Personal loans are loans you can get without offering any collateral, which is handy if you need to borrow small amounts of money and don't want to worry about losing an asset like your home. However, like many banks, Capital One does not currently offer personal loans. This means you will have to work with another lender if you need a loan to pay for planned or emergency expenses. Luckily, there are plenty of alternatives that offer reasonable fees, flexible payment terms and competitive rates.
What Are Personal Loans?
Personal loans are loans made by banks, credit unions and specialist lenders that are not secured against an asset, such as your home. Terms vary from bank to bank but generally, you will borrow a predetermined amount of money, such as $2,000, $10,000 or $50,000, and pay the money back in fixed monthly payments, typically over two to five years. The lender will charge interest, which usually ranges anywhere from 6 percent to 36 percent per year.
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Why Use a Personal Loan?
There are many advantages to taking out a personal loan:
- They usually charge a lower rate of interest than a credit card, and you may be able to borrow more.
- You make a fixed repayment each month, which can make your budgeting easier.
- You can often (though not always) decide how long you need to pay back the loan. Spreading the payments over a longer period means you'll pay back less each month, though overall you will be paying more interest on the loan.
- You can use the money for any reason, such as home improvements, paying for a wedding or consolidating all your existing debts into one personal loan product. Consolidation is useful if you wish to reduce your monthly payment costs.
- You can usually pay off a personal loan before the end of your loan term without penalty, but check the fine print as terms and conditions vary from lender to lender.
What Are the Drawbacks?
On the downside, personal loans are risky to lenders because they're not supported by collateral. With a secured loan like a mortgage, the bank can seize your home and sell it if you default, so there's something of value for the bank to dip into if you default on the loan. With a personal loan, lenders just trust your word that you're going to pay back the money.
The greater risk translates to higher interest rates. A secured loan backed by a house or car is always much cheaper, but you can lose the asset if you default.
Capital One Personal Loans
For the time being, Capital One has stopped offering personal loans. It is still widely known for its secured loan offerings, however, so if you're determined to do business with Capital One then you should call the Capital One customer service line and inquire whether its auto loans, mortgages, home equity loans and home equity lines of credit can meet your needs.
Capital One is best known for its credit cards, and a credit card can provide a good alternative to a personal loan if you're after an unsecured product. Credit cards don't require collateral so you're not going to lose an asset if you fail to pay your bill, though you typically will pay a significantly higher rate.
Capital One offers a range of cards with lots of different benefits – no annual fee, cash back on purchases, travel rewards and so on. Rates vary depending on your credit score; see if you prequalify for card offers by filling out the short form on the Capital One website.
Alternatives to Capital One Loans
Though Capital One doesn't offer personal loans, there are many companies that do offer them. Santander and Marcus by Goldman Sachs are two of the larger banks that offer personal loans in amounts ranging (typically) from $5,000 to $35,000. For larger amounts, Wells Fargo offers unsecured personal loans up to $100,000. If you have collateral, then you might qualify for a secured personal loan in amounts up to $250,000.
Minimum Credit Score for Personal Loans
The major banks prefer borrowers with good credit, starting at around 660 or so. Outside the major banks, there are plenty of options for people with fair credit, from local credit unions to online loan providers. Here are some options:
If you have good to excellent credit (minimum credit score around 660-680):
- Laurel Road
If you have bad to fair credit (minimum credit score around 580-620):
Personal loans come in all shapes and sizes and you'll have to do some calling around to figure out whether the loan size, origination fees, repayment period, interest rate and other conditions, such as whether there's a prepayment penalty, meet your needs. Check the lender's website or call their customer service. You can also compare options on loan marketplaces, like NerdWallet, 24 hours a day.
How Are Personal Loans Approved?
Lenders make their lending decision based on several factors. Essentially, they'll be looking at your credit score, credit history and debt-to-income ratio. DTI compares your monthly debt load – credit cards, loans, mortgage and so on – to your gross monthly income. This helps lenders decide whether you can realistically afford to pay back another loan.
Each lender sets its own DTI requirement. Generally, lenders prefer a ratio lower than 36 percent for secured loans like mortgages, and lower still for personal loans. A DTI above 40 percent is a sign of financial stress and you'll struggle to get any type of loan. You can reduce your DTI by paying down credit card balances.
Applying for a Personal Loan
Once you've found a suitable lender, the process is pretty simple – you could even get an approval within 24 hours if you're applying online. While every lender has its own paperwork requirements, it will help your application if you do some groundwork before you begin.
1. Check your credit
Not surprisingly, borrowers with excellent credit receive the lowest interest rates, although some lenders specialize in loans to people with fair or poor credit. You can order a copy of your credit report, free of charge and from each of the three credit reporting agencies, from annualcreditreport.com. You will need to provide your name, address, date of birth and Social Security number. Knowing your score upfront can help you select the right lender for your needs – and correct any errors before applying for a loan.
2. Research loans you qualify for
Understand that every time you apply for a personal loan, it triggers a credit inquiry and this drops your credit score a little bit. You can minimize the damage by being selective and only applying for the loans you qualify for. Call your shortlist of lenders for information about their credit, income and DTI requirements – you can probably find a lot of this information on the lender's website.
3. Get your paperwork together
Lenders will need proof of identity, your Social Security number, proof of income, such as pay stubs or bank statements, and verification of employment, such as a letter from your employer. They'll also look at your DTI ratio, so you will need to give a list of your monthly debt payments. Having this information at the ready can greatly speed up the process of applying for a personal loan.