Known for their flexibility, personal loans can be taken out for a number of reasons – dealing with heavy credit card debt, paying for expensive roof replacement, and more.

Unlike credit cards or home equity lines of credit, you take out a loan for a fixed amount and have to pay it off in fixed monthly payments at a fixed interest rate. This rate can vary considerably between 5 and 36%, depending on your creditworthiness.

In general, the better your credit rating and credit history, the lower your rate. But in 2020, banks have increased their loan requirements, making it even more difficult for people with bad credit or limited credit history to get a loan.

Why is it more difficult to get a personal loan?

Lenders use your income, employment status, credit history, and credit score to determine the likelihood of you paying off the loan or failing to do so. This risk is reflected in your interest rate. If you have no debt and have already paid your bills on time, you have access to better rates. Conversely, if you don’t have a credit history or have had debt problems, your rate will likely be higher or you may not be eligible for the loan at all.

Anuj Nayar, head of financial health at LendingClub, suggests comparing rates when considering the trade-off between a personal loan and a credit card. “Any [personal loan interest] a rate lower than the rate you are paying on your credit card is better than what you are doing now, ”he says. (Borrowers should also consider other upfront costs for personal loans, such as origination fees.) The average credit card interest rate is currently around 16%, and it typically ranges from 14-26%. .

Even if you’ve been recently made redundant, have significant credit card debt, have filed for bankruptcy in the past, or have a credit score below 600, there are options that could make you a winner. more attractive candidate for the lender – namely, secured loans and co-signers.

However, keep in mind that many lenders have tightened credit conditions in light of the pandemic and its negative impact on the economy. LendingClub, for example, has refocused its efforts on existing customers and improved income and employment auditing standards. The pool of potential applicants for a personal loan has grown as the economy has contracted, creating a difficult climate for potential borrowers.

Secured loans

Secured loans require some form of collateral, often a major asset, to be approved for a loan. The collateral can be your house, bank accounts or investment accounts, or your car, depending on the lender’s requirements. This will require more paperwork and more risk on your part because if you default on your loan, the lender can take possession of this collateral.

The tradeoff is that the lender will feel more comfortable extending an offer and may give a better rate than if the loan was unsecured. Most loans are unsecured, which comes with faster approval times, but usually higher interest rates and tighter credit requirements.

These types of loans may take longer to process, as it requires the lender to verify that you own the collateral. In the case of a house or real estate, a discounted appraisal may be necessary to determine the equity value of the collateral.

Cosigners

If you don’t own any major assets, or at least none that you want to put as collateral, then getting a co-signer is an option. A co-signer is a secondary borrower with a good credit history who can qualify you for the personal loan, which you would be responsible for repaying. Co-signers can increase your chances of loan approval and your chances of getting a lower rate because more information is given to the lender, who may be reluctant to give money to someone with no or no credit history. credit history.

Co-signers are not entitled to the loan money and have no visibility into payment history. However, they would be at the mercy of the loan if the borrower cannot or does not make payments. This is one of the reasons why it is important to determine your loan repayment plan before applying for a loan. If you are not sure if you can repay the loan, you and your co-signer will lose your credit rating.

Alternatives to personal loans

What if you can’t get a personal loan or the interest rate offered is too high to be worth it? There are more options in the market than personal loans, such as peer-to-peer loans, small business loans, and payday advances. Here are two common alternatives to personal loans: promotional rate credit cards and HELOCs. We find these two options the most accessible to the average borrower, although these options, like personal loans, favor applicants with good credit scores.

Credit cards with promotional rates

Many credit cards will offer an introductory 0% APR period on purchases and balance transfers for 12 to 15 months. Provided you make at least the minimum payments on time, you will not be charged any interest for the entire period, after which the interest rate will revert to the regular purchase or balance transfer APR, which will likely vary from 14 to 26% depending on your creditworthiness. You may also need to pay a percentage on any balance you transfer, possibly between 3% and 5%.

If the math works in your favor, these credit cards are useful for transferring debt from high interest cards and saving interest.

Credit limits also tend to be reasonable. “If you’re looking for something to fill yourself up over the next six months, the lines of credit on these cards can be around $ 10,000 to start with,” says Farnoosh Torabi, financial reporter and host of the “So Money” podcast. “If you can pay [the balance] in this period of time, it is a great alternative. “

However, it’s important to keep the limits of these promotional rates in mind, as some cards will charge you interest retroactively if you haven’t paid off the balance at the end of the introductory period. As in all situations, we recommend that you read the fine print before opening a credit card.

HELOC

If you own a home, you may be able to tap into the value of your home with a Home Equity Line of Credit (or HELOC). Torabi likens a HELOC to a “big credit card limit” in that it is a revolving line of credit where you can borrow as much or as little as you need, and it is not a loan. Like loans, however, HELOCs can be used to finance large expenses or consolidate other forms of debt.

Interest rates – usually variable – tend to be lower than credit cards, ranging from 3% to 20%. However, Torabi recommends caution around a HELOC because the collateral is your home. There’s also the fact that big banks, such as Bank of America and Wells Fargo, have tightened lending standards around HELOCs amid the COVID-19 pandemic.

“Banks aren’t as generous with HELOCs right now, because they know that if you go bankrupt or can’t make your payments, you’re likely going to default on your HELOC and your primary mortgage. So they have very high standards for who can borrow against their home, ”says Torabi.

Ultimately, you’ll have to weigh the risk yourself and see if the low interest rates and flexible line of credit would allow you to make payments on time.

How to improve your credit

Do you see yourself asking for a loan down the line? Whether or not you need to apply for a loan in the future or research loan alternatives, basic credit health should always be kept in mind. Here are some ways to increase your credit score and become a better candidate with lenders.

Make your payments on time

One of the biggest factors in your credit is your payment history. Are you paying your credit card on time and in full? Are you making at least the minimum monthly payments? In the mind of the lender, an irregular payment history translates into a risky borrower.

If you are having difficulty paying bills or loans, we recommend that you contact your creditors and apply for some sort of accommodation – deferred payments, lower interest rates, a way to relax the requirements. Many major banks, credit unions, credit card companies, and loan providers have responded to COVID-19 with financial assistance programs to help you if you’re having trouble. A formal accommodation from your creditor will also help your credit history, as your payment status will be read as current, even if a payment has been canceled for a month.

Keep credit cards open

Credit scores take into account how long a credit card has been held, so think twice before closing credit cards. Even if you’re upgrading to a better credit card, consider keeping the old one open and paying occasional payments to establish a history of liability. A scattered history with credit cards can get in your way and lower your credit score.

Apply for a higher credit limit

The major credit rating companies (FICO, VantageScore) rely heavily on “credit usage,” or the amount of available credit used, as a factor in your credit score. The lower the ratio, the better – meaning the $ 500 balance reflects better on a credit card with a $ 10,000 limit than a $ 5,000 balance (usage rate of 50 %). Experts generally recommend using less than 30% of your available credit at all times.

Review your credit reports

Due to the COVID-19 pandemic, you can now get free weekly credit reports through April 2021 from the three major credit bureaus (Equifax, Experian, and TransUnion) at AnnualCreditReport.com. In your credit report, you’ll see the payment history for each loan or credit card you’ve taken out, as well as rent and bill payments if you’ve gone with your creditor. Consult the report for any discrepancies or inaccuracies. You have the right to dispute any errors and have them removed.