Best Personal Loans of 2020

A personal loan is a loan taken out for a short period of time, usually between two and five years. The length of time is fixed and does not fluctuate, unlike a credit card or line of credit.

Most personal loan amounts are between $1,000 and $100,000, depending on your need and creditworthiness. Each bank has its own set of limitations on how much and how long you can borrow for a personal loan.

Personal loans are typically unsecured, which means there is no collateral, such as a car or house backing the loan.

Different types of lenders offer personal loans, including traditional brick-and-mortar banks and online-only lenders. They serve borrowers with varying credit scores, income levels and other requirements.

This guide explains how you can evaluate online lenders for personal loans. If you’re looking for a loan, you can find the right lender for your credit history and income, desired interest rate, loan amount and use, and co-signer requirement. Choosing the right lender and terms can save you thousands of dollars.

Methodology: Personal loan companies are selected based on consumer ratings and product availability.

Each consumer has distinct needs, and many lenders specialize in areas designed to meet them. Recommendations are based on eligibility requirements, interest rates and features that make these loans good matches for different types of consumers.

Select your desired loan amount and purpose, your credit score range, and your state to see estimated annual percentage rates and loan terms.

The average personal loan rate is 11.61%. You could pay a higher or lower interest rate, depending on your credit score.

Personal loans are not a solution for most financial situations, says Eric Roberge, certified financial planner and owner of financial planning website Beyond Your Hammock. “Most times, they are just a Band-Aid on improper money management,” he says.

Roberge recommends a personal loan if you have credit card debt with high interest rates. Paying off debt with a high interest rate, such as a 24% APR, can be difficult because the more interest you owe, the higher your payments and the longer you would need to be debt-free.

But if you qualify for a personal loan with a much lower interest rate, you can pay off the debt faster and spend less on interest.

“One bad reason to take out a personal loan is to invest in the stock market,” Roberge says. “There is no reason to go into debt just to get money in the market. Save and then invest.”

Some of the worst uses for personal loans are vacations, weddings, engagement rings and other unnecessary expenses. If you’re having trouble saving for an expense such as a wedding or vacation, delaying it until you can pay for it in cash is a better option than a personal loan.

Personal loans are also not a good idea for home repairs. Instead, consider a home equity loan that taps the equity built up in your home, and home equity loans usually have lower interest rates.

Personals Loans vs. Payday Loans

While personal loans are offered by trustworthy lenders, payday loans are predatory, often signing up borrowers for debt that takes several cycles to pay off. A payday loan is a short-term loan, usually limited to a few hundred dollars.

The borrower agrees to pay the lender the loan amount, plus interest, and writes a check or gives access to a bank account. The lender then deposits the check when the loan comes due, which is typically the borrower’s next payday. If the borrower does not have enough money in the bank at that time, the lender will usually extend the loan until the next payday.

Most payday loans have exorbitant interest rates, often around 400% APR and sometimes up to 700%. Many borrowers end up extending their loans several times. Because interest rates are so high, they struggle to repay their loans.

“Subprime lenders that don’t care about a customer’s ability to repay are probably counting on them not being able to pay the loan back on time,” says Jared Kaplan, CEO of OppLoans, an online lender that serves customers with fair to poor credit.

He says this sounds counterintuitive, as lenders might be out of business if customers can’t repay loans. But lenders commonly extend the loan’s repayment term in exchange for charging additional fees or interest.

This practice is known as rollover, or sometimes reborrowing, if a person is paying off one loan and then immediately taking out a new one to meet other expenses. Payday loans that continue to roll over with additional fees or interest are how consumers get trapped in a nasty cycle of debt, Kaplan says.

A payday loan is never a good idea, especially if you’re having trouble making ends meet. These loans can lead to bigger financial problems and often cost you far more than you originally borrowed. If you find yourself contemplating a payday loan, consider borrowing money from family members or friends, or sell something you own.

The coronavirus crisis has thrown the lives of many Americans into financial uncertainty. Millions face job losses and must prioritize paying for essentials, including food and shelter.

