Personal loans can be a relatively simple way to secure additional cash. One excellent use of a personal loan is to pay off high interest debt, such as credit card debt. If you can get a personal loan at an interest rate of 7 to 10% and use it to pay off credit card debt that carries a 19 to 26% interest rate, you will improve your overall financial situation.
Unlike collateralized loans, such as mortgages or home equity loans, an unsecured personal loan won't come at the lowest loan rate possible. However it can still be a good loan vehicle to use when you don't want to get a collateralized loan, or when you lack the option to do so.
Local Banks or Credit Unions
With the advent of the Internet, sources for loans have expanded well beyond just your local bank or credit union. A local branch of the bank or credit union where you do your usual banking is still likely to be your best bet for finding the lowest interest rate on a personal loan. Meeting with a loan officer face to face provides the opportunity to discuss the loan and review your overall finances at length. A loan officer at your local bank may be able to suggest an alternate, less expensive means of accessing extra cash, such as a line of credit. If the loan officer knows you personally, he's more likely to give you the benefit of the doubt if you're right on the line for approval.
Dealing with a local financial institution will also typically get you the cash you're looking for in the shortest period of time. It's even possible to walk in, apply for a loan and walk out with the money. Banks also typically offer more flexible loan terms than online sources, such as peer-to-peer lenders. The one major negative factor in dealing with traditional banks is that they usually have the highest credit worthiness standards to meet, often requiring a minimum credit score of 700.
Credit unions tend to be a bit less demanding regarding credit worthiness and may offer lower interest rates, but for the most part, this only applies to their existing customers.
Another plus for banks and credit unions is that there are usually no loan origination fees involved
Online Peer-to-Peer Lenders
Online peer-to-peer lenders such as Prosper and Lending Club have become increasingly popular. It takes a bit longer – up to a week or more – to secure a loan, but these online lenders are generally easier to borrow from with imperfect credit. A typical credit score cutoff is around the 640 level, and some lenders consider borrowers with credit scores as low as 600. Interest rates should be comparable to, and perhaps even a bit lower, than what you could get from a traditional bank. There may be some flexibility in repayment terms, but most online lenders tend to offer fixed-term loans, and the terms are often shorter than what you might be able to negotiate with a bank. While a traditional bank might extend the loan out for five years, online lenders rarely make loans for terms of more than three years.
To apply for a loan on one of these sites, register with the site and fill out a loan application, just as you would with a traditional bank. Most peer-to-peer lending sites require that you pay a loan origination fee, typically ranging from 0.5 to 4.5% of the loan amount.
Payday or Cash Advance Lenders
This is the place of last resort for a personal loan, and it's only useful for borrowing a very limited amount of money for a very short time frame, typically one to two weeks. Still, if your credit isn't the best and you just need to borrow enough cash to cover a major bill, such as rent or electricity, these lenders provide an option. However, it comes at a very steep price. Expect to pay back up to 125% or more of what you borrow, and that's just for payday loans. If you access an online lender of this type, expect to pay a hefty loan origination fee as well. The only positives for these types of loan sources are that you can secure the loan immediately and that they usually only require proof of income rather than checking your credit score.
Tips for Getting the Best Loan Deal
Credit scores are paramount in determining the interest rate you can get for a personal loan, so anything you can do to improve your score prior to applying is well worth the effort. It also helps if you pay down your credit card balance or other outstanding loan balances as far as you can before applying. Make sure you have all the necessary information with you for the loan application, including W-2 forms or paycheck stubs, address verification and documentation of all your monthly debt obligations. (For related reading, see "Are Personal Loans Considered Income?")