Personal loans are known for their flexibility and can be taken out for a number of reasons – to deal with unwieldy credit card debt, to pay for an expensive roof replacement, and so on.
Unlike credit cards or home equity lines of credit, you take out a fixed amount loan and have to pay it back in fixed monthly payments at a fixed rate. This rate can vary widely between 5 and 36% depending on the credit rating.
In general, the better your creditworthiness and credit history, the lower your rate. But in 2020, banks raised their credit requirements even higher – making it even harder for people with poor credit or limited credit history to get a loan.
Why is it harder to get a personal loan?
Lenders use your income, employment status, credit history, and credit history to determine the likelihood of you paying back – or defaulting – on the loan. This risk is reflected in your interest rate. If you have no debt and have historically paid your bills on time, you will have access to better rates. Conversely, if you have no credit history or have had problems with debt, your interest rate will likely be higher or you may not qualify for the loan at all.
Anuj Nayar, Financial Health Officer at LendingClub, suggests comparing interest rates when considering the tradeoff between a personal loan and a credit card. “Any [personal loan interest] Lower than the price you pay on your credit card is better than what you are currently doing, ”he says. (Borrowers must also consider other personal loan upfront costs, such as commitment fees.) The average credit card interest rate is currently around 16% and is typically between 14% and 26%.
Even if you’ve recently been laid off, have significant credit card debt, have a history of bankruptcy, or your credit score is below 600, there are options that could make you a more attractive candidate for the lender – namely, secured loans and co-signers.
Keep in mind, however, that given the pandemic and its negative impact on the economy, many lenders have tightened credit qualifications. For example, LendingClub has refocused on existing customers and increased the standards of income and employment screening. The pool of potential personal loan applicants has grown along with the shrinking economy, which has created a difficult climate for potential borrowers.
Secured loans require some form of collateral, often an important asset, in order to be approved for a loan. Collateral can be your home, bank or investment accounts, or your car, depending on the lender’s needs. This requires more paperwork and more risk on your part because if you default on the loan the lender can take possession of that collateral.
The tradeoff is that the lender will be more comfortable making an offer and possibly offering a better interest rate than if the loan were unsecured. Most loans are unsecured, which means shorter approval times, but typically higher interest rates and stricter credit requirements.
These types of loans can take longer to process as the lender must verify that you own the collateralized assets. In the case of a house or real estate, an updated appraisal may be required to determine the equity value of the security.
If you don’t have any major assets, or at least none that you would like to put up as collateral, hiring a co-signer is an option. A co-signer is a second borrower with good credit who enables you to qualify for the personal loan that you would be responsible for repaying. Co-signers can increase your chances of getting loan approval and the chance of getting a lower interest rate by providing more information to the lender who may refuse to give money to someone with no or poor creditworthiness.
Co-signers are not entitled to the cash on the loan and have no view of the payment history. However, you would be on the hook for the loan when the borrower cannot or cannot make payments. Because of this, it is important to determine your loan payment plan before applying for a loan. If you are unsure whether you can repay the loan, you and your co-signer are going to take a credit score hit.
Alternatives to personal loans
What if you can’t get a personal loan or the interest rate you are offered is too high to be worthwhile? In addition to personal loans, there are other options on the market, such as: B. Peer-to-Peer Loans, Small Business Loans, and Pay Advances. Here are two common alternatives to personal loans: promotional pricing credit cards and HELOCs. We find these two to be the most accessible to the average borrower, although these options, such as personal loans, favor candidates with good credit ratings.
Credit cards with promotional prices
Many credit cards offer a 0% APR on purchases and credit transfers for 12 to 15 months. Provided you make at least the minimum payments on time, you will not be charged interest for the entire period. After that, the interest rate is reset to the regular APR for the purchase or the balance transfer, which is likely between 14 and 26% based on your credit rating. You may also have to pay a percentage on any balance transferred, probably between 3 and 5%.
When the bill is in your favor, these credit cards are useful for transferring debt from high yield cards and saving interest.
The credit limits are also usually appropriate. “If you’re looking for something to get you covered for the next six months, the credit lines on these cards can start at around $ 10,000,” said Farnoosh Torabi, financial journalist and host of the So Money podcast. “If you can pay [the balance] within this timeframe, that’s a great alternative. “
Be aware, however, of the restrictions on these promotional tariffs, as some cards will charge you interest retrospectively if you have not paid the balance by the end of the introductory period. As in all situations, we recommend reading the fine print before opening a credit card.
If you own a home, you may be able to get the most out of your home’s value with a home equity line of credit (or HELOC). Torabi compares a HELOC to a “large credit card limit” because it is a revolving line of credit that you can borrow as much or as little as you need, and it is not a loan. However, like loans, HELOCs can be used to fund large expenses or consolidate other forms of debt.
The interest rates – usually variable – are usually lower than with credit cards and are between 3 and 20%. However, Torabi recommends caution with a HELOC as security is your home. Add to this the fact that big banks like Bank of America and Wells Fargo have tightened lending standards for HELOCs amid the COVID-19 pandemic.
“At the moment, banks are not that generous with HELOCs because they know that if you go bankrupt or cannot make your payments, if you go bankrupt, you will most likely default on your HELOC and your main mortgage. So they have very high expectations of who can take out loans for their homes, ”says Torabi.
Ultimately, you have to weigh the risk yourself and see if the low interest rates and flexible line of credit allow you to pay on time.
How to improve your credit
Do you see yourself applying for a loan later? Whether you need to apply for a loan in the future or look for credit alternatives, you should always keep an eye on basic creditworthiness. Here are some ways you can improve your credit score and become a better candidate for lender.
Make payments on time
One of the main drivers of your credit is your payment history. Are you paying your credit card on time and in full? Are you paying at least the minimum monthly payments? According to the lender, a spotty payment history means a risky borrower.
If you are having trouble paying bills or loans, we recommend contacting your creditors and asking about some type of accommodation – deferred payment, lower interest rate, one way to relax the requirements. Many major banks, credit unions, credit card companies, and loan providers have responded to COVID-19 with financial aid programs to help you out when you are in need. Getting formal informed consent from your creditor will also help your credit history as your payment status will appear as current even if a payment has been suspended for a month.
Keep credit cards open
Credit scores take into account how long you have owned a credit card. So think twice before closing credit cards. Even if you switch to a better credit card, consider leaving the old one open and making occasional payments to establish a responsibility story. A scattered history with credit cards can get in the way and lower your credit score.
Request a higher credit limit
The major credit scoring companies (FICO, VantageScore) rely heavily on “credit utilization” or the amount of credit available as a factor in your creditworthiness. The lower the ratio, the better – that is, a credit of $ 500 is better reflected on a credit card with a limit of $ 10,000 than a credit of $ 5,000 (50% usage rate). Experts generally recommend using less than 30% of your available balance at any time.
Check your credit reports
Due to the COVID-19 pandemic, you can now get free weekly credit reports from the top three credit reporting agencies (Equifax, Experian and TransUnion) at AnnualCreditReport.com through April 2021. On your credit report, you’ll see payment history for every loan or credit card you’ve taken out, as well as rental and bill payments if you’ve signed up with your lender. Review the report for any inconsistencies or inaccuracies. You have the right to challenge any errors and have them removed.