Personal loans can be an effective financial tool to meet a variety of short term and medium term financial objectives.
With the advance of technology, getting approved for an unsecured personal loan can take as little as a few hours with the completion of a simple app on your phone.
This article explains how personal loans work and highlights the best unsecured loan apps for getting approved.
- Check your Interest Rate (Upstart lets you instantly check your personal loan interest rate without impacting your credit score).
What is an Unsecured Personal Loan?
Personal loans are unsecured obligations. This means that you’re not required to pledge any collateral to secure the loan.
Because these loans are unsecured, they tend to have slightly higher interest rates than home mortgages or auto loans which are secured by your house or your vehicle.
Even though personal loans tend to have higher interest rates than secured loans, they typically have much lower interest rates than credit card debt.
As a result, personal loans make great options for refinancing higher interest rate credit card debt into fixed rate obligations with a lower interest rate.
You might be surprised at how popular personal loans have become. In 2018, outstanding personal loan balances increased to $120 billion. Auto loans were the largest source of personal loans, followed by bills and credit card consolidation.
Ways to Use a Personal Loan
Personal loans are most commonly used to refinance outstanding credit card debt. A personal loan allows you to payoff outstanding high interest rate credit card debt with a fixed rate loan over a longer term with a lower interest rate.
The easiest way to see the advantage is with a simple example.
Personal Loan Interest vs Credit Card Interest Costs
Assume that you currently have a $5,000 credit card balance with a 19% interest rate. Based on this balance your minimum monthly payment is $129.17. If you were to pay off this balance just by paying the monthly payment, it would result in the following payments:
- 275 months to payoff a $5,000 credit card balance.
- $7,322.81 of interest paid.
Clearly, making the minimum payments is not a smart way to pay off your credit card debt. So let’s try a different example that more closely matches the payment schedule for a typical personal loan.
Repaying Credit Card Debt over 3 years
Let’s assume you decide to payoff your $5,000 credit card balance over 3 years. We also assume that your credit card charges 19% interest. The 3 year payment schedule would require the following:
- $185 monthly payments for 36 months.
- $1,577.40 of total interest paid.
Repaying Credit Card Debt with a 3 year Personal Loan
In this final example, we assume that you take out a 3 year $5,000 personal loan at a 6% interest rate and use the loan proceeds to repay your credit card debt in full. Under this scenario, you would make the following payments:
- $152 monthly payment for 36 months.
- $475.95 of total interest paid.
By refinancing your $5,000 credit card balance with a personal loan, you save $1,101.41 of interest costs and you save $33 per month by paying a lower monthly payment with a personal loan.
In other words, the credit card interest cost is over 3x more expensive than the personal loan interest cost in this example.
This is a very simplistic example and the results would change based on different interest rate assumptions, but it does show you the significant savings that can be achieved by repaying credit card debt with a personal loan instead of paying off the credit card debt directly.
Other Reasons to Use an Unsecured Loan
Personal loans represent good options when you need to finance a new car, medical expenses, home furnishings, education, home improvements, vacations, and a variety of other short and medium term expenses.
If you know that you will have a near term expense that can’t be paid off within 30 days, then it makes sense to consider financing that expense with a personal loan rather than under your credit card.
Personal loans provide major interest rate savings and offer far more flexibility with the repayment period.
How to Evaluate a Personal Loan
Before selecting a personal loan, you need to understand certain loan terminology and the various options that are available. We include a brief overview of the most important terms below.
Interest Rate APR
Personal loan interest rates are typically expressed as an interest rate APR. APR stands for annual percentage rate. The annual percentage rate represents the yearly cost of a loan over its term.
Lenders are required to show consumers an interest rate in an annual percentage rate so consumers can make comparisons between lenders.
The interest rate APR differs from a nominal interest rate because the nominal interest rate does not include an additional loan costs for fees.
The interest rate expressed as an APR does take into account loan costs and fees. As a result, the interest rate APR is typically higher than a nominal interest rate for the same loan.
How is a Personal Loan Interest Rate Determined?
Personal loan interest rates are determined based on your personal credit score. The loan tenor also influences the interest rate.
Personal loans with longer payment periods will have higher rates than loans with shorter tenors. Larger loan sizes also require higher interest rates than loans with smaller amounts.
Loan Tenor
The loan tenor simply reflects the repayment period. The tenor is typically expressed in months, but can also be expressed in years.
Lenders generally view longer tenor loans as riskier than shorter tenor loans.
Fees & Expenses
The most common loan fees include origination fees and early repayment fees. Often times these fees are expressed as a percentage of the total loan amount.
