If you’re thinking about taking out a personal loan, you’re in good company: CNBC reported in February 2016 that the number of people taking out unsecured loans jumped close to 30 percent in recent years, from 10.57 million in 2013 to 13.72 million in 2015, and another 24 million Americans were likely to take out a personal loan that year alone.
You’re also making a good financial move. (Yes, really!) But when you’re looking for a loan online, you’re faced with an onslaught of candidates ready to fork over cash in exchange for regular monthly payments — plus interest of course. With the best online personal loans, that interest will be fixed, with no fees tacked on and with low APRs. The loans themselves will come from reputable lenders, like my top pick Discover, so you can trust your money will come from, and return to, good hands.
The Simple Dollar’s Online Personal Loan Recommendations
After over 30 hours of research on 40 different companies, I found four online personal loan issuers that all offer the four key features of a good personal loan: no fees, fixed interest, low APR, and Member FDIC. These guys are a great place to start shopping — but be aware that your individual APR will vary depending on your credit score and other factors, so you might not get the lowest rate these loans offer. However, you’d still get a no-fee loan with a fixed interest rate.
- Best Online Personal Loans: Discover, LightStream, Avant, Citizens Bank
- Best Overall Experience: Discover
- Honorable Mentions: Earnest, SoFi, Wells Fargo
Personal loans are a really smart alternative to credit card debt.
A personal loan is often called an “unsecured loan,” and that’s exactly what it means: A bank or a private lender loans you money without securing collateral. If you were applying for a mortgage loan, for example, the collateral would be your house; if you could not make the payments, the bank could foreclose on the house and repossess it.
With a personal loan, there’s nothing to repossess. Either you make the payments, or you start racking up late fees and debt collection calls. Because of this, unsecured loans usually have higher interest rates than secured loans; the lending institution wants to make sure it’ll make good on its investment. However, even these higher interest rates are often several percentage points lower than credit card interest rates, making personal loans a less expensive way of borrowing money.
A personal loan can help you consolidate and pay off high-interest credit card debt, allowing you to pay down your remaining debt balance with a lower interest rate. You can also use personal loans for expenses that you might otherwise put on a credit card, such as wedding or vacation expenses, and pay lower interest over time. Best of all, personal loans can even help your credit score.
Studies have shown that many individuals without a personal loan (which is considered installment debt) see an improvement in their score with a new loan. If you’re using the loan to pay off credit card debt (which is considered revolving debt), there’s a possibility that your score may increase substantially, especially if your credit utilization rate is high on the credit cards. However, the more installment loans you get, the more it may lower your score.
Adam C. Hagerman
Financial Coach and Certified Financial Planner
That said, not all personal loans are worth the money they loan you. High-interest loans with high fees can set you back financially instead of helping you move forward. When you’re shopping for personal loans, you want a no-fee loan with a fixed interest rate and a low APR.
The best online personal loans have five things in common.
They are available nationwide — or close to it.
For the purposes of this research, I only considered lenders that offered personal loans in at least 35 states. After all, I wouldn’t want to list a “best personal loan” that was only available to readers in a few geographic areas, right?
The best customers get APRs below 10 percent.
APR stands for “annual percentage rate,” and it designates the percentage of interest that you pay on a loan. Right now, Bankrate puts the average personal loan interest rate at 11.3 percent APR, but I reached out to John Ulzheimer, a credit expert who has worked for both Equifax Credit Information Services and FICO, and he told me that for people with good credit, the interest rate on a personal loan can be less than 10 percent. (Comparatively, credit card interest rates average at around 15 percent and retail credit cards often charge 20 percent APR or more.)
If you want below 10 percent APR, you have to sign up with a personal loan company that offers it first. I eliminated any company that didn’t — but remember that just because a personal loan company offers rates below 10 percent APR, it doesn’t guarantee you’ll get that rate.
They offer fixed interest rates.
Interest rates come in two forms: fixed and variable. Fixed interest rates cannot change over the life of the loan. Variable interest rates can change at the discretion of the loaning institution. If you have a loan with a variable interest rate, your interest can go up — which means you’re paying more money to pay back your money!
They don’t charge fees to borrow.
