What is a financial plan?

A financial plan is a formal strategy that takes inventory of your current financial situation, sets goals for the future, and creates action steps to achieve those goals. You can create a financial plan on your own, although you can also enlist the services of a financial planner. 

Having a person to guide can be important if you’re just starting the process. However, their services can also be valuable as your strategy becomes more complex because of life insurance needs, retirement planning, and other factors.

Why is financial planning important?

Everyone needs a financial plan. Having one in place will help you take greater control of your finances. A well-developed financial plan can help you by:

• Improving the understanding of your finances
• Allowing you to set measurable and attainable future goals
• Growing your wealth through investments

Whether your dream is to pay off your student loans or retire poolside, you need a financial plan.

How to create a financial plan in 12 steps

It’s never too late or too early to start planning for your future. Here’s how to create a financial plan.

1. Assess your current financial situation

How much debt do you currently have? How much equity do you have in your home? Do you know your credit score? A quick checkup can help you understand where you currently stand, which can assist you as you chart a course for the future.

2. Set financial goals

Set a clear financial goal for yourself. Common examples include:

• Saving for retirement
• Eliminating debt
• Launching a business
• Planning a vacation

Make sure that your goals are realistic and measurable and that you have a general timeline for when you would like to achieve them.

3. Create a budget

On one side of a sheet of paper, write down all your monthly expenses. Then, on the other side, write down your monthly income. Now, take an honest look at how much you’re actually spending each month. 

Many financial experts recommend the 50-30-20 rule. This involves spending 50% of your income on your needs, spending 30% on your wants, and saving or investing the remaining 20%.

4. Track your money

Keep track of what you spend. A banking app will help you track your expenses. If you have an investment or retirement account, make sure to keep tabs on how your money is growing and be prepared to make adjustments accordingly.

5. Save for emergencies

In the U.S., nearly a quarter of people have no emergency savings. If you have no emergency fund, you’ll be forced to dip into your primary savings account or take out a loan if you experience an unexpected car repair or medical bill or other emergency.

Aim to save for three to six months’ worth of expenses. Putting your money into a high-yield savings account will also help you grow your wealth while saving for short-term emergencies.

MoneyLion offers a convenient marketplace to compare high-yield savings accounts from our trusted partners that could help grow your money.

6. Settle outstanding debts

Debt can hold you back in your financial planning — especially if you’re paying high interest rates on things like credit cards or auto loans. By working to eliminate debt, you’ll have more money to invest in your future goals. 

In the avalanche method of resolving debt, you pay off your largest debt first, then your second largest, and so on. Alternatively, you can use the snowball method where you pay your smallest debt before using the extra money to pay off your next debt. 

MoneyLion offers a service to help you find personal loan offers. Based on the information you provide, you can get matched with offers for up to $50,000 from our top providers. You can compare rates, terms, and fees from different lenders and choose the best offer for you.

7. Invest for the future

Investing allows you to help grow your wealth through things like stocks, bonds, real estate, and more. The stock market has historically delivered an average rate of return of around 10%, although past performance is not a guarantee of future success. Investing is subject to risk of loss, including loss of principal. Investing in the stock market comes with risk, which investors can reduce — but not eliminate.

MoneyLion offers a fully managed portfolio that requires no management fees or minimums.

8. Plan for your retirement

Your employer may allow you to divert some of your paycheck to a retirement plan such as a 401(k). Alternatively, you can invest in an individual retirement account (IRA). 

In a traditional IRA, you can deduct your contributions from your annual income taxes, though your future withdrawals are taxed as ordinary income. In a Roth IRA, you’ll pay tax on your current contributions but not your future withdrawals. 

9. Protect your assets

You may already have homeowners insurance or auto insurance to protect your house and vehicle. Personal insurance can also protect your finances in the event of a lawsuit. Covering yourself with an insurance policy ensures that you keep your hard-earned wealth and that your family’s needs are cared for.