But many haven’t considered options such as government assistance, personal loans, and deferred credit card payments and fee waivers, which could alleviate coronavirus-related financial pressures.

U.S. News surveyed Americans about the coronavirus and its toll on their finances. These are the key findings:

More than half of consumers surveyed said they have serious financial concerns related to the coronavirus.

Nearly one in five consumers surveyed said losing income or business revenue is their greatest financial concern related to the pandemic. That concern is followed by losing retirement funds and managing household expenses.

Nearly half of consumers surveyed have experienced changes at work since the U.S. coronavirus outbreak began.

Of the consumers surveyed, about 19% have started working from home and about 10% have lost hours. About 13% have been laid off or furloughed.

Paying for essentials, reducing debt and building savings are coronavirus stimulus payment priorities.

About a third of respondents said they will use their stimulus checks for essentials such as groceries or rent payments. More than 30% don’t expect to get checks.

Other top priorities are shoring up savings or making debt payments.

Most consumers affected by the COVID-19 pandemic aren’t asking for government assistance.

Eighty-six percent of consumers surveyed said they haven’t applied for major coronavirus government assistance programs. Just 7% said they’ve applied for or used unemployment assistance, and less than 4% have applied for or used Small Business Administration programs.

Only about 2% have applied for or used food stamps or Medicaid.

Many consumers with credit card debt plan to skate by with minimum payments during the coronavirus crisis.

Nearly a quarter of people carrying card balances said they plan to make only minimum payments on credit cards during the coronavirus pandemic. Most credit card issuers allow cardholders to skip or defer payments, but just 6% of consumers with credit card debt plan to do this or have done so.

Just 3% of Americans will consolidate credit card debt with home equity or personal loans.

The few consumers who have incurred coronavirus-related medical expenses face steep costs.

Of the consumers surveyed, 92% said they haven’t had medical expenses related to the coronavirus. But among those who did, about half paid less than $5,000 for medical expenses.

About one in five consumers surveyed have at least $15,000 in coronavirus medical expenses.

Most consumers haven’t reported coronavirus scams.

More than 90% of consumers surveyed said they haven’t experienced attempts at coronavirus fraud. But nearly 5% said scammers have asked for personal data, 2% were targeted for a stimulus scam, and 1% received a bogus check. Being on alert for such scams is a good idea.

Most consumers don’t plan to take personal loans to help with coronavirus financial challenges, and those who turn to these loans may use them for everyday expenses.

Just 16% of consumers surveyed said they have or plan to take out personal loans because of financial pressures created by the coronavirus crisis. Among those with personal loans, about 19% of people plan to use them to pay for everyday expenses.

About 10% of respondents have or plan to take out personal loans to cover medical expenses or to consolidate credit card debt. Nearly half who will get personal loans plan to use them for other reasons.

Interest rate is the most important factor for many people when choosing a personal loan company.

Consumers surveyed about how they select a personal loan company said their loan’s APR is the top factor, followed by loan terms, fees, and reviews or personal recommendations.

Most Americans have not considered personal loan alternatives, but lower-cost options get priority for those who have.

More than 80% of consumers surveyed said they haven’t looked at popular alternatives.

How Personal Loans Affect Your Credit

A soft inquiry will only be visible to you and won’t count against your credit score. But a hard inquiry will show up on your report and will be visible to any creditor who views the report. It will typically stay on the report for two years and may hurt your score for one year.

New hard inquiries affect the new credit portion that makes up 10% of your FICO credit score, the score most commonly used by lenders when evaluating applicants. New credit refers to how many new credit inquiries you have and how many lines of credit you have opened recently.

Anytime you take out a loan, you alter the average age of your credit. The length of your credit history accounts for 15% of your FICO credit score, and the average age of your accounts is a factor in the length of your credit history. If you don’t have many loans or other types of credit, then a new account can significantly affect the average age of your credit accounts.

“If you’re taking out an unsecured personal loan, you don’t have to risk losing your home or your car, but that doesn’t mean they’re risk-free,” Kaplan says. “Failing to pay the loan back, also known as defaulting, could do some pretty serious damage to your FICO score. That will make it harder and more expensive to borrow money in the future.”

