Written by: Jessica Hemingway | Best Company Editorial Team
Last Updated: November 1st, 2019
What Is A Personal Loan and How Does It Relate to Debt?
People get personal loans for different reasons, like to help purchase an expensive item or to help pay off credit card debt. A personal loan is an unsecured loan (meaning it is not backed by collateral), typically ranging from $1,000 - $50,000.
One's credit score is a big factor in determining eligibility and interest rates for personal loans. The better one's credit score, the lower the interest rate. Because interest rates on personal loans can be higher than that of secured debt, personal loans are ideal for people intending to pay off the debt quickly. Often, personal loans are a type of installment loan with a fixed repayment term. When getting a personal loan, people can expect to get a lump sum amount of money upfront, and then pay it all back with interest, over the repayment term.
How Long Does It Take To Get Out Of Debt?
A lot of personal loans typically follow a 3-year repayment plan. Many personal loan programs stick to a quick 36-month timeline to keep on track and get out of debt fast. However, in general, repayment plan terms can vary from around 2 - 5 years. Some companies offer higher repayment terms. It should be noted that depending on the personal loan lender, some creditors charge prepayment fees. One who decides not to pay off the entire loan by the repayment due date could potentially be taken to court and sued.
How Is Credit Score Affected?
Personal loans can actually improve credit scores. They can redeem one's creditworthiness if handled correctly. In order to improve one's credit score, they must:
- Keep up with their payments
- Pay more than the minimum required monthly payment
- Reach a below 30% low balance as soon as possible
In general and because personal loans are installment loans, they will not hurt one's credit score as much as credit card debt can. So, converting credit card debt to a personal loan can be very financially beneficial. Personal loans are also known to have lower rates than credit card debt loans.
Who Can Help?
Upstart is ideal for recent college grads. When determining interest rates, Upstart considers factors in addition to credit score, like GPA and area of study. Though the minimum credit score for eligibility is 640, they look at a variety of other factors. The company claims they can save borrowers over 25% more than high-interest credit card rates. Borrowers can choose a maximum repayment term of 5 years, rates range from 4.66% - 29.99% APR, and borrowers can sometimes get the funds into their account the day after application and approval. It should be noted that Upstart charges fees. There is an origination fee of 1% - 6% of the total loan amount, and 5% or $15 (whichever is greater) late fees.
With SoFi, select customers can apply for as high as a $100,000 personal loan. Though the average repayment term most borrowers go with is 3 years, SoFi offers a maximum 7-year repayment term. Borrowers can expect between a 5.95% - 12.99% APR fixed interest rate, and there are no late or origination fees. It can take up to 4 - 5 days to get funds, and some say it is difficult to be approved. However, many customers say working with SoFi is worth the waiting period.
Personal Loans To Get On Track
Those who are battling lots of credit card debt, or who are aiming to make a large purchase should be looking at getting a personal loan. Personal loans can be financially beneficial in not only raising one's credit score but getting back on track.