Shop for a small loan as carefully as you would a large loan.
Lenders usually have minimum and maximum amounts of money they are willing to lend. If you check out the best personal loans from The Ascent, you will notice that the minimum loan offered is $1,000, and the maximum is $100,000. Of the eight lenders on the list, only one allows loans as low as $1,000.
The minimum varies by lender – sometimes in the thousands of dollars. This fact highlights the importance of interest rate shopping with many different lenders. By shopping, you are more likely to get a quote closer to the amount you really need to borrow. And if your credit score is high enough, you should have no problem qualifying.
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Choosing the Right Lender
When shopping for any personal loan, a smart move is to compare all the costs associated with the loan. In addition to the interest rate, some lenders charge:
Let’s say you only need to borrow $1,500 and Lender #1 offers a minimum loan amount of $1,500. So far, so good. However, if Lender No. 1 charges an 8% set-up fee and a 2% early payment penalty, it may not be the best deal.
What if Lender #2 offered a minimum loan amount of $3,000, but the interest rate was lower, and they didn’t charge any set-up or early payment penalty? It can make sense to borrow from a lender with a higher minimum loan amount, pay off what you don’t need right away, and take advantage of their better terms to pay off the remainder of the loan.
remembers: Even if you pay off half of the loan immediately, your monthly payments will remain the same. However, making this monthly payment with a reduced balance now will ensure that your loan is paid off early.
Micro loan advantages
There is wisdom in applying for a small loan. Getting a small loan is a good way to establish credit or build your credit score. In addition to increasing your credit when you pay off the loan as agreed, a small loan allows you to cover a financial obligation without getting into more debt than necessary.
Read the small text
As with any loan, it is helpful to understand what you are signing. Small loans are less attractive to lenders than large loans for one main reason: the lender doesn’t earn much interest. For this reason, some lenders handle all kinds of unwanted fees to offset the interest they would have received if you borrowed more money.
Other Micro Loan Options
If you’ve shopped for lenders but haven’t had much luck finding a loan that works for you, consider these options:
Personal bank or credit union
Any financial institution with which you have a well-established relationship can check your banking history and get a good idea of whether you will be able to repay the loan. Also, because they want to keep you as a customer — or in the case of a credit union, as a member — they are more likely to overlook small credit issues.
0% credit card promotional rate
Before you decide to get a personal loan, look for alternatives, such as a credit card. In an effort to attract new customers, credit card companies sometimes offer 0% promotional rates. These rates usually last 12 to 18 months. So if you have a solid credit score, you may be able to get a 0% APR credit card that offers interest-free payments for up to a year or more.
family and friends
If the amount you need to borrow is small and you have a good reputation for paying debts as promised, it may not hurt to ask for the loan from someone close to you. If they agree, write a contract that clearly states how much you are borrowing, if you are paying any interest, how much your monthly payments will be, and when the loan must be paid in full.
The bottom line is: the next time you need a small loan, don’t just look at the lowest amount you can borrow. Look for the lender that offers the money at the lowest possible rate. And think about the other options available.
For more information, see our guide on “How do personal loans work?”
Ascent’s Best Personal Loans for 2021
The Ascent team has scanned the market to bring you a shortlist of the best personal loan providers. Whether you’re looking to pay off debt faster by lowering your interest rate or need some extra cash to tackle a large purchase, these best-in-class choices can help you reach your financial goals. Click here for the full summary of The Ascent’s top picks.