"There are plenty of fish in the sea."
While this might not be true of your dating life, it's certainly true of personal loans.
Personal lenders, which nowadays are often offered via peer-to-peer lending sites, occupy a space somewhere between credit cards and traditional mortgage loans, between banks and payday loans.
And, yes, there are lots of them.
To get an idea of just how many personal lenders there are out there, one need only look to Lending Club, "the world's largest online marketplace connecting borrowers and investors." On this site, the lenders aren't banks but individual investors who take a look at your application and decide if it's a good fit for them. So the number of total investors (or lenders) on Lending Club can number in the thousands. And that's just part of the tens of thousands of personal lenders that are now available to consumers.
And then there are all the things you can use personal loans for. Unlike home loans or auto loans, which are pretty straightforward, personal loans can be used for almost anything. On Lending Club, for example, most loans go to debt consolidation or credit card refinancing. People have also been known to take out personal loans to finance a wedding, buy their uncle's car, or just take that dream vacation that has always seemed out of reach.
So just to review: thousands of lenders, multiple uses. What could possibly go wrong?
Yes, there is a downside. As sites like Lending Club, LendingTree, and Prosper make it easier for dozens of lenders to offer you personal loans, it becomes easy-too easy-to say 'yes' without really considering your options. As with your love life, signing on the dotted line without doing your due diligence can literally ruin your life.
So before you fall in love with a personal loan, you need to recognize the warning signs that a particular loan might not be a good match. If you see any of these five signs, you might want to think twice about the personal loan in front of you:
Nothing against marrying your high school sweetheart, but experience can give you a big advantage when searching for both a soulmate and a personal loan. Let's say you submit your information on a site like Prosper or Lending Club. Before you have even hit 'submit' the phone rings and a lender is assuring you he has a "not-to-be-passed-up" offer for you. You need a loan. He's ready to give you one. You're off to the races, right?
Wrong. As mentioned above, the number of peer-to-peer and other personal lenders out there is enormous and their rates and fees vary greatly. For this reason, there's a very strong likelihood that, as good as this first loan offer is, you will find others with even better rates and conditions.
"As with any financial product, when it comes to taking out a personal loan it pays to shop around and compare APRs," says Emma Lunn of The Independent. "Your bank may say it offers preferential rates to its current account customers but you might still find there are cheaper loans available elsewhere."
Our advice: it's in your best interest (pun intended) to take your time and entertain multiple offers before settling on one.
If you had the impression that personal lenders are easy, let us dispel that right now. Personal lenders are business people looking to invest their money in someone in hopes of making a return on that investment.
To put it bluntly, personal lenders are not payday lenders. They won't lend to just anybody. The upside of this is that their interest rates and terms will be more reasonable because they don't need to protect themselves from investments gone bad. The challenge is that their requirements for borrowing from them are more stringent.
As with other types of loans, personal lenders will use your credit score, among other factors, to determine if they should loan you money and how much they should charge in interest. According to Harry Langenberg at LoanNow.com, any credit score below 640 will pretty much keep any investors and lenders away from you.
Our advice: if your credit score is languishing in the sub-700 realm, you owe it to yourself to get that score up before applying for any loans.
Owning your own home, especially a home with some equity built up in it, could mean that you've overlooked a loan option, possibly with a better rate.
Consider, for a moment, that peer-to-peer loans and other personal loans are what is referred to as unsecured debt. This means no one is paying any insurance or guaranteeing repayment, and there is no asset (like a car or a house) to act as collateral if you become unable to pay off the loan. Because this scenario freaks out investors and all lenders, they cover their backs by charging higher interest rates and sometimes requiring that you pay for insurance along with your loan payments.
What many homeowners don't know, however, is that the property right under their feet might be their ticket to a better loan with a much lower interest rate than your typical personal loan.
"A home equity loan or home equity line of credit can often be cheaper than an unsecured personal loan," explains Claire Tsosie at NerdWallet. "Keep in mind that using your home as collateral means that if you default, you could lose your home."
Our advice: check with your bank or local credit union to see if you qualify for a home equity loan or home equity line of credit, which are bound to have lower interest rates than your typical personal loan and with no extra insurance payment.
You knew this was coming. Some fraudulent lenders have adopted what can only be described as the "one-night stand" of personal loans, promising approval for loans with "too-good-to-be-true" interest. All you have to do is fork out a small fee.
As soon as the payment is sent over, the fictional lender goes silent. They don't answer calls. They don't reply to emails. In many cases, weeks later, they do respond but just to tell you that your "pre-approved" loan just didn't shake out. Oh, and that small fee? It's non-refundable. Naturally.
Unfortunately, advance fee loan scams and other loan fraud are just a part of the explosion in the number of personal lenders. As personal lending options multiply, this also increases the odds of a few bad apples sneaking in.
Our advice: First, run from any lender who requires an advanced fee to determine if you're approved for a loan. Second, make sure any lender you communicate with is licensed in your state, has no past or pending lawsuits, and has a strong rating with the Better Business Bureau (BBB). If they don't pass these checks, move on to the next one.
To be sure, personal loans (namely those generated by the peer-to-peer lending model) are intended to deliver lower interest rates. After all, the whole peer-to-peer lending process is specifically designed to get the lowest possible rate for borrowers, given their credit history and financial situation. But that doesn't mean they're not sometimes outdone by credit cards.
Those zero-percent introductory offers on credit cards, in particular, are your friend. For example, let's say you need to pay for travel to attend your sister's wedding in Botswana. The best offer you can get on Lending Club has a decent interest rate of 15% (which starts to accrue on the day you take out the loan). Sounds pretty good, right?
But now let's say you just got a credit card ad in the mail offering 0% APR for 12 months.
If you can pay off the loan within the 12 months, the credit card is certainly the smarter option. If not, then do the math and determine which option (the personal loan or the credit card) will be the cheapest when everything is paid off.
Our advice: Don't limit your options just to loans, and don't avoid credit cards just because of all the negative press about them. Be objective and strategic about how you use all forms of debt, and you just might end up getting a killer deal.
Ultimately, finding the perfect personal loan is the end result of lots of research and patience. It's about recognizing all of your options ( which is more than just personal loans) and knowing the right questions to ask about each one. It's setting yourself up for the best possible outcome by making sure you've got your credit score in order. The good news, peer-to-peer lending, and other services are only leveling the playing field and giving you the best shot at really great loans.
To see how the various personal lenders measure up, visit our Personal Loans Reviews page today!
January 28th, 2021
Sign up below to receive a monthly newsletter containing relevant news, resources and expert tips on Personal Loans and other products and services.