The Balance’s Guide to Loans & Loan Rates
How do loans work?
A loan is an agreement with a lender in which you receive money now and agree to repay the funds later. To compensate the lender for the money they provide, you will usually repay more than you received. That compensation might be in the form of fees and charges you pay at the beginning or interest payments you pay over time. And often both.
What credit score do you need for a loan?
The short answer is that you don’t need a credit score for a loan if you’re willing to pay a high enough interest rate. Payday lenders and others will lend you money without checking your credit score—for a price. But to get affordable rates, you will need a decent credit score. According to the credit bureau Experian, 670 is a “good” credit score. At that level, you should expect to be approved for loans when you apply, but the best rates and terms will be reserved for borrowers with higher scores.
How long does it take to get a loan?
The time it takes to get a loan depends on three things: How long it takes to apply, how long it takes the lender to approve the loan, and how long it takes the lender to get you the funds. Generally speaking, online lenders will have the fastest application process, while banks and credit unions will be able to fund the loan quicker. For personal loans, expect anywhere between one to several days, depending on the institution and your financial needs.
How can you get a loan with bad credit?
You can get a loan with bad credit, but it’s hard to get a good deal. That means you’ll have to shop around. Try credit unions, online banks, and peer-to-peer lenders. If you have family members with better credit scores, you can ask them to be a co-signer. If you have assets—cash, a car, a home—you can use them as collateral to secure the loan. Finally, shop carefully; some unscrupulous lenders target people with bad credit and offer expensive loans that make matters worse.
How many loans can you take out?
A better question to ask is: How much money can you borrow? When you apply for a loan, lenders want to know if you have enough income to support your debt obligations—existing and new. They use a ratio of debt-to-income (DTI ratio) to understand how much more debt you can afford. If your DTI is under 10%, for example, you’re likely to be approved. But once your DTI reaches 43% or higher, you’ll have a harder time convincing a lender you’re a safe bet.
Annual Percentage Rate (APR)
An annual percentage rate (APR) is the interest rate you pay each year on a loan, credit card, or other lines of credit. It’s represented as a percentage of the total balance you have to pay.
Collateral represents some type of property that you own that you offer as security in order to obtain a loan. The item you offer should have value, and it is something the lender can repossess if you don’t make payments.
Loans that are approved without the need for collateral are unsecured. Personal loans are a type of unsecured loan.
A secured loan is when a lender requires you to use a piece of property, an asset, or money as collateral to get funding. Mortgages and auto loans are types of secured loans (the home or the car themselves are the collateral).
Credit refers to your borrowing capacity. It's based on your history of paying back your debts, and it defines how much cash you are able to borrow or your access goods and services.
Installment loans are loans that you repay with a series of monthly payments. They typically have a fixed interest rate, and each monthly payment is the same. Fixed-rate home and auto loans are the most common types of installment loans, but personal loans, student loans, and other types of loans are also forms of installment debt.
If you borrow money from a lender, the loan principal is the original amount of money you borrow and must repay. In addition to the principal, you may also have to pay interest charges and other fees.
When you prequalify for a loan, a lender gives you a general idea of how much you might be able to borrow and with what terms. With prequalification, you provide your personal financial information, and the lender uses that to produce a quote for a loan amount and interest rate.
A loan term is the length of time it will take for a loan to be completely paid off when the borrower is making regular payments. The time it takes to eliminate the debt is a loan’s term. Loans can be short-term or long-term notes.
An origination fee is charged by a lender to cover the costs of processing a loan. It may be used to pay for preparing documents, processing your application, or underwriting your loan.
An interest rate is a percentage that describes how much a borrower will be paid for a loan. It's often quoted as an annual rate, but depending on the situation, interest can be quoted and calculated in a variety of ways.