Guide on How to Choose The Best Personal Loan

Shopping For The Best Personal Loan
Put yourself in the driver’s seat when it comes to reducing money-induced stress in your life. Imagine the faucet in the tub accidentally ran all day. You return from work to a flooded mess. Your savings are tapped out. You need a loan – and fast, and you’ve chosen a personal loan as an option. And you wonder how do you get the best personal loan?


Part 1. Basic Info about how Personal Loans Work

A personal loan is a general purpose loan that you can use for things like consolidating debt, unexpected medical expenses, or fixing that pesky faucet. They are typically short-term (one to seven years) with a fixed interest rate and generally range from $5,000 – $35,000.

Types of Personal Loans

Next thing you will have to think about is whether you want your loan to be secured or unsecured.

  • An unsecured loan is based on your credit with no underlying collateral to “secure” the loan. Interest rates on unsecured loans are higher than on secured loans. Nevertheless, most personal loans are unsecured loans.
  • In a secured loan your assets protect the lender, and this is why you can get a lower interest rate in this case. If you default, the lender places a lien on the asset. Examples are mortgages, car loans, etc. Personal loans are not usually secured.

APR for Personal Loans

The APR is the cost you pay for borrowing money, calculated on a yearly basis. It includes the interest rate and any additional fees. By law, a lender is obliged to display the APR.

Use the APR to create a level playing field for comparison when shopping for loans.

Therefore, it is your responsibility to research the available options. It is of critical importance that you analyze, compare, and estimate the APRs of the loan options you consider to apply for. The best personal loan in terms of cost won’t enter your account by itself. To help you do the math, we prepared such an example:

APR Calculation Example
Let’s pretend you need to borrow a $1,000 loan, and the APR is 18%.

By applying by the following formula: Loan Amount x Interest Rate = Cost of the Loan per Year

Now replace the details: $1,000 x 0.18 = $180. You can see that cost of borrowing for $1,000 is $180 for one year.

If you want to see the monthly cost of your loan, you’ll need to divide the entire loan cost by 12 (months). $180 / 12 = $15.

Fees and Penalties

When choosing a personal loan, you will need to understand how do fees and penalties work as well. An origination fee, or upfront fee when you sign, ranges usually between 1% – 6% of the loan amount. Some lenders penalize borrowers for paying early. An you might as well incur a prepayment penalty or an exit fee. However, if exit fees are part of your loan package, it must be stated upfront.

Part 2. Link Between Credit Score and the Best Personal Loan


The number one reason a loan is rejected is poor credit. Your credit score is the indicator used by lending institutions, insurers and landlords to assess your financial reliability. Do not ignore your score, as it takes years to build a good credit history. CreditKarma and CreditSesame let you view TransUnion and Experian scores for free. However, be ready to put up with ads along with your score.

Where Do You Stand?

According to the statistics:

  • 18% of Americans have good credit.
  • 82% of Americans are vulnerable to high-interest rates.

The table below reflects the credit score ranges. You can use it to see where do you stand, and after you have determined what type of credit you have, to see what should be done next.

Type of credit Level of credit
Excellent Credit 750+
Good Credit 700-749
Fair Credit 650-699
Poor Credit 600-649
Bad Credit < 600

Obtaining Your Credit Report

Your credit report is a run-down of how you pay bills and other debts, and the timeliness of your payment history. The three main credit bureaus – TransUnion, Experian, and Equifax must provide a copy (at your request) of your credit history once every 12 months. See Annualcreditreport.com for info. You have all the available instruments to monitor your credit regularly and address issues in real time.

How To Correct A Mistake On Your Credit Report

Don’t panic if you find an error! It’s your responsibility to report inaccuracies, in writing, to the company who provided the report. Next, inform the creditor that you are disputing the item. In case you are being mistreated by a creditor or lender, just contact the Consumer Financial Protection Bureau.

Part 3. Assessing Your Income


You must have a verifiable income to qualify for a loan, and get the best deal. The underwriting process looks at your income, credit score and repayment history.
In fact, lenders calculate your ability to repay your loan by comparing your current debt to your current income. To do this, they use the Debt-to-Income Ratio (DTI). This indicator will show them to which extent you are currently indebted, and whether you can take out any other loans. Your chances to get a loan are higher if you have a DTI lower than 43%.

DTI Calculation Example
To calculate your DTI:

  • Add up recurring monthly debt (school loans, mortgage, car payment, credit cards).
  • Divide monthly debt by gross monthly income.


Part 4. Choosing the Lender

Apart from choosing the loan that best suits your needs, choosing the lender is not an easy task as well. Especially given that there is a wide variety of institutions keen to borrow you some money. Online lenders, credit unions or brick-and-mortar banks are the most common choices. Let us have a detailed look on them.

Online Lending Platforms

Online lending platforms connects borrowers and lenders online. Upon approval, funds can be in your account in a short period of time. When choosing a lender from this category, ceck the platform’s rating with the Better Business Bureau. Ensure the platform has security certification such as TRUSTe or Symantec.

BEST FOR: Fast access to funds.

Credit Unions

If online lending is too nameless and faceless for you, relationship banking still exists. But doing business with a credit union requires that you join. Be aware that Credit unions conduct hard inquiries on your credit (inquiries that affect your credit).

BEST FOR: Medium to low credit scores.

Brick and Mortar

Banks are for-profit businesses. They are more tech-savvy than credit unions and less relationship-centric. Expect traditional banks to offer lower interest rates but higher fees than credit unions.

BEST FOR: Branch banking.

Lending Resources For Poor Credit

Don’t give up if your credit is less than stellar: try applying for a secured loan or ask a co-signer with good credit to help you out. Watch that APR. If your credit score is low, expect a high APR (up to 36%!) even for secured loans.

BEST FOR: Situations when you have bad credit.

Part 5. Cheatsheet: A Quick Rundown for Geting the Best Personal Loan

If you have good credit:

  • Conduct due diligence: shop and compare before signing for a loan. Remember, you are in the driver’s seat if you have good to excellent credit.
  • Opt for the lowest rates.

If you have mediocre to bad credit…

  • Work on improving your score.
  • Stay on top of your credit history.
  • Dispute errors in writing to the credit bureau.

Using online lenders

  • Watch for online scams.
  • Protect your privacy to avoid identity theft.

If you think are not being treated fairly…