If you have decided that you need a personal loan, there are some loan basics to get familiar with. For one you have two types of personal loans you can opt for, secured personal loans which are less common, and unsecured personal loans, which are the most common. The choices here amount to deciding weather or not you want lower interest but risk an asset such as your car or home, or higher interest and risk nothing but your credit score.
An unsecured loan is what is known in the lending industry as a “signature loan”. In essence the lender will lend you the funds with just your signature on a contract to pay back the money, plus interest, no collateral required. Secured loans require collateral, which if you default on the loan, the lender can take that property after some court proceedings to satisfy any outstanding debt.
As far as lenders go, you have many options when it comes to finding one. The personal loans industry today is evolving and becoming highly competitive. Brick and motor banks in our local neighborhoods once were the only option when it came to finding personal loans. Then came credit unions, which being not for profit could offer lower rates than most banks were willing or able to offer. Enter today where online lenders are now offering billions of dollars in loans, with lower overhead and often times less fees than banks or credit unions. Fees for example make up a large portion of the true cost of a loan to a consumer, directly impacting a loans APR, yet many online lenders have done away with many of these fees. Origination fees for example are often absent with many of today’s cutting edge online lenders, several of which we feature on this website.
Every lender has their own format for deciding on what rate to offer you. No two lenders will offer you the exact same rate, so it pays off to shop around or “rate shop” before deciding on who to borrow from when it comes to personal loans. At physical banks and credit unions you need to be careful here however, as many of these lenders will ask you to fill out a loan application on the spot in order to tell you what rate they would offer. What these lenders neglect to tell you is that it results in a hard inquiry to your credit report, which can lower your credit score. These hard inquiries occur anytime you apply for credit, they stay visible on your credit report for 24 months, and effect your credit score for up to 12 months. Many online lenders on the other hand offer the ability to check your rate without affecting your credit score, another key benefit of many online lenders when compared to banks.
When it comes to credit scores, you likely will have problems finding a lender willing to lend to you if your score is under 640. Even with a score of 640 you will not find the best rates out there. Your credit score will be directly related to what interest rates you are offered. Income and even education levels can also play a factor here now. if your score is low, you may want to pull your free credit reports from annualcreditreport.com and see what you can do to improve your credit score. Often times peoples scores are lower due to how much of their available credit they have been using. If this is the case, paying down old debts will raise your score up fairly easily enough. You should pull your credit reports anyway to ensure that there are no errors on your credit report that are effecting your credit score.