A small personal loan is an excellent fund source for short-term needs. Some lenders may inquire what you intend to do with the funds, while others may want to ensure that you have the means to repay it. Small personal loans are not cheap, but they may be a feasible alternative in several situations. Here are a few things you should know before applying for one.
What are Small Personal Loans and How Do they Work
A small loan is a personal loan that people take out when they need money fast, such as finishing a project or making an emergency purchase.
There is no statutory definition of a "small personal loan," although it typically refers to $3,000 or less.
Small loans are typically unsecured, which means you don't have to submit collateral like your home or car to get approved.
Unfortunately, smaller loans – or those taken out for a shorter period – typically carry considerably higher interest rates than higher sums borrowed over more extended periods.
Each lender is unique and may have its own set of loan conditions, interest rates, and fees. Rather than leaping at the first loan you see, it is better to shop around and evaluate multiple personal loan providers before selecting which one to apply with. Read our handy loan-comparing tips to learn more.
How to Apply for a Small Personal Loan
Fortunately, qualifying for a small personal loan is just as simple as applying for a larger personal loan. Again, each lender will have different requirements for applying. Lenders will almost certainly ask for your income source, a credit check, and access to your bank account.
Many credit unions are eager to assist members in need of a small personal loan. Some credit unions also provide members with payday loan options. Banks provide personal loans as well. However, they may be less likely to provide small personal loans.
Before you pick a lender, find out whether there are any prepayment penalties if you pay off your loan early. If there is a prepayment penalty, the contract should state it.
What's the Interest Like on Small Personal Loan?
The interest rate on a small loan is usually expressed as an APR (Annual Percentage Rate) (APR). This is the annual cost of borrowing the money, including any fees, expressed as a percentage.
For example, If you took out a $1,000 loan and paid it back over a year at a 10% APR, you would ultimately pay $1,100.
The APR provided will be determined by your credit score, and individuals with a lower credit score will frequently find borrowing to be more expensive. This is because lenders consider consumers with a low or bad credit score to be riskier. If you want to build out your credit, see how personal loans improve your credit score.
What Are Some Alternatives to Small Personal Loans?
A small personal loan may be the most cost-effective option to meet your costs if you have excellent credit. If you don't, loans may not be the ideal method to borrow, and you should look into your alternatives.
Credit card debt, for example, might be costly to repay but may have a lower interest rate than a personal loan. You won't have to wait for the funds to be disbursed or pay an origination charge if you use your credit card.
You may also consider getting a new credit card with a 0% annual percentage rate (APR) on purchases, which would allow you to borrow money without paying interest during the promotional time.
A small personal loan may be a suitable alternative if you need instant cash. If your credit is in good standing, you may be able to get a small personal loan with a lower APR and costs than other credit products such as payday loans or credit cards.
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