means they’re more likely to lend money to those with fair credit.
Pros of Borrowing from Credit Unions:
- Lower interest rates and fees
- Local service
- Easier to get approved with a lower credit score
Cons of Borrowing from Credit Unions:
- You have to be a member
- May find better rates elsewhere
To borrow from a credit union, you must be a current member. Community ties and more flexible terms make credit unions an appealing option.
However, if you need money now and aren’t already a member, it’s not the best option. Many credit unions have a minimum membership time requirement to be able to borrow.
Online Lenders
Online lenders are the fastest-growing source for personal loans. Getting a loan online is especially appealing because you can do the whole process from the comfort of your home. Usually, you’ll get an almost immediate lending decision and quick access to funds if approved.
In addition, some online lenders specialize in working with borrowers with lower credit scores. However, pay close attention to the loan terms offered. In addition, online lender interest rates can vary widely, so you want to make sure you’re not overpaying for convenience.
Pros of Borrowing from Online Lenders:
- Fast access to cash
- Get pre-qualified
- Compare loan offers quickly
Cons of Borrowing from Online Lenders:
- You might get a better rate at your current bank
- May have surprise fees
Other Ways to Get a Loan
Banks, credit unions, and online lenders are typically the go-to’s for personal loans. But there are a few other lenders that a borrower may want to consider. They’re good options for getting creative with your borrowing due to constraints like poor credit or low loan amounts.
Just make sure you fully understand the financial implications before choosing one.
Let’s discuss a few in detail:
- Payday Loans: Typically between $100-$500 with dangerously high interest rates. Payday loans are an option if you need a small amount of money instantly, but beware. This option is not worth the cycle of debt those high interest rates can cause.
- Pawn Shop: Use your valued property as collateral for fast cash. Just make sure you pay the shop back before they list your item for sale!
- Buy Now, Pay Later: For retail, credit apps like Affirm, Klarna, and Afterpay allow you to pay for a big purchase with interest-free installment payments. They’re a safe alternative to a credit card when online shopping.
- Finance Companies: Often partner with retailers that process large transactions like furniture companies or used automobiles.
If you need to get a loan with bad credit, these are great options. Just make sure you read the fine print. These fast-money, short-term kinds of loans can leave you with more financial stress than before. That’s the last thing we want!
Steps to Apply for a Loan
While many online lenders like to make it seem like a simple process, applying and securing a loan is not (or shouldn’t be) as easy as 1-2-3. Although most teenagers get some guidance on financial management and banking in high school, few gain a deep understanding of the loan application process.
Shopping for a personal loan doesn’t need to be overwhelming. Still, it helps if you take the time to understand each step thoroughly so you feel confident when it’s time to apply.
Six Steps to Get a Personal Loan
- Calculate How Much You Need to Borrow
- Check Your Credit Score
- Shop Around for Lenders
- Review Loan Types
- Provide Documents & Apply
- Accept Loan and Make Payments
Before you begin, gather all the documents you might need along the way. You can create a personal loan application folder with your personal identification information, proof of income, employer information, and proof of residence. Once you have that out of the way, it’s time to begin step one: calculating how much you need to borrow.
1. Calculate How Much You Need to Borrow
Personal loans come in all shapes and sizes. You may be wondering how to get a few extra thousands to get by or how to get a big loan. Some lenders will offer as little as $100 and as much as $100,000.
Knowing how much money you’ll need to borrow is the first step to ruling out lending options.
You’ll also want to consider how much you can qualify for based on your credit report and how much money you have in your budget to make monthly payments. You can also consider how much time you’d like to take to pay off the loan.
How much money you need will be pretty black and white in some situations. If you have a set expense you need to cover, like a medical bill or appliance purchase, you can base your loan amount on this. If the exact investment is a little less clear, like a cross-country move or a wedding, you may have a general idea of how much you’ll need to borrow, but not exact.
If possible, take the time to get as close to a precise estimate of your expenses as you can. This will ensure you’re not borrowing more than you need but that you also won’t be scrambling for extra money when the costs arrive.
Another critical question to answer is how much you can afford to pay toward the loan each month. The more money you borrow, the higher the monthly payment will be. Never accept a loan with a monthly payment that is more than you can afford.
