How do small personal loans work?

Do your homework if you want to take out a personal loan to cover your emergency expenses. (iStock)

According to a report by the Bureau of Labor Statistics (BLS), Americans spend most of their money on rent, groceries, transportation, and health insurance. Rent or mortgage typically makes up about 32% of consumer’s expenses, food makes up almost 13% of yearly costs, and transportation (including car payments and fuel) make up about 15.9% of an individual’s expenses. The BLS report noted that the average American household earns $78,635 before taxes. The average family spends more than $61,000 each year, and those numbers don’t include consumer debt payments.

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The coronavirus pandemic has exacerbated tight budgets and made it much more difficult for households to find money in case of an emergency. According to the most recent report from NORC, at least 20% of Americans reported difficulty paying bills, job loss, or negative impacts on their investments.

Many of those who did have savings set aside may have already dipped into them to cover unexpected costs. However, if you’re worried about paying for an emergency expense, a small personal loan could be an option. Credible can help you compare rates from multiple lenders within minutes to ensure you're getting the best deal possible.

What is a small personal loan?

Small personal loans are typically unsecured loans totaling $5,000 or less. You can use most small loans for any expense like a medical bill, groceries, vacation, debt consolidation, or a car repair.

If you are unable to pay for an emergency expense, a small personal loan can provide quick help. Just enter your preferred loan amount and estimated credit score into Credible's free online tool to see what kind of rates you qualify for today.

READ THIS BEFORE YOU APPLY FOR A PERSONAL LOAN

You can also use the personal loan calculator from Credible to determine how much money you need and to find the best personal loan rates.

How do I get a small personal loan?

If you want to qualify for a fair rate (i.e. not payday loans), you’ll need to fill out an application and provide financial information. Lenders will look at your credit score and your credit report. When you apply for a personal loan, the lender’s inquiry will appear on your credit report.

Credible can help narrow down lenders to find the one that meets your financial needs.

Lenders have different criteria for loan approvals, but most require a minimum score of at least 600 and proof of income. If you’re unable to qualify based on your past credit history, you may consider asking a friend or family member to cosign.

If you meet the lender’s requirements, they’ll provide you with documents detailing the terms of your loan, including monthly payments and when the payments are due. Some lenders may allow you to choose the best day of the month to ensure you can pay on time. After signing the paperwork agreeing to the terms and accepting the loan, the lender will send you a check or deposit the funds directly into your bank account.

HOW TO GET A $100,000 PERSONAL LOAN

How do I get the lowest interest rate?

To qualify for the best interest rates, you should have a credit score of at least 700. If your score is slightly lower, you may still be eligible for fair rates. Additionally, you’ll need a clean credit report. When you’re applying for a small personal loan, make sure to use an online tool like Credible to compare rates and fees from multiple lenders The best way to save money on your loan is to shop around. If you want to get the best interest rate and guaranteed monthly payments, opt for a fixed-rate loan.

EVERYTHING YOU NEED TO KNOW ABOUT PERSONAL LOANS

Are there alternatives to personal loans?

If you don’t want to or can’t take out a personal loan, some other options could help you cover emergency expenses.

Take out a credit card with 0% APR

This is the easiest way to borrow money on the cheap. If you qualify, you could get a card that allows you to repay your balance without charging any interest for up to a year or more. Some of these cards charge an annual fee, so make sure you read the fine print. You can compare terms and prices for multiple credit cards at once on Credible.

8 QUESTIONS TO ASK BEFORE TAKING OUT A PERSONAL LOAN

Salary advance

Some employers may be willing to offer you an advance on your salary if you need to cover an emergency expense.

Secured loan

If you don’t qualify for an unsecured loan, you can compare rates for secured loans (loans that require collateral). If you own a home, consider a home equity line of credit or home equity loan.

WHAT YOU NEED TO KNOW ABOUT SECURED PERSONAL LOANS

Borrow from your retirement fund

Ideally, this is your last option, since borrowing from your retirement accounts will result in a penalty and a tax. However, if you need to cover emergency expenses, you may be able to borrow a percentage of your retirement funds. You’ll need to pay the funds back with interest.

Many Americans are struggling right now. If you need cash to cover an emergency, you’re not alone. Fortunately, lower interest rates make taking out a personal loan more affordable for many people. Always borrow what you can comfortably pay back. Use an online loan calculator to determine how much money will help you cover your expense without adding too much extra strain on your budget.

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