by Dana George | Updated July 21, 2021 - First published on June 26, 2021
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Shop for a small loan as carefully as you would a large loan.
Lenders typically have minimum and maximum amounts they are willing to lend. If you check The Ascent's best personal loans, 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 for loans as low as $1,000.
The minimum varies by lender -- sometimes by thousands of dollars. This fact highlights the importance of rate shopping with several different lenders. By shopping around, you are more likely to get a quote that comes closest to the amount you truly need to borrow. And if your credit score is high enough, you should have no problem qualifying.
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When shopping for any personal loan, the smart move is to compare all the costs associated with a loan. In addition to the interest rate, some lenders charge:
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 #1 charges an 8% origination fee and a 2% early payoff penalty, it may not represent the best deal.
What if Lender #2 offered a minimum loan amount of $3,000, but their interest rate was lower, and they charged no origination or early payoff penalty? It's possible that it makes more sense to borrow from a lender with a higher minimum loan amount, immediately repay what you don't need, and take advantage of their better terms to repay the remainder of the loan.
Remember: Even if you pay off half the loan immediately, your monthly payments will remain the same. However, making that monthly payment on a now-reduced balance will ensure that your loan is paid off early.
There is wisdom in applying for a small loan. Taking out a small loan is a good way to establish credit or build your credit score. In addition to boosting your credit when you pay the loan as agreed, a small loan allows you to cover a financial obligation without getting further into debt than necessary.
As with any loan, it pays to understand what you're signing. Small loans are less attractive to lenders than large loans for one major reason: A lender does not earn as much in interest. For that reason, some lenders tack on all kinds of junk fees to make up for the interest they would have earned if you'd borrowed more money.
If you've shopped lenders but aren't having much luck finding a loan that works for you, consider these options:
Any financial institution you have an established relationship with can check your banking history and get a good sense of whether you'll 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.
Before deciding 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 typically last from 12 to 18 months. So if you have a strong credit score, you may be able to snag a 0% APR credit card offering no-interest payments for up to a year or longer.
If the amount you need to borrow is small and you have a reputation for repaying debts as promised, it may not hurt to ask someone you're close to for the loan. If they agree, write up a contract clearly outlining how much you're borrowing, if you're paying any interest, how much the 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 funds at the lowest bottom-line price. And consider other options that are available.
For more information, check out our guide on "How do personal loans work?"
The Ascent team vetted the market to bring you a shortlist of the best personal loan providers. Whether you're looking to pay off debt faster by slashing your interest rate or needing some extra money to tackle a big purchase, these best-in-class picks can help you reach your financial goals. Click here to get the full rundown on The Ascent's top picks.
We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.