10. Plan for taxes

Financial planning also allows you to strategically prepare for tax season. Make sure to keep track of all your sources of income to meet your tax obligations. You may be able to reduce your tax liabilities by deducting things like charitable contributions and business expenses as well as by taking advantage of certain tax credits. These strategies can reduce your tax burden, leaving you more money to save, invest, or lower your debts.

11. Start your estate planning

Estate planning starts with creating a will so that your assets are distributed according to your wishes. You can also work with an estate planner to plan for things like business succession or a final charitable contribution. 

12. Monitor and adjust the plan as needed

Monitor your progress toward your goals by determining how much debt you have left, how much you’ve saved toward retirement, and how your investment portfolio is performing. If you’re not on track toward your goals, it’s time to repeat some of the planning steps to continue progressing.

Map your future

Creating a financial plan can help clarify your goals and create a strategy for reaching them. It may seem overwhelming, but following the above guide will help you tackle your finances one step at a time. Before you know it, you’ll be on track for a brighter financial future.

FAQ 

1. Build your emergency fund

An emergency fund is like a financial safety net for life’s surprises. Imagine having a stash of cash set aside in case you lose your job, have a medical emergency, or your car decides to call it quits. As for where to stash your emergency fund cash, a high-yield savings account is a great option to earn a bit more interest while keeping your money liquid and accessible. 

Money market accounts also offer good interest rates. Or you could ladder certificates of deposit (CDs) for potentially higher returns. The key is keeping your emergency fund separate from your other accounts so you don’t accidentally spend it for non-emergencies.

2. Pay off debts 

Paying off debt can feel like an uphill battle, but it’s freeing once you conquer it. Here’s why debt is so damaging. When you save money, you earn interest — for example, a high-yield savings account pays the saver about 4% interest in April 2024. When you owe money, you pay interest to the lender, and that rate is light-years higher than any yield you could earn. For example, mortgage interest rates run about 6%, student debt could be at 8%, and credit card debt might be anywhere from 12% to over 22%.

The key is finding a strategy that works for your unique situation and sticking to it. You could try the debt snowball method, where you pay off your smallest debts first to gain momentum and motivation. Or go for the debt avalanche approach by tackling the highest interest rates first to save the most on interest over time. Debt consolidation is another popular option — rolling multiple debts into one new loan, often with a lower interest rate and one monthly payment. 

MoneyLion offers a service to help you find personal loan offers. Based on the information you provide, you can get matched with offers for up to $50,000 from our top providers. You can compare rates, terms, and fees from different lenders and choose the best offer for you.

3.Get your 401(k) match

When it comes to building your retirement fund, your traditional 401(k) is like your superhero sidekick. It lets you sock away part of your paycheck before paying tax on it. Your company may also match part of the money you contribute, up to a certain percentage.

The key is making sure you’re contributing enough to get the full company match. It’s usually something like a 50% or 100% match on the first 6% you put in. If you make $60,000 and your company matches 50% up to 6%, that could mean an extra $1,800 per year into your 401(k) on top of your contributions. It’s an easy way to supercharge your retirement savings without feeling it in your daily budget. 

4. Roth IRA

Here’s how a Roth IRA works — instead of getting an upfront tax break like with a traditional IRA, you contribute wages you’ve already paid taxes on. That money grows 100% tax-free, which means years down the road when you’re ready for retirement, you can withdraw all that cash without paying any tax on it. Make sure you play by the income limits to qualify. By stashing cash in a Roth, you’ll be ahead of the game when it’s time for life after work. It’s a retirement power move.

5. Start investing

Investing is like planting a money tree that could keep growing over time. Even if you don’t have tons of cash to start, putting away a little bit regularly can add up. You could invest in the stock market, choosing individual stocks or diversified exchange-traded funds; buy bonds; or invest in mutual funds. It’s easier than ever to start investing with user-friendly apps and robo-advisors that do a lot of the work for you. You can often open an account with as little as just a few bucks. The sooner you plant those first money seeds, the more time and potential they have for growth. However, growth is not a guarantee. Investing and purchasing crypto currency is subject to risk of loss, including loss of principal so if you are not sure, consider consulting an investment advisor to help build your portfolio. 

