US: All you need to know about personal loans — and the best available now

Personal loans are a form of installment credit that can be a more affordable way to finance the big expenses in your life. You can use a personal loan to fund a number of expenses, from debt consolidation to home renovations, weddings, travel and medical expenses.

Before taking out a loan, make sure you have a plan for how you will use it and pay it off. Ask yourself how much you need, how many months you need to repay it comfortably and how you plan to budget for the new monthly expense. (Learn more about what to consider when taking out a loan.)

Most loan terms range anywhere from six months to seven years. The longer the term, the lower your monthly payments will be, but they usually also have higher interest rates, so it’s best to elect for the shortest term you can afford. When deciding on a loan term, consider how much you will end up paying in interest overall.

Once you’re approved for a personal loan, the cash is usually delivered directly to your checking account. However, if you opt for a debt consolidation loan, you can sometimes have your lender pay your credit card accounts directly. Any extra cash leftover will be deposited into your bank account.

Your monthly loan bill will include your installment payment plus interest charges. If you think you may want to pay off the loan earlier than planned, be sure to check if the lender charges an early payoff or prepayment penalty. Sometimes lenders charge a fee if you make extra payments to pay your debt down quicker, since they are losing out on that prospective interest. The fee could be a flat rate, a percentage of your loan amount or the rest of the interest you would have owed them. None of the lenders on our list have early payoff penalties.

Once you receive the money from your loan, you have to pay back the lender in monthly installments, usually starting within 30 days.

When your personal loan is paid off, the credit line is closed and you no longer have access to it.

Most personal loans come with fixed-rate APRs, so your monthly payment stays the same for the loan’s lifetime. In a few cases, you can take out a variable-rate personal loan. If you go that route, make sure you’re comfortable with your monthly payments changing if rates go up or down.

Personal loan APRs average 9.34%, according to the Fed’s most recent data. Meanwhile, the average credit card interest rate is around 16.43%. Given that the average rate of return in the stock market tends to be above 5% when adjusted for inflation, the best personal loan interest rates would be below 5%. That way, you know that you could still earn more that you’re paying in interest.

However, it’s not always easy to qualify for personal loans with interest rates lower than 5% APR. Your interest rate will be decided based on your credit score, credit history and income, as well as other factors like the loan’s size and term.

As you shop for a low-interest loan or credit card, remember that banks are looking for reliable borrowers who make timely payments. Financial institutions will look at your credit score, income, payment history and, in some cases, cash reserves when deciding what APR to give you.

To get approved for any kind of credit product (credit card, loan, mortgage, etc.), you’ll first submit an application and agree to let the lender pull your credit report. This helps lenders understand how much debt you owe, what your current monthly payments are and how much additional debt you have the capacity to take on.

Once you submit your application, you may be approved for a variety of loan options. Each will have a different length of time to pay the loan back (your term) and a different interest rate. Your interest rate will be decided based on your credit score, credit history and income, as well as other factors like the loan’s size and term. Generally, loans with longer terms have higher interest rates than loans you bay back over a shorter period of time.

Select now has a widget where you can put in your personal information and get matched with personal loan offers without damaging your credit score.

The loan’s term is the length of time you have to pay off the loan. Terms are usually between six months and seven years. Typically, the longer the term, the smaller the monthly payments and the higher the interest rates.

Lenders offer a wide range of loan sizes, from $500 to $100,000. Before you apply, consider how much you can afford to make as a monthly payment, as you’ll have to pay back the full amount of the loan, plus interest.

Some lenders charge origination, or sign-up, fees, but none of the loans on this list do. All personal loans charge interest, which you pay over the lifetime of the loan. The lenders on our list do not charge borrowers for paying off loans early, so you can save money on interest by making bigger payments and paying your loan off faster.

Here are some common personal loan terms you need to know before applying.

• Co-applicants or joint applications: A co-applicant is a broad term for another person who helps you qualify by attaching their name (and financial details) to your application. A co-applicant can be a co-signer or a co-borrower. Having a co-applicant can be helpful when your credit score isn’t so great, or if you’re a young borrower who doesn’t have much credit history. If your co-applicant has a good credit score, you might be offered better terms, including qualifying for a lower APR and/or a bigger loan. At the same time, both applicants’ credit scores will be affected if you don’t pay back your loan, so be sure that your co-applicant is someone you feel comfortable sharing financial responsibility with.
• Co-signers: A co-signer agrees to help you qualify for the loan, but they are only responsible for making payments if you are unable to. The co-signer does not receive the loan, nor do they necessarily make decisions about how it is used. However, the co-signers credit will be negatively affected if the main borrower misses payments or defaults.
• Co-borrower: Unlike a co-signer, a co-borrower is responsible for paying back the loan and deciding how it is used. Co-borrowers are usually involved in decisions about how the loan is used. Some lenders will only consider two co-borrowers who share a home or business address, as this is a firm indicator that they are sharing the responsibility of money in mutually beneficial ways. Both co-borrowers’ credit scores are on the hook if either one stops making payments or defaults.
• Direct payments: Some lenders offer direct payments when you select debt consolidation as the reason for taking out a personal loan. With direct payments, the lender pays your creditors directly, and then deposits any leftover funds into your checking or savings account. Until you see your account balance is fully paid off, it’s best to keep making payments so that you don’t get hit with additional late fees and interest charges.
• Early payoff penalty: Before you accept a loan, look to see if the lender charges an early payoff or prepayment penalty. Because lenders expect to get paid interest for the full term of your loan, they could charge you a fee if you make extra payments to pay your debt down quicker. The fees could equal either the remaining interest you would have owed, a percentage of your payoff balance or a flat rate.
• Origination fee: An origination fee is a one-time upfront charge that your lender subtracts from your loan to pay for administration and processing costs. It is usually between 1% and 5%, but sometimes it is charged as a flat-rate fee. For example, if you took out a loan for $20,000 and there was a 5% origination fee, you would only receive $19,000 when you got your funds. Your lender would get $1,000 of the loan off the top, and you’d still have to pay back the full $20,000 plus interest. It’s best to avoid origination fees if possible. Having a good to excellent credit score helps you qualify for loans that don’t have origination or administration fees.
• Unsecured versus secured loans: Most personal loans are unsecured, meaning they are not tied to collateral. However, if your credit score is less-than-stellar and you’re finding it hard to qualify for the best loans, you can sometimes use a car, house or other asset to act as collateral in case you default on your payments. For example, Avant offers both a secured and unsecured loan option. When you put an asset up as collateral, you are giving your lender permission to repossess it if you don’t pay back your debts on time and in full.

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