If you’re not able to make your payments on time, it could hurt your credit score and snowball your debt. Not to mention the level of stress it will cause.
With this information in mind, you can confidently move forward in your search. You know how much you need and what kind of terms you’d prefer.
2. Check Your Credit Score
Your credit score will be one of the primary considerations for loan officers when reviewing your loan application. Historically, a credit report is the best way for lenders to determine how likely you are to repay your loan. Most financial institutions will have a minimum credit standard when approving and denying loan applications.
Many financial services partner with the three major credit-reporting bureaus – Equifax, Experian, and TransUnion – to provide free credit reporting updates and alerts every month. You can quickly check your current credit score with these tools.
However, if your financial institution doesn’t offer this feature, you can visit www.AnnualCreditReport.com for a free credit report. It’s the only site authorized by the federal government to provide a free copy of your credit report annually.
In your credit report, you’ll find the following information:
- A list of creditors you’ve borrowed from
- The amount of credit that’s available to you
- The amount of credit available that you have used
- Missed payments and defaulted loans
- Creditors who have pulled your report within a specific period
- Current and former employees
- Bankruptcy or other relevant financial records
Together, this information is weighed and calculated to provide your official credit score.
Your FICO credit score will typically fall into five categories:
- Exceptional: 800-850
- Very Good: 740-799
- Good: 670-739
- Fair: 580-669
- Subprime or Bad: 300-579
Steady income and debt-to-income ratios are a few other elements lenders will use to determine how much money you can borrow. However, you can make a guesstimate of what that amount could be based on your credit score.
Average Loan Amounts by Credit Score
While it’s important to understand how the traditional credit scores work – in hopes that one day you can use it to your advantage – you should also understand that this is NOT the only measurement of your worth. We believe opportunities for financial stability should be more inclusive to those with lower credit scores. That’s why we use an alternative underwriting algorithm that expands access to affordable rates through our compassionate capital products.
3. Explore Different Lenders
A thorough understanding of your credit score will help you a lot in the hunt for a lender. If you have good credit, you’ll be able to depend on a wider variety of creditors. So you shouldn’t have an issue finding ways to get a loan from a bank, credit union, or online lender.
If your credit score isn’t very high, you may have to work with lenders who look beyond your credit report, known as bad credit lenders. Earlier, we mentioned payday lenders, pawn shops, and finance companies as alternative loans sources. However, they’re limited in how much money they can provide.
In addition to these alternatives, some lenders want to work with borrowers with bad credit–like our team at BrightUp. These lenders recognize the value of giving individuals a chance to improve their financial status.
As a financial wellness benefits provider, we provide loan options that look beyond an employee’s credit score. In the case of our Emergency Loan, there are no minimum credit score qualifications for approval. The only requirement is that the employee has been in good standing with your employer for twelve months.
4. Review Loan Types
At this point, you know a few things for sure. You have an estimated loan amount in mind, you know your credit score, and you know how much you can afford to pay each month. You’ll want to find a loan that has competitive interest rates and loan terms.
When revisiting the list of loan types, it’s easy to start eliminating options. For example, suppose you need a sizable loan. In that case, you can eliminate payday loans and buy now, pay later style lending from your search. That leaves you with secured and unsecured personal loans, debt consolidation loans, co-signed or joint loans, and a personal line of credit.
Secured vs. Unsecured
Most personal loans are considered unsecured. The term “unsecured” refers to the lender more than the borrower. The lender does not secure any guarantee that you’ll pay back the loan beyond your credit history and financial status.
Unsecured loans are typically associated with higher interest rates and lower terms. You’re less likely to get approved with favorable terms if you have bad credit.
In contrast, a secured personal loan uses the borrower’s personal property as collateral. Should the borrower not pay off the loan, the lender can take that property as payment. This kind of loan is a much safer option for the lender to offer lower interest rates and better terms.
If you need to rebuild your credit and feel confident enough to provide collateral, this might be the best option.
Fixed-Rate vs. Variable Rate
When you hear about the fixed-rate loan and variable-rate loans, we’re referring to the difference between the terms of the interest rate more than the loan itself. A fixed-rate loan means that the interest rate will stay the same throughout the life of the loan. On the other hand, a variable-rate loan will go up and down with the market’s prime rate.