MoneyLion offers a fully managed portfolio that requires no management fees or minimums.

6. Pay for insurance

Insurance is kind of like a force field protecting you from life’s crazy curveballs. With the right insurance policies in place, you can breathe easy knowing you’ve got a safety net to cover those costs if something goes sideways. For example, home and auto insurance help protect two of your biggest investments — your house and your vehicle. Travel insurance gives you backup for delays, cancellations, or medical emergencies far from home. The key is assessing your personal risks and assets to determine what coverages make sense for your situation.

PRO TIP! Search numerous auto insurance providers to find savings in seconds.

7. College fund for your kids

Starting a college fund for your kids is like giving them a supercharged head start on their futures. Instead of them being saddled with massive student loans later, you’ll have a stash of cash just waiting to make their higher education dreams a reality.

The earlier you start squirreling away funds, the better, as it gives your money more time to grow. Even saving small amounts regularly into a tax-advantaged 529 plan can potentially blossom into tens of thousands of dollars over 18 years as the interest accumulates on top of your contributions.

8. Home renovation fund

A home renovation fund is like a piggy bank for making your dream home a reality. Instead of scrambling to cover costs when those renovation projects pop up, you’ll be ready with a dedicated stash of cash. The trick is setting up a high-yield savings account specifically for this fund, separate from your normal banking accounts. That way the money is liquid and accessible whenever you need it but safely partitioned off from your day-to-day spending. And higher interest rates will give your renovation dollars a boost while you save.

MoneyLion offers a convenient marketplace to compare high-yield savings accounts from our trusted partners that could help grow your money.

9. Vacation fund

A vacation fund is like a passport to adventure and relaxation. Instead of dreaming about exotic getaways, you’ll have a stash of cash saved up and ready to make your travel dreams a reality. The trick is treating your vacation savings like an essential bill you pay each month by automatically funneling money into a separate high-yield savings account. Not only does this prevent you from accidentally spending your travel cash, but higher interest rates will give your fund a little bonus boost while you save up. 

10. Start a small business

Instead of daydreaming about being your own boss, you can use your extra cash for start-up funds to realize that goal. Imagine getting to pursue your true passion, set your own schedule, and watch something you created from scratch start to flourish and grow. With seed money from your savings, you can invest in essential equipment, inventory, marketing, or whatever your budding business needs to get off the ground. If you think a loan is what you need to get started with your small business, MoneyLion can help you compare loan options.

Gotta be startin’ something

You did it! You sacrificed, scrimped, and did without, and the result is extra money that you can use to propel you toward realizing long-held dreams or pursuing new goals. The question is — which ones? The 10 ideas discussed here mark just a beginning; if you’ve been able to get to this financial pinnacle, it’s only a start in your financial ascent. You’ll soon be looking for more ideas for what to do with extra money you’ve generated. Way to go!

FAQ 

Balancing design, comfort, quality, and cost is unique to each family. Regardless of your taste, financing a sofa or new living room decor can be a substantial cost on top of regular expenses. Read on for 10 ways to finance a couch to decide what option works best for you.

If you need cash to finance your couch, MoneyLion can help! MoneyLion offers a service to help you find personal loan offers based on the info you provide. You can get matched with offers for up to $50,000 from our top providers. You can compare rates, terms, and fees from different lenders and choose the best offer for you. You can also use the loan funds to buy a couch.

How does couch financing work?

Couch financing, like any other financing, usually involves some sort of loan. However, for the sake of simplicity, we’ll assume the first way to finance a couch is by paying in cash. You’ll save on interest and won’t have to worry about future monthly payments.

