Personal Loan Review Methodology
A Close Look at Our Evaluation Process
Personal loans can help you reach your financial goals—or help you in a pinch. At The Balance, we strive to provide unbiased, comprehensive reviews of financial products and services, including personal loans. To produce our reviews, we collect and analyze more than 50 data points from dozens of lenders. Next, we score the most important features likely to affect your finances, such as interest rates, fees, and qualification requirements. Finally, we continuously track and monitor the banks and loans in our database in order to update our analyses and reviews as the market evolves.
We strive for impartiality and editorial independence in our reviews. Lenders and others don’t influence which lenders and personal loans we review, how we present them, or the ratings they receive. Our scores and reviews are based on the data we collect, as well as our long-standing editorial experience analyzing personal loan offerings and lenders.
How We Rate Loans and Lenders
Personal loans and lenders receive scores on a scale of 0 to 5 points. Weighted scores, based on factors most likely to have the biggest impact on your finances, are used to determine the star ratings assigned to the loans and lenders. The main elements we focus on for personal loans and lenders, ranked from heaviest weight at the top, include:
- Average fixed APR
- Average origination fee
- Prequalification option
- Prepayment fee
- Minimum recommended credit score required
- Membership details
- Average late payment fee
Average Fixed APR
Because of the impact interest rate has on the total cost of the loan, fixed Annual Percentage Rate (APR) accounts for the highest weight in our scoring model—50% of the total score. With a fixed rate, you don’t have to worry about the interest rate changing over the life of the loan, as you would with a variable rate. Currently, no lenders in our database offer personal loans with variable rates, but we are constantly adding loans and lenders.
Your interest rate is basically the cost you pay to borrow money. The higher the interest rate, the bigger your overall cost. For example, if you get a 48-month loan of $15,000, the interest rate you end up with makes a significant difference in the amount of interest you pay for the loan.
With the highest APR, you end up paying $2,433.49 more in interest charges over the course of your loan than you would with the lowest rate. That’s a significant amount, and the more you borrow, the more you’ll pay with a higher APR.
Currently, the U.S. is in a relatively low-rate environment. However, it’s important to note that our average APR is an average of the range of rates offered by the lender and not the average of the rates consumers actually received on loans.
Average Origination Fee
The next item we score is the average origination fee. This is a cost charged by some lenders when they provide a loan. It’s an extra administration fee that is often added to the loan balance, so you end up paying interest on the fee. When we mention APR, it includes the origination fee, since that’s part of how the APR is figured. With personal loans, you have a base interest rate, and then the origination fee is included. All those fees together are wrapped up to determine the APR.
The origination fee is an upfront fee, usually based on a percentage of the loan amount, that is charged as one of the administration costs associated with getting a personal loan.
Because origination fees add to the cost of the loan, they are weighted fairly heavily in our rubric. Some personal lenders don’t charge origination fees at all, and those receive higher scores. Others might charge fees of 10% or more, depending on various factors. Our weighting takes into account the average of published origination fees in the event a lender charges a range.
We weigh the ability to get prequalified because it gets rid of “hard” credit inquiries that can slightly ding your credit score. With the prequalification, you receive a “soft” inquiry, which won’t impact your credit score. Prequalification can help you shop around and compare your potential interest charges and terms. Because prequalification helps borrowers make better loan decisions, a lender that offers it scores higher in this metric. On top of that, prequalification can also reflect on a lender’s overall customer service focus.
Some lenders charge prepayment fees, which punish borrowers who pay off their loans early (and avoid paying interest). With a prepayment fee, you are penalized for getting out of debt sooner so the lender can receive more in fees or interest. Before getting a loan, read the fine print to ensure that you won’t be charged for paying off your loan early.
As of this writing, none of the lenders in our database charge prepayment penalties, but it’s nevertheless something we examine on an ongoing basis for the lenders we review.
Minimum Recommended Credit Score
Lenders who offer loans to borrowers with lower credit scores receive a small boost in our scoring. This reflects The Balance’s view that access to financial products should be as broad as possible. These lenders’ APRs are generally on the higher side as they price in the added risk, and this score boost overcomes a bit of the knock they take for the high APR.