Some unsecured loan issuers include what they call “origination fees” or “closing fees.” These are extra fees you pay in exchange for the privilege of taking out the loan. Lenders might also include “prepayment fees,” which are fees they charge if you pay back the loan early (because if you pay off the loan early, the loan companies lose out on interest).
You could consider these fees “the cost of doing business,” or you could look for personal loan issuers that don’t include these fees, which is what I did.
They’re backed by the Federal Deposit Insurance Corporation.
When you’re dealing with large sums of money, you want the FDIC to have your back. So I looked into each of our remaining seven lenders to determine if they were Member FDIC; two weren’t.
If an FDIC-insured bank fails, the FDIC will step in until a buyer for the deposits/loans is found. Payments would continue during that process. If your bank is purchased by another bank or merges with one, you’ll typically be unaffected. During the transition, you may need to change where you mail your payments or send your automatic, electronic payments.
Adam C. Hagerman
Financial Coach and Certified Financial Planner
This left me with four finalists.
Each of these institutions is a great place to begin looking for an online personal loan. Shout out to Wells Fargo, which has the qualities of a great personal loan issuer, but can only give them to non-members over the phone — its online application is available to people who are currently Wells Fargo customers.
I also gave Honorable Mentions to two private lenders that didn’t make the final five: Earnest and SoFi. These lenders fulfilled nearly all of the qualifications: low APRs, fixed interest rates, and no fees. However, since these two private lenders are not associated with banks, they are not Member FDIC. I still consider them worthy contenders for online unsecured loans, but be aware that you will not get the worst-case-scenario benefits of Member FDIC institutions.
Testing the Best Online Personal Loan Companies
I wanted an easy-to-use, informative website.
Online personal loans take place — obviously — online, and I evaluated each lender’s site on the following criteria:
- Was it easy to navigate?
- Was the loan process made clear before I began the loan application?
- Did the website provide additional resources to help me understand how taking out a personal loan would affect my finances?
- Were there any special features that made the experience stand out?
I really liked all four lenders’ websites, which clearly explained the process of taking out a personal loan. They all had thorough FAQ sections, and Discover had an entire article titled “Taking the Taboo out of Personal Loans” that explains the benefits of personal loans and helps put prospective loan shoppers’ minds at ease:
“But if you dive into the numbers, taking out a personal loan to pay for expenses like revolving credit card balances can make significantly more sense than the common back-up plan of continuing to put everything on multiple credit cards. You’ll trade multiple payments at multiple interest rates for one fixed interest rate and a single monthly payment.”
Discover even offered a monthly payment estimator tool that helps you plan how your monthly payment might change depending on your personal loan’s amount and term length. A $5,000 loan at a 36-month term with an 8.99 percent APR would include a $159 monthly payment; that same loan at a 72-month term would only require a $90 monthly payment. (Keep in mind, though, that a 72-month loan would accrue more interest than a 36-month loan, and in this example you’d pay nearly $700 more in interest if you chose the 72-month loan.)
LightStream also had a few special features that made the experience stand out. If you receive an unsecured loan at a lower rate from another lender, LightStream’s Rate Beat Program will beat that rate by 0.10 percentage point (terms and conditions apply, of course). LightStream also lists multiple ways in which people can use their unsecured loans, including adoption funding, wedding expenses, and — my favorite — tiny home financing.
Lastly, LightStream promises that it’ll plant a tree for every personal loan it grants.
All four personal loan issuers passed the website test, with extra points going to Discover and LightStream for their additional features.
The application process had to be fast.
Applying for a loan was the most important test of all. I ranked each application process, looking closely at:
- Was the application easy to complete?
- How long did I have to wait before learning my application status?
- Were there any additional steps involved, such as phone interviews?
I’ll give you a few Spoiler Alerts right now: Three of the Top Four lenders approved my application, and the fourth lender denied my application. The three approving lenders each gave me slightly different rates. Expect your experience with these lenders to include similar variations. I didn’t rank the lenders based on the rate they offered me; just because I got a lower rate with one lender doesn’t necessarily mean you’ll get a lower rate with that same lender. Instead, I gave the lenders pass or fail scores based on my experience during the application process.
