Young husband and wife on porch

Perhaps you’re looking to make some large-scale renovations to your home. Maybe you’re trying to fund a major life event, like a wedding. Or perhaps you’re looking for a way to consolidate high-interest credit card debt.

Whatever the circumstances, you need money. But how do you get it? Do you open up another credit card? Do you take out a home equity loan?

The easier and often less expensive method would be to take out a personal loan. But what exactly is a personal loan? And how is it any different from traditional loans?

You might have a million questions running through your head. Luckily, we reached out to the experts at RocketLoans to answer these 10 frequently asked questions about personal loans.

What Is a Personal Loan?

A personal loan is an unsecured installment loan.  Unsecured simply means the loan is not backed by collateral such as a home, boat or car. They’re typically available from a bank, credit union or online lender and like other installment loans are paid back in equal monthly payments with a fixed interest rate.

Unlike credit cards, which tend to have high interest rates, personal loans have a fixed repayment term so often have lower interest rates, especially if you have good credit.

What Is a Personal Loan Used For?

“Personal loans can be used for debt consolidation, home improvement, auto expenses, medical expenses, credit card payoff, small businesses, large purchases or anything else that life may throw at you,” says Bill Parker, CEO of RocketLoans.

However, the most common personal loan uses are to consolidate high-interest credit card debt. Often when you take out a personal loan, you’re able to lower your interest rate, make one monthly fixed payment and save on interest by paying your debt off sooner.

How Do I Qualify for a Personal Loan?

Since there is no collateral, qualifying for a personal loan is ultimately determined by your credit history, income, other debt obligations and monthly cash flow.

While each lender varies, they typically look for a minimum acceptable credit score that falls within a range of 600 to 700+..

At RocketLoans, for example, you must have a minimum credit score of 640, and not surprisingly, the higher your credit score the more likely you are to receive lower rates,” said Parker.

Will Getting Prequalified for a Personal Loan Affect My Credit Score?

Much like looking for the right mortgage lender for you, you’ll want to compare offers from multiple personal loan lenders before locking in your choice.

Most lenders perform a “soft” credit inquiry to show you prequalified offers. This allows you to compare each lender’s offerings without affecting your credit score.

What Documents Are Needed for a Personal Loan?

The main reason lenders ask for documentation is to help verify your identity and income. When documentation is needed, typically you’ll be asked to provide:

  • Driver’s license or another form of identification
  • Pay stubs and/or bank statements

What Is a Personal Loan with Collateral?

Most personal loans are unsecured, meaning they aren’t backed by collateral, like a house or car. Your ability to get a personal loan is based solely on your financial history, like your credit profile and income.

Some lenders offer a personal loan with collateral, also known as a collateral loan, when your credit history and income do not meet their minimum requirements.  By offering collateral, you may be able to receive a personal loan with a lower rate or larger loan amount, depending on your situation.

How Much Can I Borrow and How Long Can I Borrow?

Depending on the lender and your personal financial situation, personal loans typically range between $5,000 and $15,000, with a maximum of $35,000 and repayment terms between 24 and 60 months. The higher your credit score and income, the more money you can potentially borrow.

Can I Pay Back My Loan Early Without Penalties?

When selecting your personal loan you will also choose a repayment period, typically in months.  Should you choose to pay off your loan early, it’s important to note whether your lender charges a prepayment penalty fee.

“At RocketLoans you will never be charged a penalty or additional fees for paying back your personal loan early,” Parker added.

 Why Is My Personal Loan Interest Rate Higher Than My Mortgage or Auto Loan Interest Rate?

A secured loan on a mortgage or car loan is backed by the actual asset – in this case, the home or car, respectively. Therefore, if you fail to make payments and default, you are at risk of losing the asset.

On the other hand, an unsecured personal loan has no collateral so the lender assumes the risk on your promise to repay.

It’s for this reason that unsecured loans have higher interest rates: They create a higher risk for the lender. “It’s important to remember that even with a higher interest rate, the total cost of a personal loan (Finance Charge) can be significantly lower than borrowing from a home because the term is significantly shorter,” Parker adds.

What Is an Origination Fee, and How Much Is It?

“An origination fee is a fee that covers the cost of processing a loan, and it’s charged upfront,” Parker explains. “Like all other loans, the amount of the origination fee varies from lender to lender.”

