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What is a personal loan?

When you need cash fast, where can you turn to for a loan? There are two options: applying for traditional loans at banks, or the second, better, option – applying for a personal loan online. It’s faster, more efficient, and convenient. And if you were searching for “personal loans near me” you’re in the right place.

Applying does NOT affect

your FICO® credit score!

Let’s break down the terms: “Personal” means belonging to one person. “Loan” is a sum of money lent out to you by the lender. After some time, you repay the principal amount with interest. Merging the two terms makes the overall meaning clear. A personal loan is a form of credit advanced by a lender to an individual. The lender could be a bank, credit union, peer lender, or online lending company.

Here are the main characteristics of unsecured personal loans:

  • Interest rate –  The rate is fixed for the loan duration
  • Repayment – Repaid in fixed monthly or biweekly payments
  • Collateral – No collateral or security is required

How much can I borrow with a personal loan?

There is no straight answer. That’s because the loan amount is dependent on several factors:

1) Choice of lender

Banks offer higher loan amounts than other lenders. It’s not uncommon to find the following loan amount ranges: $1,000 to $35,000, $3,500 to $40,000, or $5,000 to $100,000.

Credit unions —which are cooperatives owned by members — do offer personal loans with bank-like amounts. For instance, you may encounter stated amounts such as $5000 to $50000, $1000 to $30000, $250 to $50,000, etc.

Peer-to-peer loans are not offered by professional lenders. Actual people are behind them. On some peer-to-peer platforms, you might access up to $40,000. However, it takes time to build up trust and convince strangers to entrust you with high loan amounts.

Lastly, we have online lenders. These are lending companies that operate exclusively on the web. Some also have physical store locations. There are two categories of online lenders:

  • Online loan companies for bad credit: These companies cater to consumers deemed high-credit risks by banks because of their low creditworthiness. You will borrow slightly lower loan amounts with bad credit. The max amount offered tends to be $5,000.
  • Online lenders for customers with good scores: Some online lenders only advance personal loans to customers with credit scores of at least 660 and above. They might offer high loan amounts similar to bank loans. You may borrow up to $35000, $40000, or $50000.

2) Borrower’s income

Your income is particularly important when it comes to personal loans. That’s because they are unsecured. You repay them using the money you’re making every month. Now, it’s not feasible to borrow a loan that you can’t afford. Here is a simple example to illustrate this point:

Suppose John has a monthly income of $4000. He parts with $1200 every month for his mortgage payment. In addition, he has an auto loan with payments of $200 each month. His variable expenses amount to $600.

In this case, the lender will ask about John’s discretionary income:

Income – $4000

Expenses – Fixed mortgage ($1200) – Loans ($200) – Variable ($600)

Discretionary income ($2000)

Suppose John wants to take out a personal loan of $20,000 at an interest rate of 8% for 5 years. Can he handle the monthly repayments? Can he afford the loan?

Tip: When faced with a similar calculation, find a free personal loan calculator online for quick calculations. In this case, the loan’s monthly payments are $405.53 each. Therefore, based on his discretionary income, John can afford the loan.

3) Ability-To-Repay Rule

The Consumer Financial Protection Bureau implemented this rule in 2014. It’s meant to safeguard borrowers from falling into debt traps. One of its proposals is that the borrower’s debt-to-income ratio should not exceed 43 percent.

DTI = Total fixed monthly debt payments ÷ Monthly income.

For instance, John’s debt-to-income ratio after taking out this loan will be: ($1200 + $200 + $405.53) = 1805.53 = 45%. His DTI ratio would be slightly higher than the recommended percentage.

Now, the lender can remedy this by reducing the loan amount or extending the loan’s term. For instance, if the term was 6 years, the monthly payments would be $350.66 and the DTI ratio 43.01%.

What requirements are there to qualify?

The qualifications for personal loans also differ based on the lender. Traditional lenders (banks & credit unions), p2p lenders, and online lenders for good credit loans all have strict qualification requirements:

  • Minimum credit scores of 660 – 680.
  • DTI ratios ranging from 28% to 43%
  • Minimum monthly income of $25000 per year. Some lenders might ask for as high as $60,000.
  • Applying does NOT affect

    your FICO® credit score!

Reasons to choose lenders for bad credit

Online lenders for poor or bad credit are more relaxed. You just need to meet the following qualification criteria:

  • Age – At least 18 years in most states
  • Income – Not less than $750 per month
  • Credit type – All types (poor, fair, good, excellent)
  • Citizenship – U.S. Citizen or permanent resident with SSN

Can you get a personal loan from an online lender if you’re not formally employed?

Yes. The lender will only need to see that you’re deriving a stable income from other sources. For instance, you could be earning some government benefits, SSI disability checks, annuities, etc.

What can I use my personal loan for?

Personal loans are great because you get to choose how to use the loan funds. You’re not restricted as it is the case with mortgage or car purchase loans. Popular uses of these loans include:

  • Debt consolidation – aggregating your debts together to pay one lower monthly payment.
  • Emergencies – catering for unexpected costs such as medical bills, relocation costs, car repairs, unexpected travel arrangements, etc.
  • Vacation – some customers take out personal loans to travel.
  • Green loans – the loan funds are invested in green projects such as the installation of solar panels at your home.
  • Funeral costs – funerals can become very expensive.

What rate should I expect?

Lenders incur risk when lending out cash and risk losing their investment in case the lender defaults. What does this have to do with the interest rate?

The higher the risk the higher the interest rate will be. For instance, if you are applying with a low-income, high DTI ratio, and not-so-good credit scores, expect to pay a higher interest rate. If the loan has an APR range of 5 to 36%, the rate will be on the higher end.

Some bad credit loans have steep APRs, typically, in the triple-digit range. These are the same loans that offer lower loan amounts of up to $5,000. In addition, they have short-terms ranges from 3 months to 24 months

How to calculate your personal loan

How can you find out the interest amount you’ll be paying for a personal loan? The lender has to disclose the finance charge in the loan agreement. You can also use a personal loan calculator to find the cost of simple interest loans.

These calculators are freely available. You just need to know the loan amount, interest rate, and loan term. For instance, if you borrow a $5000 loan at 12% for 12 months, the total interest amount is $331, and the monthly payments are $444.24.

How to compare personal loans from different lenders

To compare personal loans from different lenders, specifically, note:

  • The loan amount range: Is the lender offering $2000 to $5,000 or $500 to $10,000? Is the loan amount sufficient for your needs?
  • Interest rate and fees: What’s the APR? Is it 5.99% to 35.99%? Or do they charge rates above 100%? Does the lender charge origination fees, late fees, or NSF fees?
  • Loan term: What’s the lender’s min and maximum loan duration? Can you handle the monthly repayments?
  • State of residence: Not all lenders operate in all 50 states. Ensure that the lender has licenses to operate in your state.
  • Credit checks: Does the lender conduct soft or hard credit checks to pre-qualify borrowers?

Apply for a personal loan

Quickly and easily, find lenders that pre-qualify you with soft credit pulls when you apply through Nation21. We provide an efficient loan-matching service free of charge. Here is how it works: Customers first complete one application form. The form is then shared with lenders in our network. In minutes, they receive loan offers in your inbox. Apply for a personal loan by selecting “Apply Now.”

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