All four application processes took only a few minutes to complete, and all four lenders also immediately followed up with the next step. Avant and Citizens Bank gave me their application decisions right away. LightStream and Discover asked me to call a loan specialist for a quick interview before they made their decisions.
I know that an interview with a loan specialist sounds nerve-wracking — and believe me, I did not want to make those calls — but the interview process was actually what convinced me to give Discover the “best overall experience” ranking.
LightStream’s loan specialist interview was short and simple. The loan specialist asked me to confirm my address, my income, and the purpose of the loan. Following the conversation, I immediately received an email from LightStream with my acceptance status.
Discover’s loan specialist interview was much more thorough. The loan specialist took the time to ask me questions about my debt, my income, the current interest rates on my credit cards, and my plan for paying off the cards. The loan specialist also advised me to apply for a smaller personal loan and pay off my 0.00 percent interest credit card before the promotional rate ran out, and really pushed me to consider whether a personal loan was the best solution to paying off my current debt. They were right — a personal loan really isn’t the best option for me, and the Discover loan specialist wanted me to consider that fact before making any decisions.
Although I believe that all four of these lenders provide excellent personal loan options, and I had no issues with any of their application processes, I have to note that Discover was the only lender to counsel me on whether a personal loan was the right choice. For this test, I gave all of the lenders a passing score and gave Discover a significant bonus.
And customer service had to be the very best.
If you’re planning to take out an unsecured loan, you probably have a lot of questions. (If you don’t have a lot of questions, you might not be thinking carefully enough about what you’re planning to do.) I hope I’m answering many of them, but I also know you might have a few questions specific to your unique financial situation. If that’s the case, you’re going to need to contact customer service, and you’re going to want that interaction to go as smoothly as possible.
I contacted each of the top four candidates’ customer service departments. I asked them all the same question (“If I apply for a personal loan, will you do a hard or a soft pull on my credit report?”) as well as a few questions specific to each application process. I evaluated the lenders as follows:
- Was it easy to reach the lenders?
- Did I have to wait very long (on hold or over email) to get my answers?
- Were the answers thorough and understandable?
Avant customer service is reachable through a form on the Avant website as well as through its 800 number. I got nearly immediate responses via both email and phone with thorough answers to my questions.
Citizens Bank customer service is also reachable by email or 800 number. I received an email response the next day with lots of information. However, the phone call was less successful. Its phone tree included options to apply for a personal loan or to check the status of a pending loan application. There was not an option to ask general questions of a representative. I tried pressing 0, but nothing happened.
Discover does not offer customer service via email, but they can be reached by phone. I waited on hold for nearly three minutes before being connected to a representative, but once I was connected, the representative answered my questions well.
LightStream does not offer customer service via phone, but there is a customer service form on the LightStream website. When I asked a question via the form, I got a nearly immediate email response with thorough information.
All four lenders received a passing score on the customer service test, with a bonus to Avant because it was the only Top Four lender to provide two successful methods of contact.
5 Things to Know Before You Start Personal Loan Shopping
Your Current Debt Load and Interest Rates
The best unsecured loans offer less than 10 percent APR to their best customers. However, that number doesn’t mean anything unless you know your current debt load and the interest rates you’re paying on that debt.
Let’s use my current debt load as an example. Right now I have:
- $2,591.36 on a Commerce Bank card at 9.24 percent APR
- $3,797.23 on a Discover card with a 12-month 0.00 percent APR promotional interest
- $4,000 outstanding on a zero-interest loan from my parents
This means that, in my case, I need a personal loan that can beat the 9.24 percent APR on my Commerce Bank card. If the personal loan charges higher interest, it is not to my financial benefit to take out the loan.
Likewise, it makes no sense to take out a personal loan to pay off my zero-interest debt (thanks mom and dad!). If something happens and I am unable to pay off my 0.00 percent APR Discover card by the end of the year, it might make sense to consider a personal loan as a debt-consolidation tool next year, depending on the new interest rate on the Discover card.
However, it’s my goal to be debt-free by the end of the year. I’m currently putting 20 percent of my income toward debt repayment and I am knocking those balances down month by month. In my case, taking out a personal loan with a repayment term longer than one year might keep me in debt longer.
