A small personal loan can be a quick, convenient option to pay an immediate expense, like a medical bill or car repair.
Banks and online lenders usually offer personal loans above a certain threshold, typically $3,000. But if you’re looking for smaller personal loans, there are options.
Unlike an auto or home loan, a personal loan doesn’t require you to pledge collateral in return for the money. Your interest rate is based on your creditworthiness alone. If your credit is poor, you can still qualify for a loan, but you’ll pay a higher rate than someone with good credit.
A small personal loan needs to meet certain basic requirements, which are good to keep in mind when you’re shopping for loans. According to the National Consumer Law Center, loans below $2,500 are considered “affordable” only if they have:
- A maximum APR of 36%
- A loan term of at least three months
- Fixed monthly repayment amounts, not balloon payments
Here’s where you can get a small dollar loan.
Small loans from credit unions
Your local credit union is the best place to get a small dollar loan. Many credit unions across the country offer loans as small as $500, and almost all offer amounts lower than $3,000, says Fadhila Holman, president and CEO of Cooperative Center Federal Credit Union, based in Berkeley, California.
Some credit unions have no minimum credit score or income requirements for a personal loan. Instead, they look at the borrower’s debt-to-income ratio and history with the credit union to make sure he or she can afford the loan, Holman says. You don’t always need to be a member of a particular credit union to apply for a loan there.
Federal credit unions, which are insured by the U.S. government, can charge a maximum APR of 18%. State credit unions may have higher rates.
Since credit unions are built to serve their members, you’re more likely to get an affordable small dollar loan at a reasonable interest rate than at other types of financial institutions.
Small loans from online lenders
Many online lenders offer loans between $1,000 and $3,000.
An advantage of online personal loans is that they are quick and convenient. Most lenders will also let you check the rate you’d get without affecting your credit, so you can shop around for the lowest APR available to you. Rates for people with bad credit typically top out at 36%.
Your interest rate is based on traditional factors such as your credit score, credit history and income, but there are some lenders that will also consider other factors, such as your job and education.
When you’re considering an online personal loan, also take a look at the origination fees, late fees and repayment flexibility to see what works best for you.
Lenders that offer small personal loans include:
- Avant ($1,000 and up)
- Discover ($2,500 and up)
- Earnest ($2,000 and up)
- Lending Club ($1,000 and up)
- OneMain Financial ($1,500 and up)
- Pave ($3,000 and up)
- Peerform ($1,000 and up)
- Prosper ($2,000 and up)
- Upstart ($3,000 and up)
- Vouch ($2,000 and up)
Small-dollar loans from banks
Not all major banks offer personal loans. Among the five largest banks in the nation, Bank of America, Capital One and Chase no longer issue such loans; Citibank and Wells Fargo still do.
Citibank loans start at $2,000 and require applicants to open a bank account before applying for a loan, among other requirements. Wells Fargo loans start at $3,000, and applicants don’t need to be existing customers. Borrowers receive interest rates based on their credit profile and what state they live in.
If you have excellent credit and a good relationship with your bank, you may get a low interest rate on a small personal loan. You can call the customer service number of your bank and try to get a ballpark range of interest rates.
Keep in mind that bank loans are usually on the higher end of the interest rate spectrum, especially if your credit isn’t great, so you may get better rates from a credit union or online lender.
No-credit-check loans and payday lenders
There’s no easier way to get a small loan than visiting a storefront or online lender that doesn’t check your credit. That’s because they start with interest rates so high — 200%, 300% or even higher — that they are guaranteed to make money even if you later default, which a high percentage of their borrowers do.
Here’s what monthly payments on a $3,000, three-year loan look like under three interest-rate scenarios, the first two from online and traditional lenders who consider credit and the last from a no-credit-check lender:
| Credit | APR | Monthly payment |
|---|---|---|
| Excellent | 6% | $91 |
| Poor | 36% | $137 |
| No-credit-check | 200% | $502 |
No-credit-check loans aren’t payday loans, but they can be impossible to repay and can trap borrowers in a cycle of debt. Payday loans can be even worse, with interest rates well over 1,000%, but their amounts are typically capped at a few hundred dollars.
If you’re in need of cash quickly, there are many alternatives to payday loans.
The bottom line
Consider why you are borrowing for emergencies — and plan for the next one.
An emergency fund means you don’t need to take a loan when something pops up. Though you should aim long-term for three to six months’ worth of expenses, even $500 in the bank will get you through many small crises.
Consider working on your credit over time, which will give you options from cheaper lenders or credit cards when emergencies arise. The basics of improving your credit score are simple: You need a track record of paying bills on time and you shouldn’t use all of your available credit.
If you really need a small dollar loan today, a credit union is a better first stop than a payday lender. Many credit unions offer similar products, known as “payday loan alternatives,” that will get you the money you need while making sure you can afford to repay your loan.
Even the most expensive personal loan available through online lenders for bad credit will be a cheaper option than a payday loan or no-credit-check loan.
If you’re borrowing money to consolidate debt, look for a loan that gives you a lower interest rate or lets you pay off your debt more quickly. Otherwise, you’re just delaying the inevitable.
Amrita Jayakumar is a staff writer at NerdWallet, a personal finance website. Email: ajayakumar@nerdwallet.com. Twitter: @ajbombay
Image via iStock.
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