Designed to provide individuals with affordable loans with reasonable repayment terms, small personal loans are a lump sum loan from a lender to a borrower to be repaid over time with interest. Small personal loans usually have principal amounts less than $5,000, short repayment periods, and fixed interest rates.
Most of the big financial institutions have exited the small loan market, but there are still great options if you need a small loan: Credit unions are a good option if you need a loan of $500 or less, but if you need more money, online lenders are your best bet.
What is a small personal loan?
Small personal loans are low-cost, short-term installment loans for borrowers with little or no credit history. These loans, offered by national banks, community banks, and credit unions, have a maximum amount of $5,000. They are regulated at the federal and state levels to keep costs low.
Small personal loans are designed as an affordable alternative to payday loans and can be used for a variety of expenses. You might use a small loan for expenses such as:
- Car repairs.
- Debt consolidation.
- Medical procedures.
- Unexpected bills.
- vacation.
- wedding.
What sets small loans apart from other forms of lending is the qualification criteria. Rather than focusing solely on creditworthiness, approval for a small loan is based on everyday banking activities, although the details vary from bank to bank.
The pros and cons of small personal loans
Consumers cite ease of access, quick funding, low cost, and the ability to build credit as benefits of small loans. That said, small personal loans also have some drawbacks, and they may not be a good fit if you need a larger loan amount or live in an area where the program isn’t offered.
Strong Points
- It can be used in a wide range of applications.
- Eligibility criteria have been relaxed.
- Fast funding.
- Relatively low cost.
- Potential for trust building.
Cons
- The loan amount is small.
- You must have a valid checking account.
- Not available with all lenders.
- Short payment terms.
- There is a possibility that they are scammers.
How to get a small personal loan
If the benefits outweigh the drawbacks and you’re ready to apply for funding, there are a few steps you should take: As with any funding you’re considering, you should start by considering your options.
1. Explore your options
Small loans are becoming more widely available due to their growing popularity, so when looking for this type of loan, consider contacting multiple institutions.
- Choose your national bank: As of 2024, Huntington Bank, Regions Bank, Truist, U.S. Bank, and Wells Fargo all offer small loans to their customers.
- Community banks or local credit unions: If you’re already a customer or would like to seek local financing, ask community banks and local credit unions about their small loan offers and compare them. These institutions tend to have more flexible lending criteria than national banks, so you may find it easier to secure a small loan.
- Community Development Financial Institutions (CDFIs): Some CDFIs participate in the Small Dollar Proram, a program aimed at providing alternatives to more expensive options like payday loans.
Financial institutions require borrowers to open an account to qualify for a small loan. If you choose a credit union loan, you’ll need to become a member. The requirements are usually easy to meet and are based on factors such as location, occupation, and affiliation. Some credit unions even accept donations to certain nonprofit organizations as a form of membership.
That said, it’s always a good idea to start your search with an institution where you already have an account, as that will make the process much quicker.
2. Check if you qualify
Unlike traditional screening, which focuses primarily on credit score and history, small loan approvals are based on recent bank transactions, including account information such as withdrawals, deposits, overdrafts and account status, as well as income and employment history.
While there are general approval requirements for loans, statutory requirements for small loan programs state that loans must be “underwritten on a basis that takes into account the consumer’s ability to repay.”
The documentation required varies, but the most common requirements borrowers must meet are:
- Be 18 years of age or older.
- Have a government-issued ID.
- Have a valid current account (with a participating bank) in your legal name.
- Please provide at least two recent pay stubs.
- Pass an employment verification check.
Although these loans are designed for borrowers with poor credit, you may be denied based on your recent account history. For example, if you’ve had any bounced checks or multiple overdrafts in the past few months, or have accumulated associated fees, you may have a harder time getting approved.
Plus, if you don’t have a checking account with a partner bank or credit union, you won’t be able to get a loan right away after opening your account. According to Pew’s Affordable Credit Overview, “All large banks that offer small loans require customers to have at least three months of account history to qualify for a loan, but some smaller banks and credit unions will lend based on as little as one month of account history.”
