Key takeaways
- A small personal loan is a type of installment loan of up to $5,000 that’s payable in equal monthly installments with interest.
- These loans often come with fast funding times and can help you build credit.
- Research loan options, get prequalified with at least three lenders and compare offers to find the best fit.
- Be on the lookout for predatory lenders and know the red flags to protect your finances.
Designed to offer individuals affordable loans with reasonable repayment terms, small personal loans are a fixed-amount, lump-sum loan from a lender to a borrower that is paid back over time with interest. Small personal loans usually have a principal of less than $5,000, shorter repayment periods and fixed interest rates.
Most larger financial institutions have moved away from the small end of the loan market. However, there are still great options if you need a small loan. You can try a credit union if you need $500 or less, but online lenders are ideal if you’re looking for more cash.
What is a small personal loan?
Small personal loans are low-cost, short-term installment loans geared toward borrowers with little to no credit history. Offered by national banks, community banks and credit unions, these loans have maximums of up to $5,000. They’re regulated on a federal and state level to ensure that the costs remain low.
Designed to be an affordable alternative to payday loans, small personal loans can be used for a wide range of expenses. People may use small loans for expenses like:
- Car repairs.
- Debt consolidation.
- Medical procedures.
- Unexpected bills.
- Vacations.
- Weddings.
What sets small dollar loans apart from other forms of lending is the underwriting criteria. Rather than focusing solely on creditworthiness, approval for a small dollar loan is based on routine banking activity, although the specifics may vary by bank.
Pros and cons of small personal loans
Consumers cite accessibility, fast funding, low costs and the ability to build credit as positive small dollar loan benefits. That said, some disadvantages come with taking out a small personal loan, and they may not be a good fit if you need a higher dollar amount or live somewhere the program isn’t offered.
Pros
- Widely available.
- Easier qualifying standards.
- Fast funding.
- Comparatively low cost.
- Credit-building potential.
Cons
- Small borrowing amounts.
- Must have an active checking account.
- Not available at all lenders.
- Short payment terms.
- Potential for scammers.
How to get a small personal loan
If the pros outweigh the cons and you’re ready to apply for funding, there are a few steps you’ll need to take. As with any financing you’re looking into, you’ll want to start by considering your choices.
1. Research your options
Small dollar loans have become more widely available due to their increase in popularity. When looking for this type of loan, consider checking with several institutions.
- Select national banks: As of 2024, Huntington Bank, Regions Bank, Truist, U.S. Bank and Wells Fargo all offer small dollar loans to their customers.
- Community banks or local credit unions: If you’re already a customer or prefer a local lending experience, ask and compare small dollar loan offers from community banks and local credit unions. These institutions tend to be more flexible with their lending criteria than national banks, so it may be easier to secure a small loan dollar from them.
- Community Development Financial Institutions (CDFIs): Some CDFIs participate in the Small Dollar Proram, which is a program designed to provide an alternative to expensive options, like payday loans.
Institutions require borrowers to have an account to be eligible for small dollar loans. If you opt for a credit union loan, you’ll need to become a member. The requirements are generally easy to meet and based on factors like location, occupation and association. Some credit unions may also accept donations to a specific nonprofit organization for membership.
That said, it’s always a good idea to start your search with an institution you already have an account with, as the process will be much quicker.
2. Make sure you qualify
Unlike traditional underwriting, which focuses primarily on credit score and history, small dollar loan approval is based on your recent banking activity. Account information like withdrawals, deposits, overdrafts and account status are considered, as well as income and employment history.
While there are general approval requirements for a loan, the Small Dollar Loan Program statutory requirements state that the loans must be “underwritten with standards that consider the consumer’s ability to repay.”
Even though the documentation requests may vary, these are some of the most common requirements borrowers must meet:
- Be at least 18 years old.
- Have a government-issued identification.
- Have an active checking account in your legal name (with a participating bank).
- Provide at least two recent pay stubs.
- Pass an employment verification check.
Even though these loans are designed for borrowers with low credit, it is still possible to get denied based on your recent account history. For example, if you’ve had checks bounce, multiple overdrafts or corresponding accumulated fees over the past few months, you’ll likely have a harder time getting approved.
