Best Personal Loans of 2021 | U.S. News

With a personal loan, you can borrow money to consolidate high-interest debt, finance a large purchase or cover emergency expenses. Loan terms are usually less than five years, and amounts typically range from $1,000 to $100,000. The Federal Reserve has held interest rates near zero amid the pandemic, which can reduce the cost of a personal loan – if you can get one.

Borrowers faced stricter lending standards during the coronavirus downturn, but that may soon change as the economy heats up again. Still, if you have strong credit and steady income, finding the best personal loan for your needs at a low interest rate could save you thousands. Here’s what you need to know about choosing a personal lender and getting approved.

When you shop around for the best personal loan rate, you can save. Compare personal loan offers with national average personal loan trends to know whether you’ve found a competitive interest rate.

You could pay a higher interest rate or a lower one, depending on your credit score.

*Rate as of May. 21, 2021

Americans are grappling with a lot of uncertainty over jobs, finances and health risks as the COVID-19 pandemic endures.

Many who have lost jobs or wages because of the health crisis are struggling to pay for essentials, including food and shelter. But a U.S. News survey about the pandemic’s toll on finances revealed that consumers may have overlooked options such as personal loans, deferred credit card payments and fee waivers, which could ease financial pressures.

These are the key survey findings:

More than half of consumers surveyed said they have serious financial concerns related to the coronavirus.

Nearly half of consumers surveyed have experienced changes at work since the U.S. coronavirus outbreak began.

Paying for essentials, reducing debt and building savings are coronavirus stimulus check priorities.

Most consumers affected by the COVID-19 pandemic aren’t asking for government assistance.

Many consumers with credit card debt plan to skate by with minimum payments as the coronavirus pandemic continues.

Most consumers don’t plan to take personal loans to help with coronavirus financial challenges, and those who turn to these loans may use them for everyday expenses.

A competitive interest rate is the most important factor for many people when choosing a personal loan company.

Most Americans have not considered personal loan alternatives, but lower-cost options get priority for those who have.

More than 80% of consumers surveyed said they haven’t looked at popular alternatives.

A personal loan is a lump sum you can borrow from a bank, a credit union or an online lender and repay over a fixed amount of time, unlike a credit card or line of credit. Borrowers pay back loans of up to $100,000 in fixed installments, usually over two to five years.

Personal loans are typically unsecured, which means they are supported by your creditworthiness rather than collateral. Collateral is an asset, such as a car or house, a lender may require for certain types of loans and use to recoup its losses if you default.

You can get a personal loan from different types of lenders, including traditional brick-and-mortar banks and online lenders. They serve borrowers with varying credit scores, income levels and other requirements.

To see if you qualify for a personal loan, your lender will likely look at some or all of the following:

There are smart ways to use personal loans, although these loans won’t work for everyone.

A personal loan might make sense if:

A personal loan might not be the right choice if:

Personal loans are available everywhere from brick-and-mortar banks and credit unions to online lenders. Review the pros and cons of each type of lender.

A bank or credit union could offer personal service, especially if a location is nearby. But online lenders sometimes offer more convenience, especially if you prefer to apply, close and manage your personal loan online.

Strive to obtain preapprovals from a variety of lenders so you can compare rates, terms and other factors for different types of personal loans.

Because each lender has distinct terms and conditions, you will need to know what you want in a personal loan before you start comparison shopping.

“Consumers can choose the best personal loan by doing their research, shopping around between multiple lenders, reading the fine print and only selecting a loan that they know they can afford to repay,” says Jared Kaplan, CEO of OppLoans, an online lender for bad credit loans.

An easy place to begin is to check that a lender is licensed in your state. Make sure each lender can offer personal loans where you live.

Then you can compare these other key factors to help you choose the right lender.

Lenders often set minimum credit score requirements and other qualifying factors that borrowers need to meet for personal loan approval.

Some lenders require that you work a certain number of months before you’re eligible for a personal loan. If you’re furloughed or unemployed, the lender may ask you for documentation that indicates when you’ll return to work, such as your furlough letter or a pending job offer.

If you don’t have a long employment record or high income, make sure your credit score is strong.

Lenders also care about your debt-to-income ratio, which is the percentage of your monthly income that goes toward paying your debt. They like to see a low DTI, usually 40% or less.

Each lender may have a minimum annual income requirement for borrowers to qualify for a personal loan as well.