If that’s not an option, you can choose from in-store financing to personal loans, credit cards, or peer-to-peer lending. In all of these cases, you’ll need to make monthly payments towards the loan principal plus interest. If you can pay off the full purchase price before interest charges build up, you’ll save more in the long term.

For example, some stores offer a 0% APR for 12 to 18 months after a couch or furniture purchase. Likewise, you could use a credit card with a 0% APR introductory offer to finance a couch. 

If those options don’t work, a personal loan or other loan with interest is always an option. And then there’s borrowing from family or friends. Which works for you? Read on to understand the pros and cons of each and how much you can expect to pay for the convenience of financing. 

10 Financing options available for purchasing a couch

Ready to finance a couch? Here are the 10 best options. 

1. Cash

If you pay in cash, there are no credit checks, minimum credit score requirements, or monthly payments after the purchase is complete. Instead, you’ll pay the full value of the couch upfront. While this can save you more in the long term, you’ll need to save up ahead of time to ensure you have the cash reserves to make the purchase. If you’re paying from savings, it also means depleting your savings for the purchase. 

Pros

The advantages of buying a couch with cash are:

• No monthly payments.
• No interest payments.
• You’ll own the couch outright from the first month.

Cons

The disadvantages of buying a couch with cash are:

• You need to save up the full value of the couch.

2. In-store financing

In-store financing is a type of consumer financing. You can purchase the couch and finance the purchases at the physical retail location. This option is best for consumers who cannot get a personal loan or when the store has a 0% APR offer. This option is usually only available at department stores or major furniture stores, but some smaller furniture stores may also offer in-store financing. Many stores will perform a hard credit check, which can temporarily impact your credit score. 

While minimum credit score limits vary by store, you may qualify for a lower interest rate with a higher credit score. Minimum credit scores range from 580 to 620, while optimal credit scores are 670 or higher. Usually, you can apply in-store and will get instant approval or denial. 

Pros

The pros of in-store financing include:

• Easy to qualify.
• You’ll usually get instant approval or denial.
• Some in-store financing offers a 0% APR for 12 to 18 months to help you save more on interest.

Cons

The disadvantages of in-store financing include:

• You may get higher interest rates than with other payment options. 
• Some stores perform a hard credit check, which can affect your credit score. 
• Some stores may charge retroactive interest after an introductory interest-free period.
• Not all stores have in-store financing.

3. Personal loan

A personal loan is a flexible financing option. You can use it for anything, from financing a couch or home renovation to consolidating credit card debt or paying medical expenses. A personal loan can be a good option if you purchase more than a single couch or need to combine the purchase of a couch with debt consolidation. 

Personal loans require a credit check. You’ll usually need a minimum credit score of 580, but some lenders have higher requirements. The higher the credit score, the greater the possibility of a lower interest rate. Interest rates on personal loans are significantly lower than on credit cards and payday loans. 

Pros

The advantages of a personal loan include:

• Fixed interest rates, and thus fixed monthly payments.
• You can often prequalify without a hard credit inquiry.
• Get funds for the purchase within a few days or even the same day.

Cons

The disadvantages of personal loans include:

• Lenders may charge upfront origination fees.
• It’s difficult to qualify with poor or no credit. 
• Interest rates can be high for borrowers with lower credit scores.

4. Credit card 

Putting major expenses on a credit card is usually only a smart financial strategy if you know how to manage the credit card and plan to pay it off before interest is due. Otherwise, the interest rates may be significant when factored into your budget. Other options to finance a couch could be less costly.  

If you have a credit card introductory offer, buying a couch with a credit card and paying it off on time can be a strategy to earn extra rewards or bonus points. On the other hand, if your credit card has a 0% APR offer, you could buy a couch on the credit card and plan to pay it off before the introductory offer ends. 

For example, if you buy a $3,000 couch on a card with an 18-month 0% APR, you could pay $176.50 monthly for 17 months to pay off the debt before interest is due. 

If you already have a credit card, you don’t need a credit check or minimum credit score before buying a couch with your credit card. However, notifying your card issuer of the large purchase you plan to make can ensure the purchase goes through without issues. 

