Small personal loans: when to get one and when to stay away

Peter Warden
Peter Warden
The Mortgage Reports Editor
July 22, 2019 - 5 min read

Small personal loans perfect fit for small personal financial crises

Some financial gurus have a zero-tolerance approach to all borrowing except mortgages. And we’d all like to take their advice.

Nobody likes getting into debt. But, for most Americans, life’s not like that. It throws us a curveball (the water heater gives up, the car won’t run, we get an unexpected medical bill ...) and we’ve little choice but to borrow.

Some go for payday loans. Some ramp up their credit card balances. But those who know about money often opt for small personal loans.

*TheMortgageReports and/or our partners are currently unable to service MA & NV

Study: Most people don’t have much in savings

“Four in 10 adults, if faced with an unexpected expense of $400, would either not be able to cover it or would cover it by selling something or borrowing money,” says a Federal Reserve study in 2018.

True, some of those may be making a choice to keep their savings intact.

But a later survey, reported by CNBC, found “Just 40 percent of Americans are able to cover an unexpected $1,000 expense, such as an emergency room visit or car repair, with their savings.” In other words, the majority of us simply don’t have $1,000 stashed away for emergencies.

While the ultimate goal is to build an emergency fund, small personal loans can help you through tight situations until you get there.

*TheMortgageReports and/or our partners are currently unable to service MA & NV

What are small personal loans?

Personal loans are unsecured installment loans. That means you do not have to put your home directly on the line (as you would with a second mortgage) and you pay back your loan in equal monthly payments over an agreed fixed term.

So you can spread your payments so as to make them easily affordable. And you know exactly where you stand from day one, making your budgeting simple.

The “small” in small personal loans is relative. People often borrow $50,000 or even six figures with big ones. But small ones typically have a floor of $1,000 or $2,000, depending on the lender.

LightStream and LendingClub currently offer $1,000 personal loans. You might find one willing to go lower (credit unions sometimes do) but you’ll have to hunt around to find one.

Why minimum loan amounts?

These floors exist for three reasons:

  1. Administrative costs for lenders are pretty much the same for setting up small and big loans
  2. Lenders charge borrowers relatively little (sometimes nothing) in set-up fees (a.k.a. “origination” fees)
  3. Personal loans tend to have lower interest rates than most other sorts of borrowing, like credit cards

Taken together, those three mean lenders make nearly all their money on interest payments. And small borrowers pay little in the way of interest. To avoid making losses, lenders typically impose floors and charge somewhat higher rates on small loans than big ones. Alternatively, they may charge higher origination fees.

Finding small personal loans

We already mentioned talking to your credit union, if you’re a member of one, about your small loan needs. Or you could try your bank.

But, as with all borrowing, it’s a good idea to get competitive quotes from other lenders. That makes sure you end up with the best deal possible. And often the easiest way to compare is to get multiple quotes online.

*TheMortgageReports and/or our partners are currently unable to service MA & NV

Are small personal loans always cheaper?

Personal loans aren’t always cheaper than other borrowing. And, as of this writing, several lenders were offering them with interest rate ranges that topped out at 35.99% APR. Not exactly cheap.

But only borrowers who were highly risky and who had pretty grim credit scores would be likely to pay that. And, if you’re an excellent borrower with a stellar credit score, you might be able to find a personal loan with a rate below 6% APR.

So small personal loans aren’t always the cheapest — although it’s hard to imagine a scenario where they cost more than a payday loan. However, suppose you’re paying about 18% APR on credit cards and you find a personal loan at 8% APR.

The tool with which you should borrow becomes obvious.

Small personal loans can boost credit scores

Credit scoring technologies such as FICO and VantageScore deal differently with borrowing on personal loans and plastic.

When you apply for a personal loan, your score will take a tiny hit just for the application. But it should soon recover as you make on-time payments.

It might even get a boost because scoring systems reward you for having a good mix of “revolving” (mostly store and credit cards) and “nonrevolving” (installment loans) accounts.

A small personal loan is an installment account and can round out your credit picture.

Credit (ruining) cards

But those scoring technologies hate it when you run up balances on your plastic. And every month your balance(s) exceed 30% of your credit limit(s), your score will take a serious hit. Indeed, the closer you get to maxing out a card, the worse the monthly hit. So, if your emergency pushes any balance above that magic 30% level, all your efforts to improve your score and rebuild your credit will count for nothing.

Indeed, if your card balance(s) are already above that 30% mark, you may want to think about taking a bigger personal loan so you can reduce them and also cover your emergency.

Related: How to use a personal loan for debt consolidation

How to avoid small personal loans

We started off telling you about those financial gurus who take a zero-tolerance approach to all nonmortgage borrowing. Often they’re not very likable. They take an absolutist, puritan approach to money that’s hard to reconcile with 21st-century life.

Trouble is, they’re right. Nearly everyone can organize their financial lives so they never have to borrow. And that can remove a lot of stress.

Better yet, it can see you end up with more of the good things in life because you hand over less of your earnings to lenders in interest and fees.

If your latest emergency has made you feel vulnerable and in need of a long-term fix for your finances, you could see it as a trigger for a new life.

You could set up a household budget and make your first goal the establishment of a worthwhile emergency fund. That should be one that could see you through months of sickness or unemployment as well as unexpected expenses. If you want this small personal loan to be your last, learn how to set and stick to a budget here.

Apply for a small personal loan online

Thanks to today’s emphasis on online financial tools, most personal loan lenders allow for online applications.

At the link below, you can apply and often receive an approval the same day, and receive funds in as little as 24 hours.

*TheMortgageReports and/or our partners are currently unable to service MA & NV

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