A personal loan is an installment loan that is not backed by collateral such as a house or car. It differs from a mortgage or car loan in that the lender cannot directly seize your assets if you fail to pay back the loan. Your credit score still will be damaged if you default, though.
What lenders are looking for: Any reputable lender will check your credit history and ask about your income and debt when deciding whether to offer you a loan. Your credit history directly affects the interest rate you are offered, and so does your ability to repay the loan. Rates do vary from lender to lender, but here is what interest rates on personal loans look like, on average:
Average Personal Loan Rates
|How’s Your Credit?||Score Range||Estimated APR|
|Excellent||720 - 850||10.94%|
|Good||690 - 719||14.56%|
|Average||630 - 689||19.84%|
|Bad||580 - 629||28.64%|
|Poor||579 and below||Unlikely to qualify|
Source: 2016 NerdWallet survey of lenders
Someone with poor or average credit may be able to get an unsecured personal loan on the strength of a steady income and low debt levels. Someone with excellent credit and a low debt-to-income ratio may be offered interest rates as low as those seen on secured loans.
Almost all lenders will require you to be 18 or older and a legal U.S. resident, with a verifiable bank account and not in bankruptcy or foreclosure.
What about lenders that don’t check your credit? Some lenders have no minimum credit score requirements, but that does not mean they don’t check your credit report. They do.
You may have seen lenders that offer loans with no credit check at all, but they will charge interest rates of 300% or more, as will a payday lender.
Only a few lenders will approve a loan for borrowers with poor credit scores. Expect rates toward the higher end of the range — that is, up to 36% — if your credit is damaged. If you can’t qualify for a loan through a reputable lender, don’t head for a payday lender. Consider these options first.
Pros of personal loans
- Consolidation for your credit cards and other debts. A personal loan can be used to consolidate high-interest credit card debt into one payment at a lower interest rate and accelerate debt payoff.
- Improved credit score. You may improve your credit score by moving revolving credit card debt to an installment loan, because you lower your credit utilization ratio and diversify your types of debt.
Cons of personal loans
- Higher interest rates than secured loans and (some) credit cards. If you have excellent credit and can pay off the debt in 12 to 18 months, you can likely get a credit card that has 0% interest on balance transfers for a year or longer. Alternatively, if you are a homeowner, home equity loans often have lower interest rates than personal loans. But be cautious; you’re risking your house by putting it up as collateral.
- Extended application process. The approval process for a loan can last a few days and may require more information than that needed to get a credit card.
Is a personal loan right for you?
Personal loans work best as part of a longer-term plan to improve your finances.
Borrow to consolidate debt if it means you’ll get out of debt more quickly. Borrow for a wedding or a vacation if you are confident you can make the payments.
But don’t borrow to put off the inevitable. If you aim to become debt-free, create a plan to do so. If you can’t handle your current debt, investigate your debt-relief options.
If you have good credit and an existing banking relationship, it’s worth checking out the offerings from your current provider or local credit union.
The lenders who partner with NerdWallet follow Consumer Financial Protection Bureau standards for installment lending, with interest rates no higher than 36% (widely considered the upper limit of affordability) and consideration of your credit history and ability to repay. NerdWallet has reviewed their application processes and verified their underwriting guidelines.