Pros

The advantages of buying a couch on a credit card include:

• Easy to plan for purchase and repayment without applying for a loan or needing to stick to specific repayment schedules. 
• No need for a new credit application (if you already have the card, and the limit is high enough).
• During a 0% APR promotion you’ll save on interest.
• With a new credit card offer, you could earn bonus “points” from the credit card to use for cash back, travel credit or other benefits.

Cons

The disadvantages of financing a couch with a credit card include:

• High interest rates (average APR of 27.89%) if you don’t pay it off on time.
• Depending on the sofa price and total credit line, it could negatively impact your credit score and credit utilization ratio, as exceeding a credit utilization of 30% can have negative consequences for your credit. So if the sofa is $3,000 and your credit line is $5,000, your credit utilization ratio will be seen as “too high”.

5. Earned wage access (EWA)

Earned wage access (EWA) is also called instant pay, early wage access, accrued wage access, earned income, or on-demand pay. With EWA, you may be able to access your usual salary ahead of the payday schedule. This doesn’t require a credit check and is best for employees of large companies or businesses with consistent wages. 

Pros

The advantages of EWA include: 

• Typically interest-free early payment.
• A way to pay for a coach without taking a loan.
• Usually no credit check.

Cons

The disadvantages of EWA include: 

• Not offered by all employers.

PRO TIP! You can access up to $500 of your paycheck, any day with MoneyLion Instacash^SM. No interest. No credit check. No mandatory fees*.

6. Payday loan 

Payday loans are typically short-term, high-interest loans. As the name implies, they’re designed to help you cover expenses until the next payday. Some payday lenders offer these loans without a credit check, while others will perform a credit check. Payday loans may help borrowers who expect a large payment within a couple of weeks, and who don’t have other financing options like a credit card, personal loan, or Instacash. 

Pros

The advantages of a payday loan are:

• Get instant approval in most cases.
• Some lenders offer payday loans without a hard credit check.

Cons

The disadvantages of payday loans include:

• Interest rates for these products tend to be higher than other options
• Short-term loans designed to be paid back within two weeks aren’t usually the best option to finance a couch because of high interest rates and the risk of getting caught in a cycle of debt. 

7. Secured loan

A secured loan requires you to offer equity in exchange for the loan. This can include real estate, savings, retirement accounts, or other assets. Secured loans are best for borrowers who don’t have other loan options, or who want lower long-term interest rates. 

One type of secured loan is a home equity line of credit (HELOC). This revolving credit line is backed by your home. Likewise, a home equity loan is a type of secured loan backed by the equity you’ve built in your home. These common secured loans are easier to qualify for, as long as you’ve built up equity in your home. 

Pros

The advantages of secured loans include:

• Possibly lower introductory rates.
• HELOCs offer a flexible credit line to use and pay off on your own schedule.
• Other secured loans usually have fixed interest rates.

Cons

The disadvantages of secured loans include: 

• You need home equity, savings, or other assets with value to secure the loan.
• If you can’t pay off the debt, you risk losing the asset securing the loan. 

8. Payday alternative loans

Payday alternative loans include online loans. These short-term loans may offer easier qualification requirements, no credit checks, or no interest. Payday loan alternatives are best for borrowers who expect to be able to pay off the full loan amount in the short term. 

Pros

The advantages of payday alternative loans include:

• Easier qualification requirements than personal loans.
• May not require credit checks.
• Some come with low or no interest charges for a short-term loan.

Cons

The disadvantages of payday alternative loans include: 

• These loans are usually short-term, so they aren’t the best option if you need to pay off the couch over a year or more. 
• Some payday alternative loans charge high interest rates or fees. 

9. Peer-peer lending

Peer-to-peer lending (P2P) is an emerging option for securing loans. Instead of visiting a bank or applying online, with peer-to-peer lending (P2P), you can borrow money from other individuals through lending platforms. While peer-to-peer lending often comes with higher interest rates, you could also secure a loan with lower interest. P2P lenders usually look for credit scores of at least 600 or higher.