For example, a .5% loan fee on a $5,000 loan represents a $25 fee. However, if the loan size was $10,000, the actual loan fee would double in cost to $50.
Best Apps that Loan you Money
The most important aspects of a personal loan app include ease of use, rapid response time, flexible loan options, and reasonable fees.
SoFi
Sofi is designed to help its users achieve financial independence. SoFi offers a wide range of financial products including personal loans. Users benefit from access to financial education and a goal oriented financial community.
SoFi personal loans are available in amounts up to $100,000 with interest rates ranging from 5.99% to 20.01% APR.
SoFi is currently offering a $100 incentive bonus for anyone who signs up for a personal loan through SoFi.
- Click here to learn more about the $100 bonus.
Upstart
The Upstart lending platform was created on the idea that you are more than your credit score. This unique idea uses additional data about your education and job history to better understand your future potential.
By adding these additional data sources and combining them with your credit score, Upstart can potentially offer borrowers a lower interest rate.
According to Upstart, its borrowers reduce interest costs by an estimated 21% compared to their credit card interest rates.*
Other notable features include:
- Personal loans ranging from $1,000 to $50,000.*
- Typical interest rates ranging from 8.69% to 35.99% APR.*
- 3 or 5 year loan terms.*
- No prepayment penalty.
- Check your interest rate within 5 minutes.
- Loan funds available in the next business day if selected by 5pm est.
- Ability to setup automated monthly repayments.
Payoff
Payoff combines the benefits of a simple loan approval process with an entire online community dedicated to improving your finances through Payoff Life.
Payoff offers loans between $5,000 and $35,000 with an online approval process that just takes a few minutes. The loans offer a fixed interest rate and monthly payments.
We like that you can check your interest rate without effecting your credit score. For added support, you can reach a live customer support member by phone to answer any questions you might have.
Payoff also provides members with monthly FICO score updates, so you can monitor improvements in your credit score.
Upgrade
Upgrade offers a simple, clean interface with unsecured personal loans ranging from $1,000 to $50,000. The personal loan options feature no prepayment fees, rapid decisions, and an easy to use app to monitor your account.
You have a choice of fixed rate loans with repayment terms that range from 3 to 6 years. You can check your rate without impacting your credit score.
If you see an offer that makes sense for you, the loan funds will be sent by ACH to your bank account within 24 hours.
Credit Building Programs for Weak Credit Scores
Credit building programs offer a unique combination of a small installment loan combined with an online savings account. Loan sizes range from $500 to $2,000.
The main benefit of these loan options is that they do not require a hard credit inquiry like other online personal loan options. The other big benefit of these accounts is that they are designed to positively benefit your credit score as long as you make on-time loan payments.
Credit Builder Loan
Borrowers can choose between a 12 month or 24 month installment loan with loan amounts ranging from $500 to $2,000. After completing all monthly payments, the account converts to a traditional savings account held at an FDIC insured bank.
The savings account will be funded with the balance of your repaid loan plus the interest you have earned.
See Credit Strong Review for more information about credit builder loan options.
LendingTree
LendingTree operates as an online marketplace. Instead of going to one single lender for a personal loan, LendingTree will take your application to its marketplace and solicit competing bids from other lenders so you can pick and choose the best rate for your financial situation.
LendingTree is a completely free platform for consumers. After inputing your information, you will typically receive up to 5 quotes from lenders within a few minutes.
If you decide to use one of the lenders that provided a quote, LendingTree will receive a commission from that lender.
LendingTree also has a downloadable app available on the apple and android platforms.
The app offers credit score information, credit monitoring services, and customized recommendations based on your financial profile. The app is free to use.
Loan Options
LendingTree offers customized quotes for the following financial products:
- Unsecured Personal Loans
- Mortgages
- Credit Cards
- Auto Loans
- Business Loans
- Student Loans
- Insurance
- Home Equity
Loan Exchange
Loan Exchange offers a unique platform that allows you to input basic information and multiple lenders will send you offers directly on your phone.
You can review the various offers and decide which is the best deal for you. The simple process takes less than a minute and it doesn’t effect your credit score.
Personal loan amounts range from as low as $2,600 to as high as $100,000. If you decide to move forward with one of the offers, the proceeds will reach your account within one day.
If you decide not to choose one of the options, you won’t have to worry about a credit check on your account.
Prosper
Prosper was founded in 2005 as one of the very first peer to peer lending companies. The peer to peer lending model means that your personal loan is funded from another person instead of a traditional lender like a bank.
This means that you have the ability to get approved faster and for a lower interest rate than what you might receive from your local bank.
Since its founding, Prosper has grown rapidly. Under its platform, Prosper has originated over $14 billion of loans to more than 870,000 borrowers.
Prosper Personal Loan Options
Prosper offers unsecured personal loans from $2,000 to $40,000. The loans are fixed rate with terms ranging from 3 to 5 years. The loans include a fully amortizing repayment structure.
This means that you would repay your loan in full over the course of your repayment schedule.
The personal loans have no fees for early prepayments or for partial payments. So you can take out a five year loan, but repay the loan in full before the 5th year for no fee.
Loan Approval Process
In order to qualify for a personal loan on Prosper’s platform, you must complete an application so you can be assigned a Prosper Rating. A Prosper Rating is a proprietary rating assigned by Prosper to evaluate your credit quality.
Your Prosper Rating is what determines how much you can borrower, the interest rate, and the loan tenor length. Prosper’s loan verification process is typically completed in 7 days or less.
Lending Club
Lending Club was established in 2007 as a peer to peer lender, similar to Prosper. Since its founding, Lending Club has originated over $42 billion of personal loans to over 2.5 million individuals.
You can apply online and receive loan quotes within the same day. If you choose to proceed with a personal loan, it will typically be funded within 7 days.
Loan Options
Lending Club offers unsecured fixed rate personal loans for up to $40,000. Loan terms range from 3 years to 5 years. In order to compare loan offers, you need to complete an application which does generate a soft credit inquiry.
A soft credit inquiry does not effect your credit score and is not visible to other creditors.
Earnest
Earnest created a unique personal loan platform that is designed to look more comprehensively at your financial profile.
By utilizing proprietary data sources designed to measure both your current financial profile and your future potential, Earnest is designed to reward borrowers with high future potential with lower rates than other lenders will offer.
The Earnest app allows you to monitor your loan balance and make payments against your loan balance. The app is also secured with touch ID.
Personal Loan Products
Earnest’s product platform is focused on personal loans and student loan refinancing.
In order to apply for a personal loan, Earnest requires the following:
- Proof of consistent income.
- 18 years or older.
- Reside in one of the 45 states that Earnest lends to (Earnest is not registered in Alabama, Delaware, Kentucky, Nevada, or Rhode Island).
- 680 minimum credit score.
- Not declared bankruptcy in the last 3 years.
- On time payment history.
- No open collection accounts.
Earnest has higher credit standards than some other personal loan lenders, but they offer higher loan amounts of up to $75,000 and lower potential interest rates.
Personal loans from Earnest have no origination or prepayment fees.
Avant
Avant is an online personal loan and credit card provider. The company started in 2012 and has grown its loan portfolio to $4 billion and served over 600,000 customers.
Personal loans are available in amounts that range from $2,000 to $35,000 with a tenor of 2 years to 5 years. Your actual interest rate and available terms will be based on your credit profile.
Loan Application Process
Avant offers a very simple application process. Potential borrowers fill out an online application form. You will receive multiple loan quotes within a few minutes of submitting the form.
Filling out the application does generate a soft credit inquiry, but soft credit checks will not directly impact your credit score.
Avant App
Borrowers have the ability to view their loan information directly inside the Avant app.
You can also apply directly for a loan through the app and make changes to your monthly payments.
Money Lion
The company launched in 2013 with the objective of empowering consumers to take greater control of their financial lives. Money Lion’s product platform is delivered through a downloadable app.
The app includes 3 main products: a low cost robo advisor investment portfolio, access to low interest rate personal loans, and a free credit monitoring service.
The Company’s services are delivered under two main membership options: a core plan and a plus plan.
Core Plan
The core plan is a free basic plan that includes the following options:
- Managed investing account
- Cash advances
- Cash back awards
- Credit Monitoring
- Fraud protection
- Free Checking Account
Plus Plan
- Access to up to $500 of credit builder loans with a 5.99% APR.
- $1 daily cash back swept into your investment account.
Money Lion Personal Loans
With a plus account, you have access to personal loans with a 5.99% APR rate on up to $500. Over time, your borrowing limit will steadily increase based on your payment history. The nice part is that once you’re approved as a plus member, you never have to reapply again. You just need to request a new loan from the app.
Loan Requirements
In order to qualify for a personal loan from Money Lion, you do need to meet the following requirements:
- Verify your identity.
- Employed with income.
- Pass the ability to repay your loan.
- Have a checking account with direct deposit.
