Average annual percentage rate on personal loans has declined for both three-year and five-year loans, according to data released Monday by Bankrate for the week ended December 13. If you have excellent credit (i.e. a score of 751 or higher), the interest rate slump has been particularly severe: the average APR on personal loans fell to 12.56% for a three-year loan (up from 14.25% a week ago) and 13.36% for a five-year loan (14.80% a week earlier). These are the lowest rates in 108 and 115 weeks, respectively. And you may get a far lower than average price as a number of Issuers offer interest rates starting at around 5% for qualified borrowers. However, the rates are much higher for those with lower credit scores.
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What is a personal loan?
A personal loan is a loan that is usually granted by an online lender, bank, or credit union in the range of about $ 1,000 to $ 100,000. You often repay personal loans at regular intervals, such as monthly, over a period of one to seven years. You can often get these loans quickly, sometimes in as little as a day or two, and they sometimes have lower interest rates than credit cards, but usually higher interest rates than things like home loans or home equity lines.
Who could benefit from a personal loan?
If you need a loan quickly, this can be a good option for you provided you can repay it and get a good interest rate. “When you take out a personal loan, you can often get there a little earlier by providing you with money upfront rather than waiting for it,” said Lauren Anastasio, Certified Financial Planner at SoFi. And Ted Rossman, Senior Industry Analyst at CreditCards.com, notes that in addition to being quick to fund, these loans are often easier to obtain than other types of funding like business loans, especially if you’re just starting out and don’t have much, if you have one , Business revenue.
“Personal loans can be very helpful depending on their purpose,” adds Anastasio. In fact, you could use a personal loan to consolidate debt and potentially save money by getting a lower interest rate on the personal loan than on your debt. Another advantage? When moving credit card balances to a personal loan, switching revolving debt to an installment loan can greatly improve creditworthiness, said Matt Schulz, chief credit analyst at LendingTree. “Your credit mix, or the variety of types of credit on your credit report, is an important factor in FICO credit rating formulas,” he explains.
Personal loans are also good for home improvement projects that you want to get started quickly, like a roof repair, since you can usually go from application to financing in a week or less, experts say. They can also be an alternative to small business loans, and if you have good credit they can come with lower interest rates than business and personal credit cards.
However, experts say you shouldn’t use personal loans to cover discretionary purchases like vacations and retail expenses. “Personal loans are a big obligation for short-term, discretionary purchases. Everyone itches to get out and travel these days, but even the smallest personal loans often have repayment periods of a year or more, ”says Annie Millerbernd, personal loan expert at NerdWallet.
What are the pros and cons of personal loans?
In addition to quick financing, these loans have other advantages. “Not only are you avoiding jeopardizing your home or car, but you are also avoiding giving up any equity in your business,” says Rossman; This is because most of these loans are unsecured so the borrower does not need to provide collateral to guarantee the loan.
However, their interest rates can be higher than other types of loans such as home loans and HELOCs. And you have to watch out for fees. Millerbernd warns borrowers to watch out for front end charges. “Lenders who charge a commitment fee often cut off a percentage of the amount you borrow before it is deposited into your account. You could be a few hundred to a few thousand dollars missing, ”says Millerbernd. She adds, “Personal loans also have the potential to accelerate spending by giving you the ability to pay for large expenses without having to save.”
What Do Personal Lenders Look For In A Borrower?
Rossman says every lender is different, but generally they don’t place too much emphasis on the purpose of your personal loan. “Usually they care a lot more about your creditworthiness, income, debt-to-income ratio, and other factors that affect the likelihood of you paying them back,” Rossman says. The debt-to-income ratio can be calculated by adding up all of your monthly debt payments and dividing them by your gross monthly income; Many lenders look for a DTI of 35-40% or less, although many lend to individuals at a higher rate.
How to get a personal loan when you have a lower credit score
In general, the lower your creditworthiness, the more interest you will pay on a personal loan. And some borrowers may not qualify at all. That said, there are a few things you can do that can range from being rejected to being accepted by a lender. “When you’re close to the threshold, you can be overthrown relatively quickly by making a large payment for a revolving balance or using Experian Boost,” says McBride. Also, “If you pay all of your debts and bills on time, and you pay off all revolving debts, time will heal the wounds,” he added. Just remember that you need to repay a personal loan in full and on time to make sure it does not affect your creditworthiness.