Pros

The advantages of P2P lending include:

• Easier to qualify for than some other loans, especially if you have a low credit score.
• You could get access to funds within days.
• Search for P2P loans with terms that meet your needs, giving you more flexibility.

Cons

The disadvantages of P2P lending include:

• No insurance or government protection for your funds (or for lenders)
• Some jurisdictions do not allow peer-to-peer lending 
• You won’t always get funded right away. 
• Borrowers with a low credit score can struggle to qualify. 

10. Borrow from family and friends

Borrowing from family and friends can be a polarizing topic. If you are comfortable asking a friend or relative to borrow the funds, you could potentially save on interest. However, you also risk straining the relationship. 

If you decide to borrow from family or friends, be sure to make a written agreement of repayment terms and interest, and stick to it. If this is an option, you could get money the same day with no credit checks and no hassle. 

Pros

The advantages of borrowing from family or friends include:

• Since you are making an agreement with a friend, they may agree to a lower interest rate. 
• Access to cash quickly, often even on the same day, depending on the liquidity of your friend or family member.
• Set repayment terms to meet your needs.

Cons

The disadvantages of borrowing from family and friends include:

• Possible strain to relationships or arguments stemming from unmet expectations.
• Possibly more of a hassle than applying for a loan or choosing other payment options if it strains your relationships. 

Should You Finance a Couch?

Sometimes the best strategy is delayed gratification. If you can use personal savings or cash to pay for the couch, you don’t have to worry about interest rates, credit checks, origination fees, or repayment terms. However, if you choose to finance a couch, carefully compare interest rates and terms to find the loan option that best fits your needs and financial situation. 

FAQ

EWA is a financial benefit that lets employees control when they receive their pay, typically for a small fee. Access to your pay early can be a financial lifeline, steering clear of the high costs associated with payday loans and potentially enhancing financial stability. Read on to learn more about EWA in this guide.

See EWA offers (and others) from our network of financial partners.

How does earned wage access work? 

Earned wage access is a financial service offered by private companies and is not affiliated with government programs. The service is available to employees who have earned wages that have not yet been paid out, typically because they are between pay periods.

EWA is accessible through different methods. Some employers offer it as a benefit, integrating the service with their payroll systems. In this setup, employees can request an advance on the wages they’ve already earned directly through an app or a website associated with their employer’s EWA provider.

Workers whose employers do not offer EWA can access independent cash advance apps. These apps require users to sign up, connect their bank account, and verify their employment. The app will track the hours worked and offer a portion of the earned income.

You could also use overdraft apps that provide a safety net by advancing funds to cover expenses that exceed an individual’s bank account balance, preventing overdraft fees.

To use EWA, you’ll need to meet the criteria of the service provider, which generally includes having a verifiable source of steady income and a bank account. 

Why should you consider using earned wage access?

If you often find yourself strapped before payday or you’ve got bills that pop up out of nowhere, EWA can step in to make things easier. It lets you pull out some of your paycheck ahead of schedule, which can be a big relief.

But here’s the kicker: you have to use it wisely. Think of EWA like an emergency kit — it’s there when you need it, but you shouldn’t dip into it for just any reason. Every time you tap into your earnings early, there might be a fee. So you don’t want to go for it unless you really need it.

3 types of earned wage access

EWA is often particularly valuable when there’s an unexpected crisis and you need money right away. It’s a way to avoid overdraft fees as well. 

When choosing an EWA service, consider your payroll provider’s options, the potential for emergency expenses, and your personal financial management habits. The goal is to enhance your financial well-being without incurring unnecessary fees or dependency on services like payday lenders, which can have high interest rates and unfavorable terms.

