Introduction to Personal Loans
Getting a Third Party Personal Loan
Personal loans are the fastest-growing category of debt in the United States today. In fact, more than 38 million Americans currently hold a personal loan, and the total bill has now reached $305 billion nationwide. When used responsibly, personal loans are a great way to purchase a new car, cover those long overdue home improvements, and deal with emergencies when life decides to throw a curveball your way.
Whatever your reasons for taking out a personal loan, though, we understand just how stressful the process can be. Many first-time borrowers turn to their banks in the first instance but can be put off or intimidated by the mountains of paperwork they need to complete and the long waits before the money is in their pocket.
There has been an explosion of third-party lenders in recent years and the personal loan market has been cracked wide open. Borrowers have more choices than ever when looking for a personal loan, and we’re here to guide you through the options, advantages, and risks of using a third party lender. We’ll also answer any questions you might have about personal loans along the way.
What are the risks?
Some people hold the misconception that getting a loan via a third-party lender is somehow access to easy money. This is because the lending process is often easier and quicker than using banks. However, taking out a loan is always a big decision and it will always come with risks associated with it.
Always remember to read the fine print, don’t rush into the first loan you’re offered and keep your eyes open for the following risks:
- Origination fees - This is just the fancy term for any upfront fees charged by the lender. These fees are partly to cover the admin costs of setting up the loan but also constitute part of the lenders own income.
These fees vary wildly between providers. Some may charge between 0.5% and 1% of the entire loan value, while others can be much higher. If you shop around you’ll be able to find lenders that don’t charge any origination fees at all. Any reputable lender will make these fees very clear at the outset, though.
- Understand your interest rate - Interest rates are another big variable. Two people could apply for the same loan amount, from the same company, and come out with two completely different interest rates. Lenders factor in individual circumstances for every loan. The higher the risk they think you are, the higher the interest you’ll pay.
Always ask to see the total amount you’ll pay over the lifetime of the loan. This will give you a good idea of how much interest you’ll actually be paying. If it’s too high, shop around for a better rate.
- Early repayment penalties - The longer you take to pay off your loan, the more interest a lender makes on it. Lenders don’t want you paying off your loan early and many will have early repayment clauses written into the loan contract.
You should always try to pay down your debts as quickly as possible, so check with your lender to see if they’ll penalize you for doing so. Again, any reputable lender should make these charges very clear from the outset.
- Payday loan risks - These types of third-party lenders will loan you money on the promise of a portion of your next paycheck. The interest rates are incredibly high and if you’re unable to make the payments you can get trapped in a cycle of debt. Only take this type of loan if you’re absolutely certain you’ll be able to make the repayments.
- Be careful in giving your personal details away - When a loan company is comparing your best loan options it might be necessary for them to give out your personal details to different providers. This can lead to many unwanted marketing calls and emails from loan companies, each trying to pressure you into signing on the dotted line.
Make sure you’re clear on the marketing practices of the provider you’re going with. Any decent provider will let you choose your marketing options so you don’t drown in spam.
- Make sure you can make the payments - Of course, always plan ahead and ensure you can actually pay off the amount you borrow. While the lender will check your circumstances, never be dishonest in the amount you can pay back.
Any missed payments can affect your credit rating and risk trapping you into a cycle of debt you’ll be unable to repay.
Personal loans are still incredibly useful when used the right way, something that millions of Americans can attest to. Just make sure your eyes are open and you’re aware of the risks going in.
How are the loans secured?
There are two types of personal loans you can apply for, secured and unsecured. Before deciding on which s right for you, it’ll help to understand these in more detail:
Secured loans
With a secured loan, you make a promise to give up a chosen asset in the event you can’t repay the loan. This could include things like your car, promise of money in a savings account or a certificate of deposit.
These are a lower risk for the lender as they’re pretty much guaranteed to get their money back one way or another. They can be useful for borrowers as secured loans usually come with lower interest rates.
These work well for those with low credit ratings too, and a good way for you to build credit. Many lenders will be happy to discuss secured loan options with you. Of course, though, if you don’t pay, you’ll lose the assets you’ve nominated.
Unsecured loans
These tend to be the more common type of personal loan you’ll see. These loans aren’t secured against any of your assets or possessions, meaning if you default on your payments, the lender can’t take any property from you because it wasn’t specifically named as collateral.
However, there are some downsides to using unsecured loans. As these present a higher risk for the lender, they tend to have higher interest rates, meaning you’ll be paying more in the long run. Also, missing any payments has a significant impact on your credit rating, making it very difficult to apply for other types of credit in the future.
How much can you borrow?
This is where it’s important to set realistic expectations. Your credit score doesn’t just affect your interest rate, it also comes into play when determining how much money you can borrow. Again, we’ll stress that a good credit rating isn’t the be-all and end-all of getting a loan, but the worse your score is, the lower the amount you’ll be eligible to borrow.
This isn’t such a bad thing, as borrowing small amounts and paying them off quickly can really boost your credit score.
