Unlike a mortgage or a auto loan, a personal loan can be used for almost any purpose. It’s set up for a specific length of time at a fixed interest rate which is typically lower than most credit card APRs. Many banks and credit unions offer personal loans and now there is a whole new market of peer to peer lending networks established by companies like LendingClub and Prosper.
Do I need collateral to get a personal loan?
Typically, personal loans are unsecured, so no collateral is necessary. But that also means interest rates are higher than those on secured loans, like mortgages. Some financial institutions do offer secured personal loans, so you can use items like your savings account or certificate of deposit with that financial institution as collateral. Having a secured personal loan might garner a lower interest rate than that for an unsecured loan.
What else is required?
Even if you apply for a secured loan, it’s likely your bank or credit union will want you to provide information about your employment status and monthly income. With an unsecured loan, financial institutions generally focus on a person’s credit score and credit history, as well as their employment and income, to determine the loan’s interest rate. Some also take your other assets into account, while others don’t consider them.
The alternative lending platform such as LendingClub and Prosper offer many compelling reasons as the rates can be as low as 6.03% if you’re a high quality borrower and the loan can be funded in days. However, don’t consider these options if you have a low FICO score or have a debt to income ratio the exceeds 25% (excluding a mortgage). It’s also not recommended to send in multiple applications for loans as that can hurt your credit.
Compare to credit cards
Regardless of whether you apply for a secured or unsecured personal loan to get your hands on quick cash, the interest rate will typically be cheaper than that of a credit card cash advance. Some credit card companies offer low- or no-interest cash advances for a short period of time, but charge a transaction fee that is often 3 percent to 4 percent of the amount borrowed. Unless the cash advance is paid off within a few months, the interest rate soars.
More Financing Questions?
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