Defaulting can lead to having the loan go to collections and getting a judgment issued against the borrower, both of which can stay on a credit report for years.

Some of the most common requirements for a personal loan are:

How Your Credit Score Affects Interest Rates

Personal loan APRs typically range from about 6% to 36%, depending on creditworthiness and other factors. Jeff Rose, certified financial planner and CEO of financial planning firm Alliance Wealth Management, says consumers can get better interest rates the higher their credit scores.

In addition, the higher your credit score, the greater selection you’ll have in choosing a personal loan with favorable terms. Companies want to work with people who have good or excellent credit scores and are more likely to offer these consumers better terms.

Joseph A. Carbone Jr., certified financial planner and founder of financial planning firm Focus Planning Group, says: “Realistically, you probably need a credit score of 680 to 700 or higher (to qualify for a personal loan). If you are in a range of 620 to 680, you might need a co-signer to secure the line.”

Your credit score is not the only component that determines your approval and interest rate for a personal loan.

Adds Rose, “A lot of factors go into the approval process: the purpose of the loan, loan amount, repayment term, credit history and current financial situation.”

Companies will request information about your job, how much you earn, how stable your income is, what kind of savings you have and more. Your answers can determine your eligibility.

Understanding the Application Process

When you apply for a loan, if you meet the lender’s criteria, you will get a preapproved interest rate. This is a rate you receive that’s valid for a certain amount of time, usually up to 90 days.

Borrowers must ask lenders how long rates are guaranteed and whether they could change before an application is finalized.

When you formally apply for a loan, you will choose what kind of term you want, which includes the length of the loan. You’ll also learn what interest rate you’ll have and if you have to pay any other fees, such as origination fees.

The formal application will lead to a hard inquiry on your credit report, where it will stay for two years but only factor into your credit score for one year.

Once you finalize the loan, you’ll start repaying it according to the terms of the loan agreement. Remember, personal loans are not like credit cards. You’ll have to repay the entire sum, plus interest, by a certain date.

Determine How Much You Can Afford to Pay

Examine your budget to determine how much you can afford to pay each month. Getting an idea of this number before you look at a loan will help you choose the right lender.

It doesn’t matter if you get an offer of 4% APR if you can’t afford the monthly payment. This could lead to defaulting on the loan, which will damage your credit.

“A loan with a longer repayment term might cost a little more overall, but that longer term will also lower the monthly payment amount,” Kaplan points out. “And if those payments are a much better fit for a person’s budget, then that loan is probably the best one for them.”

Compare lenders to see what your preapproved interest rates are. Make sure that the lenders you’re requesting information from will only perform a soft inquiry on your credit.

When you request a rate quote, you’ll provide your personal information, such as your address, income and Social Security number. You’ll indicate the amount you want to borrow and the reason for borrowing.

Once you give these details, you’ll be informed of rates and how to formally apply for the loan. Even with good credit, you won’t be guaranteed approval or a particular interest rate.

If you have received preapproved offers in the mail or online, keep those in mind but still do further research. Choose your top one or two lenders and then apply formally.

Kaplan recommends researching lenders through the Better Business Bureau website to check for negative marks or complaints. This can help you avoid an unscrupulous lender – scams can cost you thousands.

“Consumers can choose the best personal loan by doing their research, shopping around between multiple lenders, reading the fine print and only selecting a loan that they know they can afford to repay,” Kaplan says.

Each lender has its own terms and conditions, so figure out what you’re looking for before you start comparing lenders.

Lenders often set minimums that borrowers need to meet for credit scores and years of credit history to qualify for personal loans.

They also care about your debt-to-income ratio, which is how your monthly debt repayments compare with your monthly income. Lenders like to see a low debt-to-income ratio.

Lenders may not be licensed to lend money in every state. Before comparing lenders, check to make sure they can offer loans where you live.

Some lenders allow you to take out a personal loan with a co-signer. A co-signer is helpful for people who don’t have enough income or credit history to qualify for a loan on their own.

With a co-signer, you can sometimes get a lower interest rate because the lender is taking into account the co-signer’s credit score and history as well. And there’s someone else the lender can collect from if you stop making payments.

The loan will also appear on the co-signer’s credit history, which could affect his or her ability to be approved for future credit. Keep this in mind if you ask someone to co-sign for you.

Lenders may offer merit-based qualifications, which means they will count your education, earning potential and more when approving you for a loan. This is especially helpful to low-income borrowers in the beginning of their careers.

Each lender may have a minimum income requirement that a borrower must meet to qualify for a personal loan. Borrowers with higher incomes tend to be better applicants because they have more money for repaying their loans. Still, a high income can’t fix a low credit score or high debt-to-income ratio.

Some lenders require that you work a certain number of years before you’re eligible for a personal loan. If you don’t have a long employment record or high income, make sure your credit score is strong.

Most personal loans offer a fixed interest rate, which stays the same through the duration of the loan. A variable rate changes over the life of the loan, depending on prevailing interest rates.

Some borrowers don’t want the uncertainty of a variable-rate loan and prefer to stick with a fixed-rate loan.

Each lender sets its own terms, such as loan amounts, repayment periods and use restrictions.

Every lender has a minimum and maximum loan amount, for example. If you’re looking for a personal loan under $2,000, you’ll need to find a lender offering that amount.

SoFi will lend up to $100,000, while Payoff lends up to $35,000. If you need to borrow $45,000, then only look at lenders that offer that amount or more. Don’t expect a personal exception if you need to borrow more than a lender’s maximum.

Lenders also have minimum and maximum repayment terms. You’ll typically have two to five years to pay off your personal loan, but some lenders offer terms of up to seven years.

The longer your loan period is, the lower your payments will be, but you will pay more in interest. If you can afford a higher monthly payment, go with the shorter loan period to save some money on interest.

Some lenders have restrictions on how you can use your loan. Payoff only allows you to apply its personal loan funds toward your credit card debt, while Earnest does not allow borrowers to use funds for business expenses.

Don’t lie about how you’re going to use the money. Lying on your loan application can be deemed loan fraud and can result in extra fees and charges.

Lenders also have their own time frames for how quickly you’ll receive your personal loan funds. Usually, funds are distributed within a few business days, and most lenders will disburse them electronically.

A few lenders offer discounts if you set up automatic payments online. This can help you avoid missing a payment and save a little on interest.

One of the most important aspects to compare before choosing a personal loan is the fees each lender charges. Fees can significantly increase the cost of a personal loan. For example, a 3% origination fee on a $25,000 loan is $750.

An origination fee is the fee a lender charges to administer the loan. Only a few lenders, including LightStream, SoFi and Earnest, do not charge an origination fee.

Most lenders have an origination fee between 1% and 6%. The amount you pay for the origination fee may depend on your credit score; the higher your score, the lower the origination fee.

While some lenders charge a prepayment fee, none of the lenders in this guide do. A prepayment fee is a fee you pay for repaying your loan early or ahead of schedule.

Because most lenders enforce late fees, always pay your loan on time. Autopay can help you avoid missing a payment, which can result in a late fee and damage to your credit score.

Most lenders charge a minimal fee for returned payments, which happens when you have insufficient funds to cover your loan payment.

Most lenders offer a few different repayment options, including autopay, check by mail or online, and even an option to change your payment date. These choices vary by lender, so make sure it offers the repayment option that works best for you.

Some lenders have additional features that make them a better fit for certain borrowers.

Try to compare rates from at least two personal loan companies before you apply. Consider credit requirements, loan amounts, terms and other factors.

Take a look at this example comparing these two personal loan companies:

Discover
Minimum FICO score: 660
Loan amounts: $5,000 to $100,000
Loan terms: 24 to 84 months
Best feature: No fees except for late fees

Sofi
Minimum FICO score: 680
Loan amounts: $2,500 to $35,000
Loan terms: 36 to 84 months
Best feature: Co-borrowers are accepted.