These are the kinds of factors you should consider before you take out a personal loan. Ask yourself:
- What is my current debt burden?
- What interest rates am I paying?
- How long do I think it will realistically take me to pay off this debt without a personal loan?
Knowing the answers will help you make smart choices about which loans to pursue and which ones to ignore.
This applies to personal loans for bad credit, too. You probably aren’t going to get that coveted less-than-10-percent APR, but if a reputable lender offers you an APR that’s lower than the interest rate you’re currently paying on your credit cards, it might be a good loan for you. Just remember to read all of the terms and conditions carefully and know exactly how much you’ll be paying, how long it’ll take you to repay the loan, and how much interest you’ll be charged before making your final decision.
The Difference Between “Soft Pulls” and “Hard Pulls”
When you apply for an unsecured personal loan, the loan company checks your credit score in one of two ways: a “soft pull,” which does not affect your credit score; and a “hard pull,” which might affect your credit score.
I reached out to each of my top four lenders to confirm whether the companies did soft or hard pulls as part of the application process.
Hard Pull: Citizens Bank, Discover, LightStream
Soft Pull: Avant
If you’re worried that applying to multiple personal loan issuers at once will look bad on your credit report, rest assured that in many cases the hard pulls will be treated as a single inquiry:
If the hard pull is through a bank or a credit union, then the inquiries are not treated as individual searches for credit. Certain types of inquiries that are within 45 days of each other are counted as one. The assumption is you’re interest rate shopping.
Credit expert, formerly of FICO and Equifax
Also, keep in mind that the hard pull on your credit isn’t going to significantly drop your score. I can’t give you an exact amount because it’s going to be different for everybody, but your score might go down by 3-5 points for a little while. Keep practicing good credit habits and you’re likely to see it rise again.
Avoid Payday Lenders
You’ve probably seen those “payday loan” commercials on TV or driven by payday loan businesses in strip malls. It turns out that payday loan companies are online too, and they are ready to take your money at ridiculously high interest rates.
Slimy payday and hard money lenders charge outrageous rates of interest. They sneak in weird fees and harshly unreasonable consequences for late payments or other infractions. Read the terms and conditions carefully and count the gotchas.
Founder, Debt-Proof Living
I did not consider payday loan companies when I created my list of personal loan contenders, and I would urge you not to consider them either. The Simple Dollar has written about the dangers of payday loans before:
You could pay $10 to $30 to borrow just $100 with a typical two-week payday loan, according to the Consumer Finance Protection Bureau. In fact, the average APR is just shy of 340 percent.
But wait: The payday lender will let you simply pay the interest and roll over your loan so you can get more cash. Sounds nice, but many borrowers become dependent on the payday loan, rolling it over indefinitely since they can’t afford to pay back the principal. A quarter of borrowers owe payday lenders for 80 percent of the year, the CFPB has found.
Consider Loan Matching Services If You Want Help Finding a Lender
A lot of people use what are called “loan matching services” to apply for unsecured loans. These are sites like Lending Tree or Guide to Lenders, which take your application and then give you a list of lenders willing to offer you a loan.
I did not include loan matching services when we reviewed personal loan contenders because I wanted to focus directly on companies that provided loans, not companies that helped match you to loans. If you decide to use a loan matching service, examine the matching lenders carefully before accepting a loan. Use the criteria I’ve set out — low APR, no fees, fixed interest, and reputability — to determine whether a matched lender is a good choice for you.
Don’t Forget Your Local Bank or Credit Union
Sometimes the best unsecured loan is the one offered by your local bank or credit union. If you’ve already built a relationship with a bank, it may be more likely to offer you a low interest rate on an unsecured loan. Check your local bank or credit union’s website to see if it offers personal loans, and remember the four criteria you’re looking for: low APR, no fees, fixed interest, and reputability. If a local bank or credit union is offering no-fee unsecured loans with fixed interest rates below 10 percent APR, consider giving it a try.
Is a Personal Loan Right For You?
At this point you have a lot of information about personal loans, as well as the online personal loan process. You probably also have a few remaining questions about whether a personal loan is really the right choice for you. I did too, so I reached out to a group of financial experts to get some answers.
