Lenders use your credit score to decide whether you are eligible for a personal loan or what the interest rate will be. This can help lenders determine your financial responsibility as well as your likelihood of paying on time.
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The higher your credit score, generally speaking, the easier it is to get a loan. Also, your interest rates will likely be lower. A loan can be obtained even if you have poor or fair credit. However, your options for loan types and interest rates may be restricted.
Different types of personal loans
- Secured vs. Unsecured Loan
Personal loans are almost always unsecured. This means that there is no collateral. Lenders take on risk by lending money to you. Secured loans require collateral, such as your home, car, or bank account, that can be claimed by lenders if you default on your loan repayments. A secured loan is a loan that can be granted to you even if you don’t have the credit score required for an unsecured loan. You may be eligible for a lower interest rate by putting up collateral.
- Fixed vs. variable rate loan
Fixed-rate loans have an interest rate that is constant for the entire term. Fixed rate loans are the best choice if you want predictability. Variable rate loans offer lower interest rates but they fluctuate with the market throughout the loan’s life, which makes them less predictable for the borrower. If the lower starting rate appeals to you, and you are able to afford the risk, they may still be an option.
- Co-signer loan
You may need to apply for loans jointly with someone else. If you have poor credit or very little credit, a cosigner can help increase your appeal as a borrower. Although this can increase your chances of being approved for a loan, you need to feel confident about your ability to repay the loan. Your financial responsibility will also affect your credit score.
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- Debt consolidation loan
Consolidating debt is one of the main reasons to apply for a personal loan. Some personal loans are made specifically for this purpose. Consolidating your debt is one way to reduce interest rates. This will allow you to save interest. This reduces the amount of monthly payments and can help you pay down your debt quicker. While debt consolidation loans generally have the same terms as personal loans and the APR, there are some options that can make it more efficient. For example, you may be able to pay your lenders directly through a loan provider.
- Credit builder loan
If you are looking to improve credit scores, credit building loans may be an option to credit cards. After you are approved for a loan amount and term, your monthly payments will begin until you reach the total. At that point, you will be able to access the entire amount. This is an option for those with poor or no credit. Your lender will report to credit bureaus as you pay. Credit will be built as long as you pay your monthly payments on time and in full.
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- A place where you can get a personal loan
There are many options available to personal loan lenders. Some may be more suitable for your needs than others. It is important to understand the pros and cons of each option when you are looking for a personal loan.
Brick-and-mortar banks You might have the option to meet with customer service in person, especially if you are an existing customer.
Banks that are small and local: These banks may have a shorter wait time than larger banks. Because of their size and cost efficiency, they might be able offer rates comparable to larger branches.
Online banks: Because they don’t have to pay the same overhead costs, banks without branches are often less expensive than traditional banks. They can offer lower rates and have access to banking instantly and remotely.
- Credit unions
Credit unions are a great option if you value the ability to access in-person services. Credit unions are not-profit organizations and can be more flexible to individual needs. However, there are restrictions on who is eligible for their services. Make sure you check your eligibility before applying.
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- Online lenders
Many start-ups offer online lending services, which makes it easier and faster than traditional banks. These lenders can offer lower rates, faster transactions, prequalification options, and flexibility for those with poor credit. You can probably find the best online lender for your financial needs if you don’t have an immediate need for in-person service.