This explanation of personal installment loans is meant to help people struggling with high interest rate debt. But even those who need a loan for a one-time emergency will find this guide useful.
Many people struggle with debt – whether credit card debt or other forms of high interest rate loans. They juggle multiple short term loans or balance transfer offers. But they cannot seem to get out of the debt hole. They are on a treadmill, just paying the monthly minimums. And never making a dent into their principal balance.
If this explains your situation, we think a personal installment loan, combined with a conservative budget, can help you (1) consolidate your debt, (2) save money, (3) improve your credit score, and (4) get those loans paid off!
What is a Personal Loan?
A personal loan is any type of loan made to a consumer for personal or household use, and not for business activities. Funds for personal loans can be used for:
- Education
- Vacation
- Home or car repairs
- Medical expenses
- Consolidate and pay off other consumer debt (such as credit card refi loans)
- Convert variable rate debt into a fixed rate loan
- Any other similar family, personal, or household purpose
The type of personal loans we will focus on are unsecured loans paid back in fixed installments over a set term of months or years. This means you do not need to put up any collateral, like your house or your car. So the lender cannot sieve any of your assets if you fail to pay back the loan. These types of consumer loans are also known as installment loans or signature loans.
To differentiate the types of personal or consumer loans we recommend, we often refer to them as personal installment loans.
Personal Loans Can Be a Bright Idea
Consolidate your debt.
Lower your interest rate.
Improve your credit score.
Advantages of Personal Installment Loans
An installment loan is a safe and convenient type of personal loan.
These types of loans are designed to be paid off over the term of the loan. Each payment includes principal and interest. And you have the flexibility to pay off your loan early, or even pay down a little extra with each payment, to save on total finance charges.
There are a lot of installment lenders out there, however. Many of them are disguised payday loans.
Unlike payday loans, installment loans allow borrowers to repay their loan over an extended period of time – not in 2 weeks. Each installment includes both principal and interest. But some of these installment loan lenders still charge interest in excess of 300% APR!
What we are going to do is give you tips to find an affordable personal loan, even if you do not have the best credit. You will not need to resort to expensive payday loans or other costly short term loan options.
And most of the lenders we recommend all take online applications, can tell you your loan status instantly, and fund your loan the next business day. This is a lot better experience than a stodgy bank!
Why is a Personal Loan Better than a Balance Transfer?
Credit Card companies generally assign a standard APR for all consumers and reserve the right to implement much higher Penalty APR rates if you are late on or miss a payment. It is also rare for someone to get their Credit Card APR reduced, which is why refinancing can be a powerful way to save you thousands on your outstanding debt.
When you take out a personal loan to refinance your credit card debt, you can repay those high-interest balances all at once – and get a single monthly payment that often has better rates and better terms.
Another advantage is that most of the personal loan lenders we recommend do not charge an origination fee. This is opposed to the 3% to 5% transfer fee charged by most cards. And even when an online lender does charge an origination fee, it is usually a tool for them to provide a lower over interest rate on your monthly payments. And this leaves you with a very competitive APR.
What to Look For
To help you find the best lenders, and avoid the scams, we put together a quick checklist of what to look for from a personal installment loan lender.
- Apply directly with the lender or through a reputable lead generation service.
- Advertises interest rates of 36% APR or less.
- Provides terms of at least one year to repay the loan.
- Allows partial or full prepayment at anytime, without penalties or fees.
- Is licensed to do business in your state.
- Helps you improve your credit score.
Direct Lenders and Lead Generation Services
There are a lot of lead generation services out there trying to get you to apply for personal loans.
A lot of them are selling your information to payday lenders and other services that charge interest rates in excess of 100% APRs. Sometimes the interest rates exceed 300% APR.
And these lead generation services sell your personal information to any lender who signs up for their services. This often leads to:
- You getting multiple, harassing calls from pushy sales people.
- Your personal information transmitted to many unknown parties.
- In some cases, a loan may be funded that you never agreed to!
For a long time, we recommended that you avoid all lead generators because they were, at best, a wast of time. And, at worst, total scams,
But researching different lenders and filling out several applications is a lot of work.
Our readers wanted to be able to decide for themselves whether to:
- Apply directly to a lender of their choice; or
- Fill out a common loan application and review competing offers.
So we did even more research.
Not only did we find even better, lower cost lenders for you. We found a common loan application that will submit your application to great online lenders like Prosper.
And now you can take advantage of the EVEN Financial loan application to:
- Apply to multiple lenders.
- Compare interest rates.
- Increase your chances of approval.
- Find the right loan for you!
If you apply with one of our reviewed lenders or via the EVEN Financial common application, you will:
- Know the terms before your loan is funded.
- Avoid hidden fees and costs.
- Decide which lender you want to work with.
Get the Best Interest Rate
Your interest rate determines how much the loan will cost you. It is often expressed as an Annual Percentage Rate, or APR. This just means what the average interest rate for the loan would be for a calendar year.
Sometimes, you will need to compare loan offers that include origination fees against ones that do not. The loans with an origination fee may also have lower annual interest rates. But they may not be less expensive.