When should I take out a personal loan?
As a financial coach, I’m not the biggest fan of using personal loans to purchase items unless it’s an immediate need and you have no other option to finance it. For example, if your refrigerator breaks and your options are to either purchase a new one using a store card with an interest rate of 22.9 percent or take out a personal loan at 12.9 percent, I’d obviously suggest the personal loan. A nice feature of a personal loan is that it’s an installment loan. That means you’ll have a set time period to pay it back and cannot access additional credit once you begin paying it down. If you’re someone that sees available credit and immediately wants to spend it, a personal loan is an attractive option.
Adam C. Hagerman
With any consumer borrowing vehicle, it’s important to be extremely cautious. Holding no or low consumer debt is a pillar of financial wellness and paying off high interest debt can be your best investment. Ask yourself these questions if you are considering taking out a personal loan:
Do I have any other sources of funds to meet this cash flow need besides borrowing (e.g., selling something, taking a side gig, cutting expenses, etc.)?
What is the interest rate on the loan, and is it fixed or variable? Personal loan rates are often higher than a home equity line of credit rate, but for those with good credit can be favorable to credit card rates.
Is the lender reputable? Have I heard of them before, or do I know someone who’s used them?
Can I negotiate the expense? For example, personal loans typically come into play when borrowers have run out of options and need cash quickly, such as for a medical emergency or taxes. Ask if you can negotiate a payment plan for those medical expenses or an unexpected tax bill.
Author of What Your Financial Advisor Isn’t Telling You
Founder and CEO, Financial Finesse
Which debt is better: a personal loan or a credit card?
Typically, a personal loan is a smarter choice because many of them have fixed interest rates. A majority of credit cards have variable rates, which could increase without warning over time. If you’re looking for consistency, a personal loan may be a wiser choice.
Adam C. Hagerman
This isn’t even a fair comparison. The personal loan wins hands down because the debt has almost no impact on your credit scores. And, with a personal loan you’ll have a much shorter payback period than with a credit card.
Can I use a personal loan to pay off my credit card debt?
You’ll see your credit scores improve, considerably, when you pay off credit cards with a personal loan because you’re converting score-damaging revolving debt to score-benign installment debt.
Most personal loans I see stem from credit card consolidation. If a personal loan can reduce your interest rate and help you secure a payment that can give you some breathing room in your budget, I’d say go for it. However, before you do, you need to address the reason you got into debt in the first place because I don’t want to see you continue to accumulate more. By paying off credit cards with the loan, you’re left with available credit. If you don’t address your spending issue, you’ll now have the personal loan, plus credit card debt. In that example, the loan only made matters worse.
Adam C. Hagerman
What if I have bad credit?
You want to start with the banks that offer the best rates. If you just assume that you’re going to get a bad rate, and only shop at high-risk lenders, I guarantee you’ll get one. Instead, start with the banks that have the best rates and call them up to see if they offer loans to individuals with your FICO score.
Adam C. Hagerman
Your options are more limited because you’re a higher risk borrower. You can certainly apply with the mainstream lenders, but even if you’re approved, your rates are going to be considerably higher.
What might stop me from getting approved?
There are a number of factors that could prevent you from getting a personal loan. If you don’t pay your bills on time or have too much debt and haven’t paid it down, chances are good that a bank won’t be too interested in giving you money. If you don’t have a history of using credit, you may need to have someone cosign a loan with you to get established.
Adam C. Hagerman
How can I tell if a loan company is reputable?
Some loans are covered by consumer protection laws and some are not. Do your research before you sign. Sites such as Bankrate, CreditKarma, and Credit.com can help you gather basic information about what’s available. Check out the FDIC website for general information about banks. Most importantly, check out the lender in the Consumer Financial Protection Bureau’s Complaint Database and see if it is rated by the Better Business Bureau.
The best online personal loans have four key criteria — no fees, low APR, fixed interest, and reputability — and I found four lenders that hit all the marks: Avant, Citizens Bank, Discover, and LightStream. Your individual acceptance and interest rate may vary, but if you’re applying for personal loans, start here.