“RocketLoans origination fees range from 1% to 6% of the loan amount, and they are deducted from the loan before the funds are distributed to your bank account,” says Parker. “Some lenders do not charge an origination fee and instead raise the interest rate to account for the cost of processing a loan.”

For this reason, make sure you borrow enough money for the loan amount you need and enough to cover the origination fee.

There are a lot of things to consider before you apply for a personal loan. The most important, however, is making sure you don’t borrow more than you can pay back.

If you’re ready to apply for a personal loan, talk to an expert at RocketLoans today about your goals for taking out the loan and to see how much you qualify for.

Do you have any questions about personal loans that we missed? Let us know in the comments below!

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This Post Has 21 Comments

    1. Hi Daniel:

      At this time, Iowa is one of a few states that RocketLoans isn’t licensed to lend in. Different lending spaces have different regulations at both the federal and state level. If something changes, we’ll be sure to let you know.

      Thanks,
      Kevin

  1. Hi,

    Curious. What is going to be the determining factor for one to be charged an origination fee of 1% to 6%? Also, what would be the min and max interest rate that you will charge on personal loans? Thanks!

    1. Hi Flor:

      I’m not an expert in personal loans, but here’s what it says on the FAQ for our friends at RocketLoans. It’s really a variety of factors.

      “Your personal loan rate is determined by your financial profile and payment method selected. Your financial profile is a made up of your credit history, yearly income, debt amount, loan term, home ownership, and number of credit inquiries, among other items.”

      Hope this helps!

  2. I used to be a banker with Rock Financial. I still have the great 1st mortgage I got in 2006 when I was still there. I’ve had a HELOC for 10 years and I’ve been told you guys don’t do those anymore? I’m in payback mode and need to refinance it! Payment tripled. Why doesn’t Quicken do HELOC’s anymore?

    1. Hi Stacey:

      It’s good to hear from you. Given your background, you may know some of this, but I’m going to give the best explanation I can and alternatives you might have.

      You’re correct that we don’t do HELOCs anymore. They’re inherently more risky for lenders and investors in mortgages because they represent your second mortgage as opposed to primary mortgage. Because of this, if you were to default on your payments for the house, the primary mortgage investor gets preference. Therefore, we haven’t done these in the last several years except on a very limited basis for special circumstances.

      What we can do is refinance and take cash out so you could combine your first and second mortgages. If you would like, you can do that through Rocket Mortgage or by calling one of our Home Loan Experts at (888) 980-6716. I hope this helps!

      Thanks,
      Kevin Graham

  3. I currently have a mortgage with Quicken Loans. I am interested in getting a personal loan to catch up on my mortgage which is in default. I’ve been offered a personal loan through my banker which is Wells Fargo but I would rather stay in financial relationship with Quicken Loans.

    1. Hi Sharlicia:

      I suppose that’s an option you can look into, but before taking out any other loans, I’m going to recommend you talk to us. We can help you take a look at the best possible option to help you out in your situation. I’m passing this on to our Client Relations team to reach out to you. Thanks for getting in touch!

      Kevin Graham

  4. Thank’s, but no thanks, I already tried, they can’t help, i’ll just keep going pay check to pay check, like I have been doing. I had ask for help several times. No such luck.

    1. Hi Sandra:

      I’m sorry to hear you had a poor personal loan experience. If it was with RocketLoans, they’re here to help. You can give them a call at (800) 333-7625 Monday through Friday between 9 AM and 6 PM Eastern. If you’d prefer, shoot us an email at support@rocketloans.com. I hope this helps! Have a good day!

      Kevin Graham

  5. I would like to access the equity in my home to fix the front porch and some other home improvements. My current mortgage is through quicken/ rocket.

  6. I was going to apply one time and it said you couldn’t loan in Iowa. I have a mortgage through Quicken, why could you give me a house loan in Iowa, but not a personal loan? Maybe this has changed?

    1. Hi Joel:

      Unfortunately, you heard correctly. RocketLoans isn’t licensed to lend in Iowa at this time. While our companies are affiliated, they’re separate businesses that lend in spaces with different regulations. I’m sorry.

      Thanks,
      Kevin Graham

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