You’ll generally find that the highest amount most third-party lenders will be willing to let you borrow for a personal loan is up to $100,000. However, it’s very rare to see personal loans reach these figures. The average loan amount in the US is around $15,000.
Try not to borrow more than you need to either. Go into a personal loan application with a clear idea of what you need the money for.
What will your repayment terms be?
Most personal loans will have repayment terms between one and seven years. The length of time you choose to repay a loan, your credit rating, and financial circumstances all play a part in determining the interest rate, which can vary enormously.
Generally, the shorter the repayment term, the higher the interest rate will be. Confusingly, though, this doesn’t always mean short term loans are more expensive. This is because the longer you take to pay off a loan, the more you’ll generally pay overall. Even if the long term interest rate is lower.
This is why you should always check what the total repayment figure will be over the life of the loan. And remember to watch out for any early repayment penalties in the loan contract too.
Personal loans can be with you for a significant chunk of your life, and many lenders understand your circumstances can change over time. Some lenders may offer additional benefits, such as unemployment protection clauses, to help protect against unforeseen circumstances. This means if you lose your job during the loan repayment period, you won’t have to pay back the loan and your credit rating will be protected.
Make sure you read the fine print on all the clauses of your loan contract before signing and get as many protections as you can.
Stages for Applying for a Personal Loan
Applying for a loan online couldn’t be easier these days, and can usually be completed in just a few steps:
- Plan a budget and come up with a monthly payment you feel is affordable; make sure not to accept offers over this amount
- Check your credit score on FICO to get an idea of what you can borrow
- Research the best online lenders and marketplaces
- Provide basic personal details to the lender or connection service, including your desired loan amount
- The provider or marketplace will show you a range of options with varying rates and terms
- Select the one you like and the lender will run a hard check on your credit score
- Once approved, sign your loan agreement and receive your funding
How to Choose a Lender
With a huge range of choice these days, it can be difficult to know where to start. You might want to take a lot of the work out of your decision by going to a loan marketplace, where you’ll be presented with offers from dozens of different lenders. Or, you can do your own independent research. Either way, we’d recommend looking into the following before you sign any agreement:
- Eligibility requirements - Check you’re eligible before you apply, making sure you meet the age, credit score, and income requirements. Otherwise, you’ll be hit with a hard check to your credit rating for nothing
- Research the lender’s reputation - Almost all lenders will have ratings across a number of aggregate review sites like TrustPilot. Plus, a lot of loan marketplaces will have customer reviews built into the website, so it’s easier than ever to check a company’s reputation
- Compare interest rates and fees - To make sure you get the best deal possible, always compare the fees and interest rates among your top choices
- Read the fine print - This is the best way to not get stung and can be used to double-check that you’re able to keep up with the repayment schedule
Fast, Instant and Quick Personal Loans
It can sometimes be the case that the faster you get your loan, the higher your interest will be. Usually found at the likes of payday lenders, these can be a risky option, but might be a borrower’s only choice in certain circumstances.
If you'd prefer to go to a more reputable lender, you can speed up the process significantly by having the relevant documentation ready, such as proof of income and identity. The time it takes to get your funding is often dependent on how quickly you respond to the lender’s queries.
Luckily, the industry has recognized the need for speed when it comes to borrowing and many lenders are doing everything possible to make the process easier and faster. Most now offer pre-qualification with a soft credit check, which will give you estimated rates without impacting your credit score.
Excellent Credit, Good Credit and Fair Credit Loans
Before you’ll be approved for a loan, you’ll first need to pass a credit check. Your credit score is a measure of your financial health and is represented by a three-digit number, usually landing between 300 at the bad end and 850 at the excellent end. Borrowers can build up their score by consistently paying off debts and by having a long history of repayments.
The higher your credit score, the lower your rates will be, and those with excellent credit can expect the lowest rates and most favorable terms. However, the vast majority of borrowers will fall into the fair credit rating, and you’ll find many providers specializing in this type of loan.
Be careful you don’t apply for too many loans, though, as each one could result in a hard check on your score, which in turn will negatively impact it. Check out the best personal loan companies and try to limit your applications.
Terms And Conditions for Example:
* Upgrade Terms and Conditions:
Personal loans made through Upgrade feature APRs of 6.94% - 35.97%. All personal loans have a 2.9% to 8% origination fee, which is deducted from the loan proceeds. Lowest rates require Autopay and paying off a portion of existing debt directly. For example, if you receive a $10,000 loan with a 36-month term and a 17.98% APR (which includes a 14.32% yearly interest rate and a 5% one-time origination fee), you would receive $9,500 in your account and would have a required monthly payment of $343.33. Over the life of the loan, your payments would total $12,359.97. The APR on your loan may be higher or lower and your loan offers may not have multiple term lengths available. Actual rate depends on credit score, credit usage history, loan term, and other factors. Late payments or subsequent charges and fees may increase the cost of your fixed rate loan. There is no fee or penalty for repaying a loan early. Personal loans issued by Upgrade's lending partners. Information on Upgrade's lending partners can be found at https://www.upgrade.com/lending-partners/.