By comparing APRs, and not just interest rates, you can compare the cost of different credit options. It does not matter whether the term is for 6 months or for 3 years. Of course, even if the APR is lower, the longer the term, the more in total interest you will pay.
For this reason, the Truth in Lending Act requires a lender to tell you the APR (or interest rate) and the total amount of interest (or finance charges).
The best installment loan lenders provide credit at rates between 5% and 40% APR, depending on your credit score, the term of the loan, and what state you live in. And they disclose the available interest rates ranges up front – even if they cannot tell you what your rate will be until after they process your application.
For consumers who have only fair, average or even poor credit, the sweet spot will be interest rates between 18% and 36% APR.
While these rates sound expensive, please take into account the following:
- The rate you obtain will usually be slightly lower than the real cost of credit card debt. Since credit cards are “revolving” credit, federal regulation allows them to add fees that are not included in their APR calculations.
- Unlike 0% balance transfer offers, (1) you will not pay a fee to open the account, and (2) your interest rate will not expire at the end of the promotional period.
- If you have excellent credit, you will be able to obtain a personal loan at much lower rates. In fact, the peer-to-peer lending sites like Prosper may be able to offer you loans at a 7% APR or less.
Note About Origination Fees
A number of online lenders do charge an origination fee. What you need to know about origination fees are:
- The cost is included in the APR calculation. And this is why the APR can be higher than your regular interest rate.
- Lenders use origination fees to cover some or all of their upfront fees, and to mitigate risk (and offer you a better interest rate over the term of your loan).
- Most lenders deduct the origination fee from the loan proceeds you are sent at funding.
- If you pay off your loan early, that will increase the effective APR of your loan (since the cost of the origination fee will not be amortized over the life of the loan) – but will still save you money in interest payments you will not make.
Don’t know your credit score? We recommend you find out your score before applying for a personal loan. Check out this article for recommended resources – including options for a free credit score.
Note on Variable Rate Loans
There are currently a few lenders offering variable rate loans – notably SoFi. (You can learn more about SoFi personal loans in this article.)
Variable rate loans allow lenders to offer you a lower interest rate – because you bear the risk if the market price (i.e., interest rates) increase during the term of your loan. So, if you take out a variable rate loan, keep the following in mind:
- Your interest rate – and monthly payments – may increase.
- Make sure you are comfortable with the maximum rate the loan can go to … because you never know.
Decide What Term is Right for You
Most lenders offer loan term anywhere from one year to five years.
But the longer term loans will also have a greater total interest cost.
In some instances you may need to go for a longer term so that the minimum payments meet your budget. In those cases, we recommend making extra principal payments when you can.
So you will want to try to balance out your monthly cash flow requirements with a desire to get your debt paid off faster (and for less).
And, if you need any help budgeting, you may want to check out some of our tips. You can find examples of how to save money and budget here, here, and here.
Tip: If you see loan terms of 3 months or 6 months, but no disclosure of the interest rate, then you may be looking at the site of a disguised payday lender.
Early Prepayments
Before signing on the dotted line, make sure your installment loan lender allows you to make full or partial prepayments at any time, without penalty or fee.
This will allow you to pay down or payoff your loan early.
Which we know you want to do, especially after reading up on our budgeting and cost saving tips.
TIP: You should only pay interest on principal outstanding. So partial prepayments should act to lower your future installment amounts.
Licensed Lenders
A great way to avoid scams and putting your personal information at risk is to make sure your lender is licensed in your state.
Only licensed direct lenders and national banks will be legally authorized to make loans in your state. And they will follow all applicable laws, including usury laws. (Usury laws are ones that cap interest rates on consumer loans.)
The lead generation services, scam artists, and expensive short term lenders often will avoid the costs of bothering to get licensed in your state.
Helps with Credit Repair
Ideally, your lender will also report your timely payments to the credit bureaus. (You are going to make all your payments on time, right?) This will help improve your credit score.
However, this is an ideal, not a requirement. It is more important to get a low cost personal loan than to pay more for one that reports your payments.
In fact, if you use the proceeds of an unreported loan to pay off or pay down credit card debt, that will still help your credit score. A part of your score is based on how much of your available credit you do not utilize. After you pay down credit card debt, you should be able to increase your score by utilizing less of your available credit.
As your credit is repaired and your score improves, you will be able to qualify for lower priced loans in the future.
But please try to avoid taking advantage of those paid off credit cards by turning around and getting into new credit card debt.
Closing Thoughts
A personal installment loan may not be cheap, but they are available to consumers with even average or poor credit. And they can really help you:
- Get money in an emergency.
- Manage your debt.
- Lower your costs.
- Improve your credit score.
And they do all this in less time and with less hassle than a traditional bank.
Where to Get Started
If you are ready to get started, you can:
- Find resources to get your credit score in this article.
- Apply with our top recommended lender SoFi for a personal loan or to refinance your student loans.
- Check out our chart comparing key terms of all reviewed lenders.
- Peruse our reviews of leading online lenders.
- Fill out our recommended common loan application below and compare different offers.
