Personal Loans FAQ

Frequently Asked Questions about Personal Loans

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What is a personal loan?

A personal loan is way for an individual to borrow money for a myriad of purposes, from medical emergencies to funding a vacation. Unlike taking a loan from a conventional bank, personal loan services do not require extensive paperwork or a lengthy approval process — which means the turnaround for obtaining money is quick. Some borrowers can receive money in as little as 24 hours from the time they submitted their application. Most personal loans are unsecured with a fixed interest rate, and you will be required to pay the money back in regular installments that factor in the added cost of the interest.

Will applying for a loan negatively affect my credit score?

Applying to find out what interest rates you are approved for will not impact your credit score because this is not considered a hard inquiry on your credit — meaning it will not show up on your credit reports. However, when you actually submit your application to receive the money, this will usually entail a hard inquiry that will be noted on your credit reports.

What kind of credit do I need to take out a personal loan?

The advantage of borrowing from a personal loan service is that those with less-than-perfect credit have the opportunity of being approved for a loan. Some services require you to have good-to-excellent credit to be considered, but many will look at the entire picture of your financial and credit history along with your current financial circumstances when considering your application. Those with poor or average credit should keep in mind that they may receive a substantially higher interest rate than someone with good credit or better.

What is a fixed rate?

A fixed rate for your loan means that the interest rate will not change throughout the life of your loan. Whatever interest rate you are presented with when you sign the paperwork to receive your money is the interest rate that will remain in place during your repayment period. Because the interest rate does not change, the lending service can accurately predict the amount of each payment from beginning to end.

What is the difference between a secured and an unsecured loan?

A secured loan is obtained with the pledge of some type of asset owned by the borrower, such as an automobile or your home. This secures the loan, and the lender will hold onto the ownership of the asset until the loan is repaid in full.

An unsecured loan does not require any such collateral to be taken. Because of this, often the interest rates for unsecured loans are higher to cover the added risk to the lender. Most personal loans are unsecured, however some services do offer secured loans for large amounts or loan purposes — such as the purchase of a new or used vehicle.

What is peer-to-peer lending, and how is it different from a traditional personal loan?

A traditional personal loan consists of a single financial institution loaning money to the borrower. Peer-to-peer lending allows borrowers to request and receive money from multiple people rather than a single financial institution. The lenders are generally also customers of the lending service who loan money as a form of investing. Most peer-to-peer lending services function by having borrowers create a listing to request money that prospective lenders can read to decide if they want to give or not. Whereas in a traditional loan request you will either be approved or denied for the amount requested, peer-to-peer loans can be approved with only partial funding if the borrower is willing to accept a lesser amount.

Why can't I use my loan proceeds for college expenses?

Many personal loan services prohibit the use of your loan money to pay for college expenses, including tuition, books and student loans. The reason for this is a law called the Higher Education Opportunity Act, which places requirements and restrictions on private loans taken out to finance education in order to protect students. Often these requirements and restrictions do not line up with the way personal loan services operate, so, to avoid any problems, the service will simply prevent borrowers from using their loan proceeds for this purpose. Keep in mind, this restriction is not in place for all personal loan services we review.

What if I run into a financial hardship and can't make my monthly payments?

Most personal loan services offer financial hardship assistance and will work with you to ensure that you can keep making payments on your loan should you fall on hard times.

Top Personal Loans

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Bottom line: Simple application process and low rates make this peer-to-peer service a great choice for those with average or better credit
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Bottom line: Great choice for those with good/average credit or better; Low interest rates, personalized application process and a unique rating system
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Bottom line: Personal loans with both fixed and variable rate options allow borrowers flexibility; education and work history considered alongside credit information; excellent customer service; includes unemployment protection
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Bottom line: Evaluates financial information, work history and academic performance; allows loans for educational purposes; great choice for students/recent grads without much credit or work history; strong customer service
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Bottom line: Good choice for those with fair to average credit; excellent customer service and reporting to the credit bureaus are a plus
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Bottom line: Competitive rates and long loan terms; works to connect borrowers with the best overall loan option; spotty customer service but a stellar reputation
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Bottom line: Credit bureau reporting can help build credit, but limited access and high interest rates may deter some borrowers
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Bottom line: Good choice for those who favor a hands-on approach with a local branch, but lack of information prior to application can be frustrating

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