Tips to Find a Cheap Unsecured Loan
If you need money to meet basic expenses, fund your wedding or take a vacation, you’ve probably considered getting a personal loan – a loan where you don’t put up any collateral, such as your house or your car, that the lender can repossess if you default. Because the lender has no guarantee for the loan other than your own reputation, you’ll have a higher interest rate than you would with a collateralized loan.
Personal loans are rife with pitfalls. Used correctly, they can save a significant amount compared to payday loans, overdrafts and pawnshops. However, there are many unscrupulous lenders who may try to bleed you with fees and high interest rates. Here’s how to find the best personal loans without paying too much.
What’s my credit score?
Since you aren’t putting up any collateral, the loan terms will be based on your creditworthiness – your credit history, your income and what other debts you have. Be sure to check your credit history and score for any inaccuracies before applying.
Pro tip: If you don’t know your credit score, check it for free by signing up for a credit monitoring service and cancelling during the grace period.
If you have good credit, you can probably get a personal loan at a decent rate with your current bank. If you have less-than-perfect credit, don’t be tempted by “no credit check” offers. Payday lenders often charge exorbitant rates and can often be avoided.
Where should I get a personal loan?
You can get personal loans from any number of institutions:
Credit building groups
Your best bet is probably your local credit union. Because they’re not-for-profit, they can charge lower rates than for-profit banks; federally chartered credit unions have limits on the rates they’re allowed to charge. Even if you have less-than-perfect credit, credit unions can help: many have payday loan alternative programs that provide loans at the lowest price to people who’d otherwise be denied.
Another good option is peer-to-peer lending groups like LendingClub and Prosper. While the rates might be a bit higher than those at credit unions, you may find it easier to qualify. Remember that these companies are for-profit, compared to not-for-profit credit unions. If you’re really in dire straights, consider a credit building nonprofit that will get your finances back on track. The Credit Builders Alliance can help you find a program in your state.
Pretty much all personal loans require income verification (such as a W2 or pay stub) and identification (such as a passport or driver’s license); some ask for bank statements or tax returns.
Finding the lowest rates
Here are a few tips to finding the best loan.
Compare your options. Is a personal loan cheaper than a low-interest credit card? If you have good credit and can pay off the loan in 12-18 months, you can probably get a credit card that has 0% interest on purchases for a year or longer. Take a look at credit unions, too, before going with banks.
If you have bad credit, find a co-signer. Having a co-signer with good credit allows you to piggyback off of their creditworthiness and potentially get better rates. However, use this option only if you trust the co-signer completely, as any mismanagement goes on your record as well as his.
Consider a secured loan instead. If you have a house, consider using it as collateral in order to get lower rates. A home equity loan or home equity line of credit can often be cheaper than a straight-up, unsecured personal loan. Keep in mind that using your home as collateral means that if you default, you could lose your home.
Pay off as much of your credit card balance as you can before you apply. The outstanding balance on your credit card – even if you pay it off at the end of the month and never pay interest – counts against you when a lender runs a credit check.