A real-life example can help your understanding. In 2020, interest rates plummeted due to Covid-19’s impact on the financial markets. Homeowners with mortgages saw an opportunity to lock in a lower interest rate for the long term.
Those who had a variable-rate mortgage chose to refinance to a fixed-rate mortgage, knowing that the prime rate wouldn’t stay that low. As a result, millions of homeowners will save thousands of dollars in interest charges.
The advantages of a fixed-rate loan are clear. You’ll know the exact repayment amount for the life of your loan, and you don’t have to worry about interest rate hikes in the future.
However, variable-rate loans could be more appealing because they tend to have lower interest rates. A variable-rate loan is an excellent option if you can afford to risk the interest rate increase.
Co-Signed or Joint Loans
Maybe you have a friend or family member who has good credit and is willing to support you. A co-signed or joint loan could be the best way to get a personal loan – especially if you have subprime credit.
Joint loans allow you to get a loan with a co-borrower. The co-borrower will complete the loan application with you and share ownership of the loan and responsibility for the payment. Bringing in a co-borrower with a better credit history can also help you access lower interest rates or higher loan amounts despite your bad credit.
Like joint loans, a co-signed loan requires a second person to apply. However, a co-signer does not have official ownership of the loan. Instead, they lend their good credit score to improve your likelihood of getting approved and accessing better terms.
They’ll have no right to the money you receive from the loan. If you can’t pay back the loan, they’re responsible for taking over the payments.
Personal Line of Credit
A personal line of credit is equal parts loan and equal parts credit card. While it is a flexible loan, it involves revolving credit like a credit card.
Revolving credit is an agreement to allow the borrower to repeatedly access money up to a certain dollar amount. The borrower repays that portion of the balance due in regular payments.
For example, say you get approved to access a revolving credit line of $2,000. You won’t be paying for the $2,000 immediately. Instead, you’ll only pay for whatever money you use.
So if you use $500 in the line of credit to pay for an expense, you’ll only have to make payments toward the $500.
When you get approved for a line of credit, you will have access to a defined amount of money that you can borrow as needed and pay back over a set period. Like any other loan, you will be required to apply for the loan and receive an approval within their qualifications.
A personal line of credit is the perfect option if you aren’t sure how much money you need. For example, say your wedding budget estimates $8,000 in expenses. You might want to apply for a $10,000 line of credit in case you run into some surprise costs.
If you don’t use it all, you will only get charged interest on the amount you borrow.
Lines of credit are one of the most under-used borrowing options. Yet, they can be very financially beneficial for the right person.
5. Provide Documents & Apply
By now, we hope you’re feeling more confident about finding the best loan for you. While all application processes may vary, there are some things you can expect from every lender.
When filling out your application, you’ll need to provide a set of documents proving your identity and creditworthiness. These include:
- Proof of identity
- Proof of address
- Proof of employment status
- Education history
- Income details
- Social Security number
Some lenders offer online portals to complete your application, while others require you to visit a branch or brick-and-mortar location. You may find out if you’re approved within 24-hours, or it could take a few days to a week. This experience will vary from lender to lender.
6. Accept Loan and Make Payments
Before celebrating your application approval, make sure you read the fine print!
As with any financial product, make sure you understand the terms before you sign the contract. Pay attention to the interest rate, origination fees, and any mention of prepayment penalties.
Make sure every detail is explained to you before signing the dotted line.
Once you’ve signed your papers, the speed at which you receive your money will vary. Most lenders will make a direct deposit into your account. Shortly after, it will be time to make your first payment!
Here’s a quick tip: Use a phone app or calendar to remind you about your payments! You don’t want a late payment hurting your credit score.
Compassionate Capital Through Your Job
Employers who work with BrightUp understand that financially healthy workers are less stressed and more productive. Unfortunately, employees with a troubled credit history may have limited access to affordable loan options. That’s why we offer compassionate capital in the form of Emergency Loans and Debt Consolidation Loans through our financial wellness benefits program.
When you’re having trouble getting approved for a loan and feel overwhelmed, we can help you access compassionate capital and provide tools to get you on track. If your employer does not currently offer financial wellness benefits, share BrightUp with them today!
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