Personal Loans USA

How Do Personal Loans Work in the US?

Taking out a personal loan typically means that you are borrowing a sum of money and will be repaying the loan in regular intervals over a defined period of time. The amount of the loan, interest rates, and term length depends on many factors, including: the type of loan you are applying for, whether the loan is secured or unsecured, your income level, your credit score and personal financial history.

Below are some of the most common types of US personal loans, and how they work. 

Instalment Loans: 

An instalment loan means that you take out a lump sum which is then repaid in fixed, regular intervals. The interest rates will vary depending on your credit score, income levels, and past financial history.

Line of Credit: 

A line of credit means that you have access to money, but you are not required to use the entire amount at once. The main benefit of a line of credit is that as soon as you are approved, you have access to funds, but you can use only as much of it as you need, and you only pay interest on the portion that you’ve used.

Car Title Loan: 

A car title loan means that you use your owned vehicle as collateral on the loan. This means that if you cannot repay your loan as per agreed terms, then you are risking losing your vehicle. The more value your vehicle has and the more equity you have in it, the higher amount of loan you will qualify for.

Home Equity Loan (2nd Mortgage):

A home equity loan, also called a second mortgage, means that you use your owned home and the equity in your home as collateral. This means that if you cannot repay your loan as per agreed terms, you could risk losing your home, just like if you cannot repay your primary (first) mortgage.

First Mortgage:

A first mortgage is a loan used to purchase a property, such as a house or a condo. It is repaid over a long period of time such as 20, 25 or 30 years. A mortgage is typically one of the biggest loans any person will have in their life. The interest rates vary on many factors including the type of mortgage (variable or fixed), personal credit history, lender, and more. If you are unable to repay your mortgage as agreed, you could risk losing your property.

Auto Loan:

An auto loan means that you are financing a purchase of a vehicle. Typically, this happens when you visit a dealership and are ready to buy a car but do not want to pay for it as a lump sum. Typical term length on an auto loan is 4 – 6 years. If you are unable to repay the auto loan as per agreed terms, the vehicle may be repossessed.

Payday Loan:

A payday loan is a very short term loan, usually as little as 2 weeks, and is intended as a quick solution to cover necessary expenses before the next “payday” comes in so the loan can be paid back. These types of loans are easy to qualify for, even if you have bad credit, but are also expensive, and can sometimes lead to a cycle of constantly trying to catch up on loan repayments and borrowing more money. Payday loans should be used responsibly, as overusing these high-interest loans can lead to negative impact on your overall financial health, and make the debt unmanageable.

Secured vs Unsecured Personal Loans

Personal loans in the US can be secured or unsecured. Secured loans involve using your assets as collateral on the loan. For example, it can be your vehicle or your home. While this allows you to get a higher loan amount, qualify easier, and sometimes even reduced interest rates, using collateral means that you are risking your personal assets. Common US secured personal loans are home equity loans, car title loans and mortgages.

Unsecured loans, such as a basic instalment loan, means that there is no collateral attached to it. While this means that you will not risk any personal assets, it may also mean that the interest rates may be slightly higher. It may also be more difficult to qualify for unsecured personal loans in the US.

How Much Can I Borrow with a Personal Loan in US?

Personal loan amounts can vary greatly based on the type of loan you are trying to obtain. For example, instalment loans can be anywhere from $500 up to $30,000 and even more, while a mortgage to purchase a home can be well over $1M. Furthermore, within each loan type, the amount that you can qualify for will vary based on your own individual financial situation. Factors like income, credit score and past financial history will help various lenders assess how big of a loan they can offer, as well as the interest rate on the loan.

The chart below offers a glance at some typical loan amounts for different types of loans, however these amounts can fluctuate and are only meant to serve as a rough estimate. 

How to Qualify for a Personal Loan in the US?

Depending on the loan type, the purpose of funds and the lender you are applying with, qualification requirements will vary. However some basic factors are consistently important in getting approved for a USA personal loan. For example, your income level and source of income, such as full time or part time employment, will be one of the main factors in getting approved. That is because lenders will want to ensure that you have the means to repay your debt.

Your credit score and financial history will be important factors as well, because they provide an indication of how you managed debt in the past. While having good credit history is important, it is possible to get a personal loan in the US with bad credit as well. Finally, personal assets will play a factor. For example, if you own a home or a vehicle, you can use those assets as collateral to help get approved for a loan, and even receive a larger amount compared to an unsecured loan. But keep in mind that using collateral means that you are risking those assets if you fail to repay the loan.

Here are some general loan qualification guidelines for US personal loans, but it is important to always consult the lender you are applying with about their specific requirements.

Where to Get Personal Loans in the US?

Personal loans are offered by various lending institutions throughout the United States. Most commonly personal loans are obtained at various banks and via online FinTech lenders. Different lenders have different personal loan products, terms and qualification requirements, so make sure to do your research and compare options before making the decision of which company to go with.

What Are Personal Loans Used For?

Some of the most common uses for personal loans in the United States are: pay for overdue bills, cover an emergency or medical expenses, renovations or home improvement projects, paying for unexpected expenses such as car repairs, making small purchases, taking a vacation or making big purchases like a vehicle or a property.

Can I Get a Personal Loan with Bad Credit in the US?

While it is more difficult to get approved for a US personal loan if you have bad credit, it is definitely possible. In fact there are many companies and loan providers that specialize in helping people with less than perfect credit scores. Keep in mind however that bad credit loans in the US are considered to be riskier from a lender’s point of view, which means that they usually come with higher interest rates. Make sure you read and understand the terms and full cost of the loan before accepting any agreements.

How Fast Can I Get a Personal Loan in the US?

Many lending companies in the United States operated online and, if approved, you can receive funds in your bank account the same day and in as little as 24 hours. The entire process from application to funding happens entirely online, and you can do it from the comfort of your home.

Author: Vlad Sherbatov

Vlad is the President and Co-Founder of Smarter Loans, Canada’s original and largest loan comparison website. He is a passionate entrepreneur and business leader in the Canadian financial sector. He was selected as a 2019 Top 25 Leaders in Lending by the Canadian Lenders Association. Vlad is an author at Smarter Loans, and has been featured in publications like the Toronto Star and National Post, among others.

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