Loans

Personal loans are a good idea when you have a clear purpose in mind. For example, the top personal loans can provide you with the funds you need to repair or remodel your home, cover an emergency expense, or consolidate debt. As with any debt, personal loans are not a good option if you're not sure how you'll pay the money back, or you're borrowing for something you don't actually need.

If you need the proceeds from your personal loan quickly, look for a loan with streamlined approval. This will limit the time you have to wait for funds to be deposited into your bank account. If you run into a financial roadblock, a personal loan can help you over it, even when you need the cash fast.

A debt consolidation loan can save you money and time. Here are three other main benefits:

1. Save money. Most debt consolidation loans have a lower interest rate than credit cards. Many people can save hundreds or thousands of dollars with a lower interest rate. Plus, if you have a lower interest rate, you'll likely also have a lower monthly payment.

2. Simplify debt payments. Consolidating multiple debts into a personal loan means you'll have fewer bills to juggle. Also, you'll know exactly how long it will take to pay off your debt -- for example, if you get a five-year loan, you'll pay off your debt in five years.

3. Improve credit score. One of the best ways to improve your credit score is by paying off debt.

There's a wide range of personal loan options available, and that's why it's so important to know how to identify the loan that will benefit you the most. Whether you enjoy excellent credit or are specifically looking for a loan for borrowers with poor credit, at their core, the best personal loans have three things in common. 

Low interest rate

The lower the interest rate, the more money you save in total.

Let's say you need to borrow $20,000 to replace the roof of your house, and you're planning on getting a loan with a 5-year term. You're considering two options: Lender A and Lender B. Below, we've summarized these two imaginary lenders and how their interest rates would impact the cost of your loan. As you can see, even a small percentage change can result in significant savings.

Lender A

• Interest rate: 5.5%

• Monthly payment: $382

• Total interest paid over the life of the loan: $2,921

Lender B

• Interest rate: 6.9%

• Monthly payment: $395

• Total interest paid over the life of the loan: $3,705

The higher interest rate will only cost you an extra $13 per month, but that small difference amounts to $780 over the life of the loan. For more information, check out our guide to good interest rates for personal loans.

Loan terms that work for you

A loan term is the period of time you have to repay the loan. The longer the loan term, the lower your monthly payment -- but the more you'll pay in interest overall. Look for your personal loan term sweet spot. The shortest term with the most affordable payment is your personal loan sweet spot.

Low fees

The best personal loan rates mean little if they are coupled with expensive fees. The best personal loan lenders won't charge an origination fee (or a very low origination fee) and keep other expenses -- like prepayment and late fees -- to a minimum.

For example, many lenders charge origination fees to cover the cost of processing and distributing your loan. Origination fees range from 1% to 8% of the amount you borrow. Using the scenario above, if you borrow $20,000 to replace a roof, that means you could pay between $200 and $1,600 in origination fees alone.

Most financial decisions, including personal loans for debt consolidation, have pros and cons. Here are some drawbacks of personal loans for debt consolidation.

Temptation to go into more credit card debt. If you use your loan to pay off your credit cards, you may be tempted to use those cards again, leaving you with a consolidation loan and credit card debt.

Not reading the fine print. The wrong loan can end up costing you money in interest or fees. Make sure you understand all the costs involved and don't inadvertently put yourself in a worse situation. A high origination fee, late payment fees, and prepayment penalty will each take money out of your pocket.

There's also a unique risk with one type of loan: a secured loan. If you take out a secured loan, you'll need to put up collateral, such as your house or your car. You risk losing that collateral if you miss payments. An unsecured loan won't require collateral. To avoid the risk of losing your home or your car, consider unsecured debt consolidation loans first.

The loan application process is much easier if you prepare in advance. Whether you want to work with a traditional bank, credit union, or peer-to-peer lender, here are the steps to take:

1. Check your credit score. The higher your score, the better the personal loan rates and terms you will qualify for. There are several ways you can check your score for free. Make sure you look at your FICO® Score as that's used by the majority of lenders. You might also want to look at your credit report to see what the three three credit bureaus -- Experian, TransUnion, and Equifax -- have on record.

2. Improve your credit score. If you can get by without a personal loan in the short-term, take time to improve your credit score. It could save you thousands of dollars as you'd be able to access the very best loan rates. As many as 1 in 5 people find errors on their credit reports that draw their credit score down, so the first step toward improving your score is to go over your credit reports with a fine-tooth comb. You can also increase your score by paying down credit card debt to reduce your credit utilization, always paying your bills on time, and being careful when you apply for new credit.

