Small Personal Loans: What They Are and the Best Ways To Get One
Small personal loans are a popular option for emergencies, funding large purchases and more. Inside, learn everything you need to know about personal loans.
September 17, 2021
Often when we think of loans, we think of large sums of money. In reality, loans don’t need to be big.
While mortgages are the most common debt, personal loans were the fastest-growing type of consumer debt from 2014 to 2020; and many financial institutions now offer small personal loans for as little as $1,000.
But what is a small personal loan, exactly, and how can you apply for one?
Small personal loans defined
A small personal loan is a personal loan issued in a relatively small amount of money. The specifics vary depending on the lender, but typically, small personal loans will be for sums of around $5,000 or less.
Many traditional banks have loan minimums, which are often in the $3,000 to $5,000 range.
Newer startups and peer-to-peer lending platforms, however, may offer loans as small as $1,000 or even less.
How small personal loans work
Small personal loans are issued directly to individuals and can be used for any purpose. They are generally not secured, meaning that they do not require collateral.
Personal loans are generally issued in a set amount, with a lump sum being sent directly to the applicant’s bank account. There will then be a fixed repayment schedule to pay back the loan over a set period of time.
The repayment schedule depends on the specific lender and the terms chosen; generally, applicants will have 12 to 60 months to repay the loan amount.
For example, if an applicant is seeking a $4,000 personal loan from their bank, the process would look like this:
The applicant submits all the necessary documents to apply for a personal loan.
The financial institution pulls the applicant’s credit report to determine loan eligibility.
If approved, the applicant receives the $4,000 personal loan — typically, direct-deposited to their bank account.
A repayment schedule is set, with monthly payments over the course of 1 to 5 years, depending on the loan terms.
Other than the size of the loan amount, small personal loans are not substantially different from traditional personal loans. With that said, each lender has its own rules and requirements for these financial products, so the specifics can vary.
Pros and cons of small personal loans
As with any financial product, there are both advantages and disadvantages to consider.
Versatility: personal loans can generally be used for any purpose
Lower APR than credit cards: personal loans typically have a lower interest rate than credit cards
Unsecured: small personal loans typically do not require any collateral
Simple: if used to consolidate debt, a personal loan can simplify repayment schedules
High fees: many personal loans have origination fees, generally 1% to 6% of the loan amount
Penalties: many personal loans have prepayment penalties. a fee that is charged if the loan is paid off ahead of schedule
Higher monthly payments: compared to credit cards, which have very low minimum payments, personal loans have high monthly payment amounts that are fixed
Higher APR than some alternatives: while lower than credit cards, personal loan interest rates are higher than HELOCs and some other types of lines of credit
Can worsen debt: utilizing personal loans can worsen debt cycles, particularly if used to pay off credit cards, as this frees up available credit on credit cards
Best uses for small personal loans
Personal loans can be used for any purpose as they are not tied to a specific purchase, as opposed to a car loan or a mortgage. This means that you have a lot of flexibility in how you use the funds from a personal loan.
Small personal loans can be used to:
Pay off higher-interest debt, such as credit cards
Cover unexpected expenses
Fund large purchases
Personal loans are highly versatile financial products that can make sense in many situations. With that said, the interest rates can vary significantly depending on the applicant’s credit score.
What do I need to get a loan?
If a personal loan seems like a good fit for your financial needs, you may be wondering: Is it hard to get a personal loan?
As with so much in the financial world, the answer is that it depends.
Your likelihood of getting approved for a personal loan relies on a variety of factors, including:
Your credit history and credit score
Your existing credit usage
Your income and debt-to-income ratio
The amount of the loan
The term of the loan
In general, you will need good credit to get approved for most personal loans. Many lenders require a credit score of 660 or higher. The higher your score, the more options you’ll have. If you have poor credit, you may wish to research improving your credit before applying for a personal loan.
In terms of what you need to get a loan, you will need to check with the specific lender for details. Most lenders will require your social security number, proof of income and other important details about your financial situation.
As for where to get a personal loan, applicants now have many options. A decent place to start is with your current bank, which may have an easier process for existing customers. However, local banks don’t always offer the best terms or interest rates.
Most financial institutions now offer personal loans. For applicants with lower credit scores, alternative funding methods include peer-to-peer lending platforms like Lending Club or Prosper.
The Tally line of credit: An alternative to small personal loans
If you plan to use a personal loan to pay off credit card debt, there’s a worthwhile alternative to consider: the Tally† personal line of credit.
Tally offers a lower-interest line of credit. If approved, funds are used to pay off credit card balances, starting with the highest APR cards. Then, you simply make one monthly towards the line of credit.
At Tally†, we’re all about helping Americans get out of credit card debt. Check out Tallyt today to learn more about achieving a debt-free lifestyle.
†To get the benefits of a Tally line of credit, you must qualify for and accept a Tally line of credit. Based on your credit history, the APR (which is the same as your interest rate) will be between 7.90% - 29.99% per year. The APR will vary with the market based on the Prime Rate. Annual fees range from $0 - $300.