If you need a small amount of cash fast to help finance an urgent need, a small personal loan can be a safe, easy, and less expensive option compared to other alternatives. However, as you consider your small loan options, be sure to weigh the advantages and disadvantages and find a lender that offers the best interest rates and terms.
What is a small personal loan?
If you need quick cash to cover a medical bill, car repair, or other emergent or unexpected expense, a small personal loan might be a good option. These loans typically have amounts of $2,500 or lower, ranging from about $1,000 to $5,000 on average. Other unsecured small personal loans can be as small as $500.
Unlike personal loans, which can max out up to $100,000, these loans are for smaller needs and are typically paid back within two or three years, making the monthly payment relatively low. Interest rates can also be low if you have excellent credit, making these loans more affordable.
Small personal loans are:
Unsecured, which means you do not have to put up collateral to be approved.
Paid back over a short period of time.
More affordable, with low interest rates for borrowers with excellent credit.
Quicker and easier to get, with most of the processes happening online.
Purpose of small personal loans
Like personal loans, small personal loans can be used for just about anything, such as paying for:
There are benefits and drawbacks to taking out a personal loan for medical expenses
On the plus side:
Fast funding: Once approved, most lenders can deposit funds into your account within one business day.
Fixed payments: These loans are easy to budget since monthly payments are fixed and repaid over a set period of time.
Fixed interest rates: Most of the time, small personal loans have fixed interest rates, which means they do not change over the life of the loan.
Unsecured: No collateral is required to get the loan, so you will not be risking losing an asset if you default.
Minimum loan amounts: You may have trouble finding a personal loan for less than $1,000, so taking one out for a small expense may not be worth it.
High APR: Unless you have excellent credit, it may be difficult to qualify for a low interest rate, and they can be as high as 35%.
Credit checks: Those with poor credit may have a difficult time getting approved for a small personal loan altogether.
Penalties and fees: Some lenders charge extra fees for small loans, or prepayment penalties if you pay off the loan prior to the full term.
Small personal loans for bad credit
Even if your credit isn’t great (629 or below) you can still qualify for a small personal loan. Your best chance to do so would be through a credit union or online lender that tailors to borrowers with bad credit. However, keep in mind your interest rate will likely be much higher.
To improve your chances of qualifying for a loan, you can:
Work to improve your credit score by making all bill and loan payments on time, lowering your credit utilization ratio, and decreasing your debt-to-income ratio.
Review your credit report to ensure there aren’t any errors that should be fixed.
Add a cosigner to your loan.
Add collateral via a secured loan, such as a car.
Where to get a small personal loan
The best places to explore getting a small personal loan are credit unions, banks, or online lenders.
Credit unions, which were built to help their members, consider other factors beyond your credit score to help determine whether you qualify for a loan and what your interest rate will be.
Not all banks offer personal loans, and those that do typically stick to larger personal loans. However, you’ll find that Bank of America and U.S. Bank allow customers to borrow smaller amounts, even as low as $100. The downside is that criteria to qualify may include being an existing customer or having a high credit score. They also charge higher fees.
Online lenders work with borrowers who have ranging credit scores and needs. You may find that online lenders also offer more flexibility with the loan amount, and lower interest rates. These lenders also likely offer the fastest approval and funding process, most of which happen online.
How to get a small personal loan
If you’ve determined a small personal loan is the best option for your financial situation, there are a few steps to getting one:
- Review your credit. You’ll qualify for better interest rates and loan terms if you have a higher credit score (690 or above). Check your score and if it needs improvement, take some steps to do so prior to applying for a loan. Also look at your credit utilization and debt-to-income ratio, which lenders may look at when determining whether you qualify.
- Do your research. With so many options out there, you’ll want to make sure to research and compare different lenders. Look carefully at loan amounts available, interest rates, terms, fees, and other loan features to find the best one for you.
- Prequalify. When possible, prequalify for a loan. This triggers a soft credit check, which doesn’t affect your credit score, and can show you a personalized estimate of monthly payments and interest rates you would qualify for. This can help you compare your options.
- Apply. When you’re ready, you can apply for the loan. Most applications will ask for things like your name, address, place of employment, Social Security Number, and other personal information. They also may ask for proof or documentation such as W-2s or pay stubs. Most of the time, applications can be done online.
- Accept the loan terms. If you are approved, the lender will send you the loan agreement to review and sign. Read the fine print carefully.
- Get the funds. After the agreement is signed, the lender will transfer the funds to you. This typically happens via direct deposit into your bank account, but you may also ask to get a check. If you choose electronic deposit, this can happen within 1-3 business days.
Types of small personal loans
There are different types of small personal loans out there, including some to avoid. Those that you should compare include:
Unsecured vs. secured:
Unsecured loans don’t require collateral to qualify, while secured loans do. Collateral can be an asset such as a vehicle or savings account. If you have poor credit, you may want to explore secured loans as they are easier to qualify for and may have lower interest rates.
Fixed vs. variable interest:
Fixed interest means the interest does not change over the life of the loan, and each monthly payment is the same. Variable interest can change from month-to-month, making budgeting more difficult and you could end up paying more depending on the interest rate you qualify for.
Loans to avoid include
These loans let you borrow a small sum of money until your next paycheck. However, these loans have extremely high interest (even up to 400% or more) and also have many fees.
Pawn shop loans:
With this loan, you’d put something of value (such as jewelry or art) at a pawn shop to act as collateral for a loan. These rates and fees may not be as high, but they are still much higher than personal loans. You’re also risking losing your collateral if you don’t repay the loan in time.
Car title loan:
This loan requires you to use your vehicle as collateral, but they have extremely high interest rates and fees. Plus, if you don’t repay the loan, you could lose your vehicle.
Personal loan alternatives
When you get a loan, you’re taking on additional debt. This increases your credit utilization and debt-to-income ratio, which can decrease your credit score. You’re also paying more over the life of the loan due to interest. Sometimes, a loan may be the best option. However, there are some alternatives to consider:
Borrow from a friend or family member you trust, and who trusts you to repay what you borrow.
Start a side hustle, pick up a second job, or work extra shifts at your current job to earn extra income on the side.
Create a budget, cutting out as many unnecessary expenses as you can and putting that money in savings, or toward other expenses.
Seek assistance from local nonprofits, charities, or religious organizations that may help those in need with things like bills, gas, groceries, or clothes.
Related: Need to Borrow Money?
Some online lenders have fast approval and funding processes, approving qualified borrowers within one business day, and depositing funds the next business day. If you need funds fast, look for lenders that offer this.
Yes, it’s possible to get a small personal loan with bad credit, though you may have higher interest rates or have to add a cosigner or collateral to qualify. Compare credit unions and online lenders for the best options.