3. Apply and receive funds
You can apply online or through the bank’s mobile banking app. If you prefer in-person assistance, call your local branch to see if customer support is available.
Due to our simplified underwriting process, your application may only take a few minutes. To simplify the process, please have all of the required information and documentation on hand.
Once you’ve submitted the required documents, you’ll receive the outcome of your application within one business day (or 24 hours). If approved, you’ll sign the applicable loan documents and the funds will be deposited in your account.
Where can I get a small personal loan?
Small personal loans are available from several types of lenders.
bank
Small loans from large banks are based on your income and credit score. Interest rates vary depending on your qualifications. If you already have a relationship with a bank, you may be able to get a better rate.
Credit union
Credit union loans often have lower interest rates and better terms than big banks. However, you’ll probably need to be a member to get a credit union loan. Existing members may be able to use their credit union’s deposits to speed up the approval process.
Online Lenders
Online lenders typically charge higher interest rates than banks or credit unions. Borrowers can quickly determine the interest rate that applies to them using tools on the lender’s website. The interest rate that applies to them is usually based on your credit score, credit history, and proof of income. Some online lenders also take into account your professional status and education level.
Best Online Lenders for Small Personal Loans
Some reputable online lenders you can choose from include:
| Lender | Minimum Loan Amount | APR Range | Fee |
|---|---|---|---|
| Penn Federal Credit Union | $600 | 8.99%-17.99% | Late fee: $29 Refund fee: $30 |
| Upstart | $1,000 | 7.80%-35.99% | Origination fee: Up to 1% of loan amount Late fee: $15 or 5% of the past due amount, whichever is greater Refund fee: $15 Bill statement fee: $10 |
| Upgrade | $1,000 | 9.99%-35.99% | Fees: 1.85% to 9.99% of the loan amount Late fee: Up to $10 if loan payment is 15 days or more late Refund fee: $10 |
| Rocket Loan | $2,000 | 9.116%-29.99% (for automatic payments) | Fees: Up to 9% of loan amount Late fee: $15 if loan is 10 days or more late Refund fee: $15 |
| Avant | $2,000 | 9.95%-35.99% | Administration fee: Up to 4.75% of the loan amount Late payment fee: $25 if loan payment is more than 10 days past due Refund fee: $15 |
Small Personal Loan Alternatives
If you don’t want to take out a personal loan to cover unexpected expenses, consider these alternatives:
- Credit card: Credit cards are a convenient option, but they usually have higher interest rates than personal loans, so you should only use them if you can pay off the balance in full before interest accrues.
- Borrowing from relatives and friends: You can also approach family and friends to apply for a small personal loan. Make sure you solidify the terms and get the agreement in writing to avoid any confusion later.
- Peer-to-peer loans: With a peer-to-peer loan, instead of applying to one bank, you have the chance to be considered by multiple investors, and you could be approved for some or all of the amount you need, on terms comparable to those for a personal loan with bad credit.
If you apply with a bank or credit union, find out what application fees or late fees there are, and check the repayment schedule. Find out exactly how much the loan will cost, and compare it to your budget to see if you can afford to pay it off.
Loans under $5,000 are considered affordable only if they have an interest rate below 36 percent, a repayment term of at least three months, and no large “balloon payment” at the end of the loan term.
Beware of predatory small loans
Unfortunately, some lenders prey on financially struggling borrowers who need cash quickly, including those with poor credit. These predatory lenders are not transparent about the terms of their loans and often offer funds in exchange for high interest rates, excessive fees, and unfavorable terms, trapping desperate borrowers in a vicious cycle that is very difficult to escape.
You can avoid small, predatory loans by carefully reading the fine print in the loan agreement before you sign it, so you know exactly what you’re signing and what will happen once the loan funds are disbursed.
If you notice that a lender has overly loose guidelines and promises to approve all applicants without a credit check, that’s a sure sign to move on. Other red flags include loan officers using high-pressure tactics to get you approved for a loan, excessive penalties, exorbitant interest rates, and repayment periods that are so short that you won’t be able to afford the loan.