Employer-based programs

EWA options offered by your employer are tied into the company’s payroll system, providing a streamlined way for workers to receive a paycheck advance. They’re a popular employee benefit as they can prevent the need to turn to payday lenders with high interest rates. For instance, Payactiv is one service that doesn’t require a credit check, uses payroll data to determine the amount you can withdraw, and often comes with no transfer fee.

Purpose: Use it to pay off pressing bills 

Example: Payactiv

Pros 

• Free to enroll
• No credit check required (eligibility by payroll info)
• Often integrated with the employer’s payroll system, which can allow for seamless transactions and quick access to earned wages

Cons

• Employer must participate
• Availability of funds may be limited to the number of times you can access your earned wages within a pay period

Cash advance apps

These apps offer a cash advance against your next paycheck directly to your bank account or debit card, like MoneyLion Instacash^SM. They’re a handy tool for getting cash quickly without the high costs associated with payday loans. They often work by analyzing your payroll cycle to safely offer a pay advance without the risk of an overdraft.

Purpose: Use it to pay immediate expenses, like bills or payments

Example: Instacash*

Pros

• No credit check (eligibility linked bank account info)
• No or low interest rate based on your financial profile
• Delivery options within minutes, providing timely financial support 

Overdraft apps

Apps such as Chime SpotMe are designed to protect you from overdraft fees if your bank account balance falls below zero. They can provide peace of mind for those who have irregular pay cycles or who need emergency savings back up. These apps might allow you to receive your paycheck a few days early, which can be a significant advantage in managing your cash flow.

Purpose: Use it to pay immediate expenses, like bills or payments

Example: Chime SpotMe

Pros

• No fees
• Covers fees for going over your checking account
• Get paid 2 days early for deposits

Cons

• Not a guaranteed feature 
• Need direct deposit

Earned Wage Access — A Financial Back-Up System That Has Your Back

EWA is a great example of a fintech system that helps put regular people in the driver’s seat on their financial journeys. You did the work, so why should you need to wait a long time to get paid, especially when you’re experiencing a temporary financial hardship? Explore EWA’s benefits to get back on track when you’re approaching an unexpected financial turn.

FAQ

According to TransUnion, personal loans have become a significant part of consumer finance with total personal loan balances reaching $241 billion in the third quarter of 2023, marking a nearly 15% increase from the same period in 2022​. 

If you find yourself in need, a personal loan can be a great way to take control of your financial future. Whether you’re looking to buy a car, take that dream vacation, or cover life’s unexpected mishaps, there are many options available. 

Let’s take a closer look at personal loans, which loans to avoid, and how to get a personal loan offer with competitive interest from MoneyLion’s trusted partners.

PRO TIP! Unsure if you would qualify for a loan? Check your likelihood of getting a loan offer from one of MoneyLion’s partners with our approval rate calculator. 

What is a personal loan?

A personal loan is a type of credit typically offered by banks, credit unions, or online lenders, where you borrow a specified sum of money and agree to pay it back over a predetermined period, usually in fixed monthly installments. This form of borrowing usually involves a fixed interest rate, meaning the monthly payment remains consistent throughout the loan term, simplifying budget management for the borrower​​​​.

Personal loans are versatile and can be used for a wide range of purposes, including debt consolidation, home improvements, emergency expenses, or major purchases. They often range in amount from $1,000 to $50,000, though this can vary based on the lender and the borrower’s financial situation​​​​.

Unlike some other types of loans, you can use a personal loan for almost anything. Some of the most common reasons why people take out personal loans include:

• Covering an urgent home expense, like a plumbing bill
• Taking a weekend vacation without putting more money on a high-interest credit card
• Paying for books, lab fees, or other supplies for school
• Paying off unexpected fines or bills
• Consolidating debt
• Buying expensive items 
• Emergency needs like medical visits and covering rent or mortgage

Steer clear of predatory lenders

When considering a personal loan, it’s important to be cautious about predatory lenders. Debt.org defines predatory lending as “any lending practice that imposes unfair or abusive loan terms on a borrower.” Although the term is most commonly associated with payday loans, it can include other types of loans too, such as car title loans.

