Personal loans have been around far longer than credit cards, but the convenience of credit cards overshadowed personal loans until now. Online lenders have made personal loans a convenient, simple, and popular way to bridge financial gaps – but for many people loans feel like a relatively new option and we get a lot of questions about how loans really work. As a company at the forefront of this new way to borrow, we love that you’re asking questions. So, here’s everything you always wanted to know about personal loans.
Why do people get personal loans?
Personal loans can be used for almost anything. The two most common uses cases are paying down existing debt at a lower rate, also known as refinancing, and making a purchase when you don’t have the money currently available. Many people use credit cards for these types of purchases, but fixed-rate loans will often help you save money. (More information on how to compare credit cards and personal loans).
Who gets personal loans?
Almost anyone. But different types of borrowers have different options available to them. Rates and loans are largely determined by a borrower’s credit history and credit score, limited history and low credit will reduce options and raise rates.
How do lenders decide whom to lend to?
Each lenders has established a formula to determine whom to lend to and at what rate. This process is known as underwriting. Typically lenders will look at many factors including your credit history, your current debt-to-income ration, and your expenses in assessing your creditworthiness.
How are interest rates determined?
Interest rates are proportionate to risk. Based on their own individual underwriting, each lender assesses each borrower’s risk of defaulting. The lower the risk, the lower the rate the lender will offer. Lenders also look to make a profit on the loans they make, so the interest rate includes both the cost of the risk and the cost of servicing the loan.
Why do credit scores matter so much?
Credit scores are a quick and standardized way to understand a person’s creditworthiness. While each credit reporting agency (Equifax, Experian and TransUnion) has its own formula, there are 5 factors that make up your score: credit history, payment history, types of credit, new accounts, and amount owed. All of those factors matter to lenders when they are trying to evaluate whether to lend to you and how much.
We believe that credit scores only tell part of the story, which is why we include education and employment information in our underwriting.
Does it cost anything to apply for a loan?
Once the loan has been finalized, most lenders will take out an origination fee before transferring the money. This fee is only charged once and is essentially to help the lender pay for the cost of issuing the loan. This fee is generally removed from the funds you receive, so if you take out a $10, 000 loan with a 4% origination fee, you would receive $9, 600 from the lender.
Most personal loans do not have loan application fees, so there is usually no cost to applying for the loan if you do not get it. If you are unsure, ask before applying as most application fees are nonrefundable.
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