May 18, 2022

Best personal loans of December 2021


What is a personal loan?

A personal loan is money borrowed from a bank, credit union, or online lender that you pay back in equal monthly installments, usually over two to seven years.

Personal loans are generally unsecured, which means that they do not require collateral. Rather, lenders consider your credit profile, income, and debt during the loan approval process. If you don’t repay the loan, your credit can take a hit.

When should i get a personal loan?

  • It is the cheapest form of financing.

  • It is used for something that has the potential to increase your financial situation, such as debt consolidation or home improvement.

In contrast, a personal loan used for discretionary spending, such as a holidays, can be expensive. NerdWallet recommends using savings for non-essential items to avoid finance charges.

If you are borrowing for medical or emergency expenses, consider cheaper alternatives first, like community aid or payment plans.

Survey: How people use personal loans

A recent NerdWallet survey published in early November found that nearly 3 in 10 Americans (29%) took out a personal loan in the past 12 months, borrowing about $ 385 billion.

The average loan amount was $ 5,210, according to the survey, and the three most common uses of a personal loan by respondents were:

  • Debt consolidation. Of the 550 people surveyed, 40% used a personal loan to consolidate their debts. Debt consolidation combines your debt into one loan, ideally with a lower interest rate that reduces your total debt and helps you pay it off faster.

  • Great events. The survey found that 39% of recent personal loan borrowers used a loan to manage the cost of a big event, which could include a marriage or vacation.

  • Emergency expenses. According to the survey, 35% of those surveyed used a personal loan to cover an emergency.

Interest rates and loan fees

Personal loan interest rates vary by lender, and the rate you receive depends on factors like your credit rating, income, and debt-to-income ratio.

Borrowers with high credit scores typically receive lower rates, around 11% to 15%, while those with low credit scores can get an APR of around 25%. Here’s what the average personal loan interest rates look like:

25.3% (lower scores are unlikely to qualify).

Source: Average rates are based on aggregated and anonymized supply data of users who have prequalified in the NerdWallet lender market from July 1, 2020 through July 31, 2021. Rates are estimates only and are not intended for use. specific to any lender.

Some lenders charge assembly costs to cover the loan processing costs. Lenders deduct the fees from the loan proceeds or add them to the balance. These one-time upfront fees are included in the loan amount annual percentage rate, so consider this when comparing costs between lenders.

Other fees to watch out for include late fees, insufficient funds charges, and prepayment charges, which are penalties for prepaying your loan.

Best place to get a personal loan

You can get a personal loan from online lenders, banks, and credit unions. The best option depends on where you can get the rate, terms, and features that match your financial situation.

For example, if a quick and convenient loan application is important to you, consider an online lender. On the other hand, if lower rates and in-person support are important, a bank loan or credit union loan might be the best option.

Advantages and disadvantages of personal loans

Depending on your financial situation and the purpose of the loan, a personal loan may be the right solution or one that you should avoid.

Advantages

Lower starting APRs than credit cards. For consumers with strong credit, personal loans typically have lower APRs than credit cards. While some credit cards offer 0% interest during an introductory period, the rates are generally higher after the period ends.

Fixed rates and monthly payments. Personal loans have fixed rates and monthly payments over a fixed term, so you always know what you owe and for how long. Other financing options, like home equity lines of credit, have variable rates that can result in fluctuating monthly payments.

Flexible loan amounts. Depending on the lender and your creditworthiness, you may have access to personal loans of $ 1,000 to $ 100,000. This range meets a wide variety of expenses, from small emergencies to large home renovation projects.

No guarantee. Unlike home equity loans which require you to secure the loan with your home, unsecured personal loans do not require collateral. You risk damaging your credit if you can’t repay it, but you won’t lose any assets.

The inconvenients

Maximum APRs can be high. If your credit score is low, personal loan APRs may be higher than credit card APRs.

Possible costs. Borrowers may have to pay fees – like origination or late fees – as well as their loan repayments.

Increase in debt. Taking out a personal loan adds debt to your budget, so it’s important to factor in the additional obligation and feel comfortable paying it off.

Summary of the advantages and disadvantages of the personal loan

  • Lower starting APRs than credit cards.

  • Fixed rates and monthly payments.

  • Maximum APRs can be high.

  • Charges are possible, depending on the lender.

  • Increase the debt you owe.

How to choose the best personal loan

Here are some things to consider when shopping for and comparing personal loans.

Soft credit check. Most online lenders allow you to check your estimated interest rate by performing a gentle check on your credit when prequalifying. It will not affect your credit score, so it is beneficial to take the steps to pre-qualify for a loan with several lenders and compare the rates and characteristics of the loan.

Annual rates as a percentage. Since APRs include interest rates and fees, they offer a apple-to-apple cost comparison for borrowers deciding between personal loan offers. Use our personal loan calculator to see estimated rates and payments based on credit scores.

Repayment Terms. Having a wide variety of repayment tenure options gives you the option of getting a shorter term and paying less interest or a longer term and having a low monthly payment. Depending on your budget, one may make more financial sense than the other.

Amount of the loan. Depending on the amount of money you need, one lender may be more attractive than another. Some lenders offer small to medium sized loans, such as $ 2,000 to $ 40,000, while others provide loans of up to $ 100,000. Figuring out how much you need up front will help you compare and decide.

Special features. You can benefit from features like automatic payment rate reductions, unemployment protection or financial coaching. Find out if the lender you are considering offers any benefits that could help you reach your financial goals.

Pre-qualify for a personal loan

After comparing the offers and selecting a loan with the lowest rate and payments suited to your budget, you apply for the loan.

Applying for a loan may require additional personal information, including employment status and educational background. You may also need to allow the lender to pull your credit reports and verify your income.

Your first loan payment is usually due within 30 days of loan approval and funding.

Check out the loans and lenders in each of these categories:

See other uses of personal loans: