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There are many ways to get a small loan, even if your credit isn't in great shape. But not all small loans are created equal, and some are much more expensive than others.
If you need a little cash but don't know where to look, it's important to keep a few things in mind as you begin your search and compare your options. Here's what you should know about where to get a small loan.
What Is a Small Loan?
A small loan could be as small as a few hundred dollars. They can be used for just about anything you want, but are generally best-suited for minor emergency expenses.
Here are the different types of small loans available to consumers:
Personal Loans
Most small loans come in the form of personal loans. Personal loans generally have more favorable terms than other types of small loans, which means they tend to offer lower interest rates and longer repayment terms. Not all personal loan companies offer small loans, so check for minimum loan amounts before you apply.
While some small personal loans may require collateral, typically in the form of cash, there are many personal loan companies that offer unsecured (collateral-free) personal loans.
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Your ability to obtain a personal loan will depend in part on your credit scores, and lower scores may disqualify you from getting a personal loan with reasonable terms. Some lenders offer no-credit-check personal loans that may be easier to get, but will likely come with exorbitant interest rates and fees. These extra costs can make no-credit-check loans much more challenging to pay back, so it's best to avoid these loans if possible.
Credit Card Cash Advances
If you have a credit card, you can request a cash advance up to your card's cash advance limit—which is typically lower than the card's general credit limit.
Credit card cash advances are expensive. In addition to an upfront fee, which is usually a percentage of your advance amount, they often charge higher interest rates than what's charged on purchases. Also, instead of giving you a grace period like what you get with purchases, card issuers start charging interest from the date of the advance.
While cash advances are more expensive than some personal loans, they're cheaper than others, especially no-credit-check personal loans. They're also much cheaper than payday loans.
Payday Loans
Another type of small loan is the payday loan. These loans are widely available in states where payday lenders are legally allowed to operate. They're typically smaller than personal loans, and they're easy to get—you typically won't even need a credit check.
But payday loans charge extremely high fees, which can equate to an average annual percentage rate (APR) of 400%. What's more, you'll have very little time to repay the debt—typically 14 days—so many consumers get caught in a vicious cycle of payday loan debt. This involves taking out new payday loans to repay old ones, racking up fees and interest along the way. As a result, it's best to avoid payday loans if at all possible.
Payday Alternative Loans
Exclusively offered by credit unions, payday alternative loans (PALs) offer a much cheaper small loan than what you can get from a payday lender. You can often get the same loan amounts, but the maximum APR is 28%, which is even cheaper than some personal loans. You also get a longer repayment term, which can range from one to six months.
The only drawback is that you have to be a member of a credit union that offers PALs, usually for at least a month, before you can apply for one. Not all credit unions offer PALs, so check with the institutions in your area to understand your options.
Where to Get a Small Loan
Depending on the type of loan you want and qualify for, there are several types of lenders that offer them.
Online Lenders
Online lenders are more likely to offer small loans than other lenders. Additionally, they tend to have less stringent requirements to qualify and get approved for a loan. There are many online lenders on the market, which improves the likelihood that you'll be able to find the right lender for you.
The catch is that online lenders may charge higher interest rates, especially if you have poor or fair credit. And, while it won't be a factor for many, some may not like the fact that you won't be able to visit a physical branch and speak with a representative in person.
Credit Unions
Credit unions are nonprofit organizations that tend to charge lower interest rates and fees than traditional banks. They may also offer payday alternative loans and cash-secured loans for borrowers with bad credit.
However, you may face more strict creditworthiness standards compared with online lenders. The same goes for some traditional banks.
Traditional Banks
National and community banks don't offer a lot of small loan options. In some cases, they may not even provide personal loans at all. However, there are many banks that offer personal loans that you can apply for, and terms can be competitive.
In general, though, traditional banks have high eligibility standards that may make it hard to borrow if you have bad credit.
Peer-to-Peer Lenders
Peer-to-peer online lending platforms bring together borrowers and investors, handling all aspects of the loan process, including loan approval, rate and fee setting, and payment collection. You may find low rates and a quick application process using P2P platforms, but not all P2P providers offer small loans.
Friends and Family
If you have friends or family members that are willing to lend you a little money, you may have an easier time paying it back, even if you agree to pay interest. However, talking to loved ones about money can be challenging, especially if you've needed financial assistance in the past.
What Do I Need to Apply for a Small Loan?
Each lender has different requirements when it comes to small loan approval. In general, though, here are the various factors most lenders consider when determining whether you qualify:
- Credit score: Your credit score is an important indicator of your ability to manage debt and your finances. As a result, many lenders have minimum credit score requirements a borrower needs to meet. The higher your score is, the better your chances of qualifying with favorable terms.
- Credit history: Even if your credit score is in good shape, lenders will check your credit report for certain items that could affect their decision. That includes things like past-due payments, repossessions, bankruptcies and more.
- Proof of employment: Regardless of your credit situation, lenders want to know if you have the ability to repay the debt. If you're not currently employed and have no other income sources, you may have a hard time getting approved.
- Income documentation: In addition to proof of employment, lenders may ask you for evidence of your income to ensure you can repay the debt. They may also use your current debt payments to calculate your debt-to-income ratio, which shows how much of your money goes toward your debt obligations.
- Cosigner: If you can't get approved for a small loan on your own, you may have a better chance if you have a creditworthy cosigner.
Before you apply for a small loan, ask the lender about their requirements. Some lenders may even allow you to get prequalified with a soft inquiry credit check, which won't impact your credit scores. This process allows you to view loan offers before you apply.
Improve Your Credit for Better Options
If you're not experiencing a financial emergency, it's usually a good idea to work on improving your credit before you apply for a small loan. Even if you need the money now, look for opportunities going forward for how you can increase your credit score.
To do this, check your credit score to get an idea of where you stand. Also, get a copy of your credit report and read through it to spot areas you may need to address. This could include getting caught up on past-due payments, paying off collection accounts, reducing your credit card balances or disputing inaccurate or fraudulent information.
Working to improve your credit can take time, but can open up your opportunities to more affordable options the next time you need money.