Additionally, if you don’t have a checking account with a participating bank or credit union, you cannot get a loan immediately upon opening an account. According to Pew’s affordable credit brief, “the major banks that offer small loans all require at least three months of account history before customers can be eligible for these loans, while some smaller banks and credit unions will lend based on as little as one month of account history.”
3. Apply and receive your funds
The applications can be completed online or through the bank’s mobile banking app. If you prefer in-person assistance, call your local branch and ask if there’s customer support available.
Because of the simplified underwriting process, it’s likely that the application will only take a few minutes to complete. To simplify the process, have all the necessary information and documentation on hand.
You should get your application results within one business day (or 24 hours) of submitting your required documentation. Once approved, you’ll sign off on any applicable loan documents, and the funds will be deposited into your account.
Where to a small personal loan
Small personal loans are available from several types of lenders.
Banks
Small-dollar loans from large banks are based on the income and credit score of the borrower. Interest rates will vary based on your qualifications. If you already have a relationship with a bank, you might also be eligible for better interest rates.
Credit unions
Credit union loans often come with lower interest rates and better terms than major banks. To obtain a credit union loan, however, you’ll likely be required to become a member. Existing members may be able to use their deposits at the credit union to speed up the approval process.
Online lenders
Online lending companies usually charge higher interest rates than banks and credit unions. Borrowers can use the lender’s website tools to quickly determine the rates they qualify for. The rate you receive is typically based on your credit score, credit history, and proof of income to determine your interest rate. Some online lenders also consider job status and education.
Best online lenders for small personal loans
A few reputable online lenders to choose from include:
| Lender | Minimum loan amount | APR range | Fees |
|---|---|---|---|
| PenFed Credit Union | $600 | 8.99%-17.99% | Late payment fee: $29Returned payment fee: $30 |
| Upstart | $1,000 | 7.80%-35.99% | Origination fee: up to 1% of the loan amountLate payment fee: the greater of $15 or 5 percent of the past-due amountReturned payment fee: $15Paper statement fee: $10 |
| Upgrade | $1,000 | 9.99%-35.99% | Origination fee: between 1.85% and 9.99% of your loan amountLate payment fee: up to $10 once your loan payment is more than 15 days past dueReturned payment fee: $10 |
| Rocket Loans | $2,000 | 9.116%-29.99% (with autopay) | Origination fee: Up to 9%of the loan amountLate payment fee: $15 if your loan is more than 10 days past dueReturned payment fee: $15 |
| Avant | $2,000 | 9.95%-35.99% | Administration fee: up to 4.75% of the loan amountLate payment fee: $25 if your loan is more than 10 days past dueReturned payment fee: $15 |
Alternatives to small personal loans
If you’d prefer not to use a personal loan to cover unexpected expenses, consider these alternatives:
- Credit cards: A credit card is a convenient option but usually has a higher interest rate than a personal loan. For this reason it should only be used if you can pay the balance in full before interest accrues.
- Borrow from a relative or friend: You could also talk to family and friends and request a small private loan. Be sure to solidify the terms and get the agreement in writing to avoid confusion later on down the line.
- Peer-to-peer loans: Instead of applying to just one bank, peer-to-peer loans give you a chance to be considered by several investors. You may be approved for some or all the amount you need at terms comparable to bad credit personal loans.
If you apply with a bank or credit union, check for application and late payment fees, and ask for the repayment schedule. Know exactly how much the loan will cost you, and compare it to your budget to ensure you can repay it.
Loans of less than $5,000 are considered affordable only if the interest rates are below 36 percent, offer at least three months of amortization and include no large “balloon payments” due at the end of the loan term.
Watch out for small predatory loans
Unfortunately, some lenders prey on financially distressed borrowers, including those with poor credit, in need of fast cash. These predatory lenders aren’t transparent about the terms of their offerings, and often extend funding in exchange for steep interest rates, excessive fees and unfavorable terms that entrap desperate borrowers into a vicious debt cycle that’s beyond challenging to escape.
You can steer clear of small predatory loans by reading the fine print of the loan agreement before signing on the dotted line. That way, you’ll know exactly what you’re signing up for and what to expect once the loan proceeds are disbursed to you.
If you notice that the lender is far too lenient with their guidelines and promises to approve practically anyone who applies without a credit check, that’s a telltale sign to move on. Other red flags include high-pressure tactics from loan officers to accept funding, excessive penalties, exorbitant interest rates and brief repayment periods that make the loan payments unaffordable.
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