* SoFi Limited Offer Terms and Conditions:
Fixed rates from 8.99% APR to 25.81% APR reflect the 0.25% autopay interest rate discount and a 0.25% direct deposit interest rate discount. SoFi rate ranges are current as of 05/19/2023 and are subject to change without notice. The average of SoFi Personal Loans funded in 2022 was around $30K. Not all applicants qualify for the lowest rate. Lowest rates reserved for the most creditworthy borrowers. Your actual rate will be within the range of rates listed and will depend on the term you select, evaluation of your creditworthiness, income, and a variety of other factors.
Loan amounts range from $5,000– $100,000. The APR is the cost of credit as a yearly rate and reflects both your interest rate and an origination fee of 0%-6%, which will be deducted from any loan proceeds you receive.
Autopay: The SoFi 0.25% autopay interest rate reduction requires you to agree to make monthly principal and interest payments by an automatic monthly deduction from a savings or checking account. The benefit will discontinue and be lost for periods in which you do not pay by automatic deduction from a savings or checking account. Autopay is not required to receive a loan from SoFi.
Direct Deposit Discount: To be eligible to potentially receive an additional (0.25%) interest rate reduction for setting up direct deposit with a SoFi Checking and Savings account offered by SoFi Bank, N.A. or eligible cash management account offered by SoFi Securities, LLC (“Direct Deposit Account”), you must have an open Direct Deposit Account within 30 days of the funding of your Loan. Once eligible, you will receive this discount during periods in which you have enabled payroll direct deposits of at least $1,000/month to a Direct Deposit Account in accordance with SoFi’s reasonable procedures and requirements to be determined at SoFi’s sole discretion. This discount will be lost during periods in which SoFi determines you have turned off direct deposits to your Direct Deposit Account. You are not required to enroll in direct deposits to receive a Loan.
* Achieve Limited Offer Terms and Conditions:
The financial solutions for which you will be evaluated are offered by service providers with which we are affiliated and/or compensated by who participates on our website. Terms and conditions apply to each, and not all are available in every state.
Achieve.com, a d/b/a of Bills.com, LLC (NMLS ID #138464) operates as a marketing lead generator for affiliates and non-affiliates, and as a broker for loans and debt resolution services offered by its affiliates. We also offer certain mobile applications that allow consumers to view and analyze their finances. We may take applications for our affiliates, but we do not make credit decisions, originate loans, process consumer loans or bill payments, or provide any other financial services. We do not collect any fees or other compensation from consumers.
Personal loans are available through Achieve Personal Loans (NMLS ID #227977), originated by Cross River Bank, a New Jersey State Chartered Commercial Bank or Pathward N.A., Equal Housing Lenders and may not be available in all states. All loan and rate terms are subject to eligibility restrictions, application review, credit score, loan amount, loan term, lender approval, credit usage and history. Loans are not available to residents of all states. Minimum loan amounts vary due to state specific legal restrictions. Loan amounts generally range from $5,000 to $50,000 (including the origination fee) and are offered based on underwriting conditions and loan purpose. APRs range from 7.99 to 35.99% and include applicable origination fees. Repayment periods range from 24 to 60 months.
For example: A four-year $20,000 loan with an APR of 18.34% would have an estimated monthly payment of $561.60 and total cost of $26,956.80. To qualify for a 7.99% APR loan, a borrower will need excellent credit, a loan amount of $12,000.00 or less, and a term of 24 months.
Loan origination fees vary from 1.99%to 5.99%, most loans have a fee of 4.99%. Adding a co-borrower with sufficient income; using at least eighty-five percent (85%) of the loan proceeds to pay off qualifying existing debt directly; or showing proof of sufficient retirement savings, could help you also qualify for a lower rate. Average interest savings for personal loans range from 0% - 6% based on closed loans that qualified for one or more of our rate discounts in July 2022.
†Times noted are estimates and can vary for a loan request from Achieve Personal Loans (NMLS#227977). Same day approvals assume that a fully completed application with all required supporting documentation is provided early enough on a day that our offices are open. Achieve Personal Loans consultants are available Monday–Friday 6AM to 8PM MST and Saturday–Sunday 7AM to 4PM MST.
Home Equity loans are available through Achieve Loans (NMLS ID #1810501), Equal Housing Lender. All loan and rate terms are subject to eligibility restrictions, application review, credit score, loan amount, loan term, lender approval, and credit usage and history. Home loans are a line of credit. Loans are not available to residents of all states and available loan terms/fees may vary by state where offered. 640 credit score applies to debt consolidation requests, 670 credit score applies to cash out requests.
Conclusion
We get it. Loans can be complicated, and this is a lot of information to digest! But, when you’re armed with the right knowledge and understanding, you’ll have the confidence to find a loan that works well for you.
There’s no need to be intimidated when applying for a personal loan. Just remember to be clear on what you can afford to repay, research the risks, understand the contract clauses, and agree to repayment terms that suit your income.