Home >

Responsible Lending

When you take out a personal loan, you receive a lump sum that you pay back over time with interest. Personal loans typically have lower interest rates than credit cards, making them a more cost-effective option for larger expenses. Loan terms generally range from 1 to 7 years, although some lenders may offer extended terms. Longer terms can lower monthly payments, but they increase the total interest paid over time. In contrast, shorter terms mean higher monthly payments but reduce the overall interest cost.


Interest and Fees

In addition to interest, some personal loans have an upfront origination or administrative fee, which usually ranges from 0% to 12% of the loan amount, depending on the lender and your credit profile. Key points about origination fees include:

  • The fee is often deducted from the loan amount when it’s disbursed.
  • It is factored into the loan’s APR, so comparing APRs rather than just interest rates is essential.
  • A higher credit score might help you avoid these fees.

Late payments or insufficient funds can result in late fees or non-sufficient funds (NSF) fees. However, some lenders, such as SoFi, don’t charge origination or late fees.


Personal Loan Eligibility

Lenders usually assess factors like your credit history, income, debt-to-income ratio (DTI), and employment status to determine whether you qualify for a loan. The DTI ratio compares your monthly debts (like credit cards and car loans) to your gross monthly income.

Before applying for a loan, consider prequalifying. Prequalification gives you an estimate of loan options and rates without submitting a formal application, and it doesn’t impact your credit score. Typically, you’ll need to provide basic information such as your name, contact details, loan purpose, desired loan amount, and sometimes the last four digits of your Social Security number.

Remember that submitting a full application will trigger a hard credit inquiry, which can lower your credit score by a few points for up to a year.


Bad-Credit Loans

For individuals with poor or no credit, bad-credit loans are generally easier to obtain, but they come with higher APRs. If rates are too high, you could consider adding a cosigner to reduce the cost.

Be cautious of predatory loans, like payday loans, which often come with extremely high APRs—sometimes over 400%. Payday loans typically charge $10 to $30 per $100 borrowed and have short repayment periods (usually two to four weeks), with loan amounts up to $500.

Due to the short repayment terms, payday loans can be difficult to pay off on time, especially if you’re facing financial strain. This could lead to rollovers or renewals, which add additional fees and drive up the overall cost of the loan.

A safer alternative is a payday alternative loan (PAL), offered by some federal credit unions. PALs allow you to borrow up to $2,000 with APRs capped at 28%. Some credit unions even offer these loans to new members, even if you’ve just joined.