3. Find a loan that meets your needs. For example, if you need $2,000 for car repairs, look for a lender that offers small loans. If your credit score is still not-quite-perfect, look for lenders that specialize in personal loans for fair credit.

Yes, you can get a debt consolidation loan if you have bad credit. Here are a few extra steps you can take to increase your chances of getting approved:

1. Check your credit reports for errors. Mistakes can drag your score down. To get started, order a free copy of your credit report from each of the three major credit bureaus. Then, read through each record carefully. If you find a mistake on your credit history, report it to the credit bureau.

2. Get pre-qualified with multiple lenders. Getting pre-qualified doesn't affect your credit score (usually -- always ask your lender to confirm, though). By getting pre-qualified, you can find out whether or not a lender will offer you a loan.

3. Consider secured debt or getting a cosigner. If you're having trouble getting approved for a loan, look into secured loans (loans that require collateral) or asking someone to cosign your loan. Doing one (or both) of these things can make it easier for you to get approved for a debt consolidation loan.

For more information, check out our list of best personal loans for bad credit.

The best personal loan lenders can provide a great way to borrow money affordably, but they are not the right choice for everybody. Depending on your circumstances -- for example, if you need money to fund a project or pay an unexpected expense -- you may want to look at other options. Here are two alternatives to personal loans:

Credit cards

A credit card can provide fast cash in an urgent situation. If you qualify for a 0% APR credit card, you have months (sometimes between 12 and 18) to pay the debt off with no interest. Avoid using a credit card with a 0% transfer offer if you're not confident you can pay it off in full before the promotional rate expires. At the end of the promotional period, the interest rate will shoot up to its standard rate.

Secured line of credit 

A secured line of credit can help you snag the best rates for personal loans. Secured loans often charge a lower interest rate because you put something of value up as collateral. It may be anything of value, such as your car, home, boat, or jewelry. A line of credit offers greater flexibility. You can borrow up to your credit limit, depending on what you need, and you'll only pay interest on the amount you borrow.

Personal loans for debt consolidation can be a great way to meet your financial goals, but they're not the only option for paying off debt. Here are some alternatives to a debt consolidation loan:

Balance transfer credit cards

A balance transfer card offers a promotional rate, such as 0% APR for a set time period (typically 12 to 24 months). You apply online, give the new credit card company a list of the balances you want to be transferred, and wait to hear back from them. Transfer fees usually range from 3% and 5% of the balance transferred. But beware: The card's interest rate will rise dramatically as soon as the promotional period expires. You should plan to pay the card off in full before then.

Home equity loans

If you owe less on your home than it's worth, that means you have equity and can borrow against it. If you use a home equity loan for debt consolidation, you'll owe your mortgage lender instead of your other creditors (like credit cards). The interest rate might be lower on a home equity loan than you'd pay on a credit card or personal loan. The danger is that you could lose your home if you miss payments.

401(k) loans

While the best move with a 401(k) plan -- or any other retirement plan -- is to leave it alone and let it grow, some plans do allow for borrowing. You don't have to worry about your credit score when borrowing from your 401(k) because no credit check is required. A 401(k) loan generally lets you borrow 50% of your 401(k) balance or $50,000, whichever is less (with some exceptions). When you take out a 401(k) loan, you pay interest to yourself by putting your interest payments back into your retirement account. However, if you don't pay back the loan within five years, you will owe income tax and a penalty of 10%.

Personal loan pre-qualification or pre-approval allows you to get a sense of what loan terms are available. Most pre-qualification processes use a soft credit check, which won't impact your credit score. If you qualify, lenders will let you know how much you can borrow, the interest rate you will be charged, and how long you'll have to repay the loan. You can use this information to compare personal loans. If you do not qualify, you can learn what you need to do to improve your odds of getting a personal loan.

Yes, if consolidating means snagging a lower enough interest rate to save money. It's a great way to pay off existing debt.

If you find yourself worrying about how you're going to repay credit debt, a debt consolidation loan can help. From the time a lender approves your consolidation loan, you will know precisely the repayment term and when it's due to be paid off. If you're busy like most people, having one installment loan to pay can simplify your life. Rather than making sure each credit card payment is sent, writing a check for your auto loan, and double-checking that all other bills are covered, you pay a single monthly payment. And if you're a small business owner, a debt consolidation loan can pay off business debt.