These days, it’s getting harder and harder to get approved for personal loans through traditional banks due to ever-tightening credit standards. Fortunately for would-be borrowers, we’re seeing a huge surge in peer-to-peer lenders such as online lenders who are filling the void in the credit market. If you haven’t been able to get approved for a loan through a traditional bank, a personal loan through an online lender may be the answer for you.
What is a personal loan?
A personal loan is any loan that is intended to be used by an individual and not for a business. The amount and repayment period of a personal loan can vary widely. There are generally three kinds of personal loans.
A payday loan or cash advance is a relatively small amount of money, anywhere from $100 to $1,000 that is expected to be repaid along with the lending fee on the borrower’s next pay day. An installment loan is also a relatively small loan amount though it can be a little larger than a payday loan and it is repaid over several smaller payments rather than all at once. A third type of personal loan is an unsecured personal loan of a larger amount, typically up to $35,000. Interest rates on smaller, short-term loans are quite high, anywhere from 390 to 780% APR. The larger the loan and the longer you’re borrowing, the lower your interest rates will be though these kinds of loans will typically require better credit.
How it works
Smaller loans such as payday loans or installment loans will often not require a credit check. Even if you have poor credit or no credit history at all you may still be able to qualify so long as you have a bank account in good standing and a steady income. To be approved for a larger personal loan, you would need at least a decent credit history and the amount you would be approved for would vary based on how good your credit is.
A major advantage to seeking a personal loan through an online lender is that approval is very quick and you get access to the funds very quickly as well. While traditional banks will always need to check your credit reports and approval can take days or even weeks, you usually know within a few minutes whether you can be approved for a personal loan and how much you can be approved for within a few minutes just by answering some simple questions online.
Once you’re approved and you and the lender agree on the amount, the terms of the loan repayment, and the repayment fee, the funds are transferred directly into your bank account.
Is a personal loan right for you?
Because the interest rates for personal loans, especially short term personal loans, is so high, borrowers should consider carefully whether it’s the right option for them. One important thing to keep in mind about the high APR is that the loan is intended to be for a very short period of time, usually just two weeks and the amount is typically less than $1,000. If you can pay the loan off in a single payment along with the lending fee within two weeks, the APR may be more manageable, especially when you consider that if you calculate the APR for credit card late fees, bounced check fees, and reconnect fees from utility companies, these rates may be much higher than the cost of borrowing from an online lender.
Small personal loans are intended to help get borrowers out of bad financial situations, but the opposite can sometimes happen. When a borrower is unable to repay a loan by the deadline, they must pay additional lending fees to extend the loan which further drives up the APR on the loan. If borrowers aren’t careful, they can become trapped in a cycle of needing to repeatedly take out personal loans to stay ahead of bills while the fees pile up.
Before applying for a personal loan of any kind, it’s recommended that you look closely at your finances and determine what amount you can responsibly borrow and repay on time. Resist the urge to take out the maximum amount you’re offered. If you borrow only what you need and you ensure that you will be able to repay it, a personal loan can be just the thing you need to get you out of a tight spot.