None of the lenders in our database offer loans to borrowers with scores below 580 (the bottom of the “Fair” range in FICO’s system).
|FICO Score Range||Rating||Description|
|800+||Exceptional||You are almost certain to repay your loans and your score is far above the average consumer score.|
|740-799||Very Good||You are considered a dependable borrower with a credit score above the national average. You can generally expect to see the best possible interest rates.|
|670-739||Good||Your credit score is in line with the average for most U.S. consumers and you’re likely to qualify for most loans.|
|580-669||Fair||Even though you will likely be able to get a loan, your score is considered below average and you might end up with a higher interest rate.|
|<580||Poor||Lenders consider you a risky borrower and your score is much lower than the national average. You will likely have trouble getting a loan.|
Credit unions often require some sort of membership or affiliation before offering products. Additionally, some banks and other lenders may require an ongoing relationship. For example, to get a loan from American Express, you must be an existing customer (such as a cardholder) and have received a pre-approval offer. Lenders without membership or relationship requirements score better; lenders with membership or affiliation requirements score worse.
While membership requirements may present a barrier for applicants, some lenders offer special discounts on rates if you have a relationship. This might be considered in the review, but isn’t part of the scoring metric.
Average Late Payment Fee
The average late payment fee is another cost (hopefully rare), and another average of the lender’s offered range. The easiest way to avoid these is by staying current on payments. The lower the fee, the better the score in our metric. For example, Marcus won’t charge a late fee, but a common late charge might be $15—and some lenders charge up to $100 for a late charge. Carefully pay attention to late fees and when they’re charged since this can add to the cost of the loan.
Other Factors We Don’t Score, But You Should Consider
Most of the items below are subjective or depend on the borrower’s circumstances. We include these in our reviews, but they don’t factor into our scoring.
- How long the lender has been in business
- Amount you can borrow
- How you get your money
- Other tools and resources
We take a look at how easily the borrower can reach the lender. Is it possible to reach a human via online chat or phone? We also consider whether there are branches located around the country and how many there are. While some consumers don’t care about in-person interactions, it can be important to others. The Balance provides this information so you can make a decision based on your individual preferences and needs.
How Long the Lender Has Been in Business
Institutions with longer track records may be stronger and have more product offerings. Additionally, in some cases, a lender that has been around longer can provide better service. A long history of serving customers can be an indication that you can trust them to some degree.
Amount You Can Borrow
While it doesn’t factor into our scoring rubric, we do provide information about the amounts the lender allows you to borrow. If you need a small loan, a personal lender with a minimum requirement of $5,000 might not meet your needs. On the other hand, if you’re looking for a larger loan, a personal lender that doesn’t offer loans of more than $25,000 might not provide you with adequate financing. Evaluate your borrowing needs and consider whether the lender meets those needs.
How (and How Soon) You Get Your Money
Because many consumers need to know how quickly they’ll receive funds, we often include this information in our reviews when it’s available. It doesn’t figure into the scoring rubric, but it does provide important insight that you can use to make a more informed decision about whether a personal loan or lender is right for you.
Other Tools and Resources
Finally, we think it’s important to provide insight into additional tools and resources offered by personal lenders. For example, a good mobile app can make it easier to monitor your loan. Additionally, some lenders offer calculators and money management tools, including access to your consumer credit score. Some even offer financial and career advice. While we don’t measure this for inclusion as a scoring metric, we still think including this information in our reviews can help you make a more informed choice.
The Bottom Line
Our personal loan and lender reviews are written with the borrower in mind, understanding that you might have questions about different aspects of the loans. We look at the items most likely to impact your cost and overall experience, we read the fine print, and we provide analysis that can help you make the best choice for your situation. Our comprehensive methodology and scoring system, along with our reviewers’ experience in the field, can provide you with the full picture and a basis for comparison.
Everyone’s situation and needs are different. At The Balance, we strive to structure our reviews to give you a way to compare your options using features, pros, cons, and terms we think are most important to making an informed decision so that you can make a decision that fits your lifestyle.
Please note that our reviews are not intended as advice, are meant to be used as a resource, and are for informational purposes.