Borrowers with higher incomes tend to be better applicants because they have more money for repaying their loans. Still, a big income can’t fix a poor credit score or high debt-to-income ratio.

If you don’t meet credit or income standards, a co-signer could help you qualify for a personal loan or even help you obtain more competitive rates than you could on your own.

Personal loans can have two types of interest rates: fixed or variable. Most personal loans come with a fixed interest rate, which stays the same for the duration of a loan.

A variable rate changes over the life of the loan, depending on prevailing interest rates.

Some borrowers don’t want the uncertainty of a variable-rate loan and prefer to stick with a fixed-rate loan.

Each lender sets its own terms, such as loan amounts, term lengths and use restrictions.

One of the most important aspects to compare before choosing the best personal loan is the fees each lender charges. Fees can significantly increase the cost of a personal loan.

Lenders commonly charge origination fees to cover the costs of processing your loan – though not always. Fees are between 1% and 6% of the loan amount.

Because most lenders enforce late fees, always pay your loan on time. Some lenders waive late fees, including Marcus by Goldman Sachs and U.S. Bank, but you should still expect interest to accrue if you pay late.

If you don’t have enough money in your account, most lenders will charge a minimal fee for returned payments.

Though rare, prepayment penalties may apply when you repay your loan ahead of schedule.

Choices vary by lender, so make sure your lender has options that work best for you.

Most lenders offer flexible payment options, including autopay, check by mail or online, and even a chance to change your payment date.

Some lenders, such as Upgrade and SoFi, provide an autopay discount, which can reduce your rate if you enroll.

Before you move forward with a lender, be sure to read personal loan reviews so you know what to expect – or when to avoid a lender.

Kaplan recommends researching lenders on the Better Business Bureau website to check for negative marks or complaints.

Some lenders offer loans with additional features that make them a better fit for certain borrowers.

In the long run, a personal loan can help improve your credit, especially if you’re using a debt consolidation loan to refinance credit card debt. The short-term cost may be a few dings to your credit score when you apply for the loan. When you submit a loan application, the lender will check your credit. The lender can check it in two ways: with a soft credit inquiry or a hard credit inquiry.

If you are approved for a personal loan, the new loan can drop the average age of your credit history. Although the length of your credit history accounts for only 15% of your FICO credit score, it is still an important factor for lenders and can affect your chances of getting a loan. Payment history is the most important factor in your credit score at 35%, which means that you must pay your personal loan on time. If you stop making payments on a personal loan, you risk defaulting on the loan and damaging your credit.

“If you’re taking out an unsecured personal loan, you don’t have to risk losing your home or your car, but that doesn’t mean they’re risk-free,” Kaplan says. “Failing to pay the loan back, also known as defaulting, could do some pretty serious damage to your FICO score. That will make it harder and more expensive to borrow money in the future.”

Personal loan APR ranges are typically from about 6% to 36%, depending on creditworthiness and other factors. Generally, the higher your credit score, the better your personal loan interest rate.

Also, the higher your credit score, the greater choice of personal loans you’ll have with favorable terms. Companies want to work with people who have good or excellent credit scores and are more likely to offer personal loans with better terms to these consumers.

“Realistically, you probably need a credit score of 680 to 700 or higher” to qualify for a personal loan, says Joseph A. Carbone Jr., certified financial planner and founder of financial planning firm Focus Planning Group. “If you are in a range of 620 to 680, you might need a co-signer to secure the line.”

But your credit score is not the only factor that determines either approval for a personal loan or where interest rates start. Companies will request information about your job, your minimum annual income, how stable your income is, your savings and more. Your answers can determine your eligibility.

There are several steps to apply for a personal loan.

1. Get preapproved rates. Make sure the lenders you’re requesting rates from will obtain them using a soft credit inquiry. When you request a rate quote, you’ll provide your personal information, such as address, income and Social Security number, on the lender’s secure website. You’ll indicate the amount you want to borrow, the reason for borrowing and the repayment term length you prefer.

Once you give these details, you’ll be informed of rates and how to formally apply for the loan.

2. Compare offers. Research different lenders to find the best personal loan interest rate.

3. Choose your top one or two lenders. Then apply formally, which will trigger a hard credit inquiry on your credit report. Know that even with good credit, you won’t be guaranteed approval or a particular interest rate. Good luck!