Responsible Lending

When you take out a personal loan, you receive a one-time payment that you will repay over a set period with interest. Generally, personal loans have lower interest rates compared to credit cards, making them a more cost-effective option for significant expenses. Loan terms typically range from 1 to 7 years, though some lenders may offer even longer terms. While extending the term can reduce your monthly payments, it often results in paying more interest overall. Conversely, shorter terms lead to higher monthly payments but lower total interest costs.

Interest and Fees

In addition to interest charges, some personal loans may include an upfront fee known as an origination or administrative fee, which can range from 0% to 12% of the loan amount, depending on the lender and your credit profile. Here are some key points about origination fees:

• The fee is usually deducted from the total loan amount at the time of disbursement.
• It is included in the loan's APR, making it essential to compare APRs rather than just interest rates.
• A better credit score may allow you to bypass origination fees.

Be aware that late payments or insufficient funds could result in additional charges, such as late fees or non-sufficient funds (NSF) fees. However, some lenders, like SoFi, do not impose origination or late fees.

Eligibility for a Personal Loan

To assess your eligibility for a personal loan, lenders typically review your credit history, income, debt-to-income ratio (DTI), and employment status. The DTI ratio is a measure that compares your monthly debt obligations, like credit card payments and car loans, to your gross monthly income.

It may be beneficial to prequalify for a loan before submitting a formal application. Prequalification gives you an idea of the loan options and rates available to you without affecting your credit score. To prequalify, you usually need to provide basic information such as your name, contact details, loan purpose, desired loan amount, and sometimes the last four digits of your Social Security number.

Keep in mind that completing a full application will trigger a hard credit inquiry, which could lower your credit score by a few points for up to a year.

Bad-Credit Loans

For individuals with poor or no credit history, bad-credit loans can be more accessible, but they often come with higher APRs. If you find the interest rates prohibitive, consider adding a cosigner to potentially lower your rates.

Be cautious of predatory lending practices, such as payday loans, which can have exorbitant APRs—sometimes exceeding 400%. These loans typically charge between $10 and $30 for every $100 borrowed and have short repayment terms of two to four weeks, with maximum loan amounts around $500.

The brief repayment period associated with payday loans can make it challenging to repay on time, especially if you’re already experiencing financial strain. This situation may lead to rollovers or renewals, incurring additional fees and significantly increasing your overall loan cost.

A safer alternative is a payday alternative loan (PAL), available through some federal credit unions. PALs offer loan amounts up to $2,000 with APRs capped at 28%. Some credit unions may even provide these loans to new members, regardless of when you joined.