These predatory lenders often target individuals who may have limited credit options, offering loans with extremely high interest rates and fees, which can lead to a cycle of debt. 

If the lender pressures you to make a quick decision or to take out a larger loan than you need, this is a red flag. Legitimate lenders do not rush customers into borrowing and generally offer clear terms and conditions.

Check for reviews, complaints, and their standing with the Better Business Bureau. You can also look for information on consumer protection sites or consult with a financial advisor.

Bad credit doesn’t have to disqualify you from getting a personal loan. However, it can make your search for the right loan a little tougher. Remember to read the terms and conditions of any loan you consider and know what to look for when you choose a lender.

Characteristics of the best personal loans

It’s not impossible to get a personal loan when you have bad credit or no credit, but it’s a good idea to be picky about which lenders you work with. Here are a few of the things you should look for when you decide on a personal loan provider. 

1. Apply for loans online

Chances are good that you don’t have time to sit around, waiting to hear back from a loan officer if you need a personal loan. One of the biggest benefits of getting a personal loan from an online or digital bank is that you don’t have to schedule multiple trips to a physical location to coordinate your loan. 

Look for a financial institution that allows you to apply for your loan and submit the necessary identifying information online. Some of the best online loan providers could provide instant approval and deposit your loan into your account as soon as your request is processed. 

MoneyLion can help you find personal loan offers based on your background and the info you provide. You can get matched with offers for up to $50,000 from top providers. You can compare rates, terms, and fees from different lenders and choose the best offer for you.

2. Loan limits

Because personal loans are unsecured loans, banks and lenders usually have limits on the amount of money that they’re willing to lend. It’s important to know how much money you need before you start looking for a lender.

A reasonable amount to borrow depends on what you need your personal loan for. You can figure out how much you need by adding up the price of your textbooks, the price of your weekend getaway, etc. Make sure to do this before you start comparing lenders, which will help you easily rule out lenders that don’t offer what you need.

3. Low APR

Lenders calculate insurance in terms of an Annual Percentage Rate (APR). The APR tells you how much money your loan will accumulate in interest.

The Truth in Lending Act (TILA) of 1968 requires lenders to disclose the APR they charge to borrowers. This act ensures transparency in lending practices, allowing borrowers to have a clearer understanding of the cost of borrowing.

High APRs generate more interest, which can make it harder to pay back your loan. Low APRs save you money, so you should prioritize lenders who offer you the best rates. 

4. No repayment or origination fees

Some lenders charge you high fees. Lending fees are common, so it’s a good idea to keep your eyes open for unnecessary fees.

Make sure that your loan doesn’t include any kind of early repayment fee or penalty. As the name suggests, If you make a payment early, sometimes you’ll have to pay an early repayment fee. You may also need to pay the fee if you make more than the minimum payment every month.

Just like when you look for your loan’s APR, make sure you’re reading all your loan’s terms and conditions before you sign. 

How to apply for a personal loan in 6 steps

Taking out a personal loan can be a financial tool to help you achieve your goals, whether it’s consolidating debt, covering unexpected expenses, or funding a major purchase. It’s important to understand the key steps involved and the potential pitfalls you might encounter.

1. Assess your financial situation

Before you begin the loan application process, assess your financial standing comprehensively. Consider how much you need to borrow, evaluate your income, and realistically analyze your ability to repay the loan. This self-assessment will lay the foundation for a successful loan application.

2. Research and compare lenders

With your financial picture in mind, the next step is to research and compare different lenders. Not all lenders are the same, and finding the right fit for your needs can save you money and ensure a smoother borrowing experience. Look into interest rates, loan terms, and additional fees or requirements. Take the time to identify reputable lenders with positive customer reviews.

3. Check your credit score

Your credit score is a critical factor in securing a favorable loan offer. According to Experian, it’s possible to get a personal loan with a lower credit score, but a score of at least 670 has the high approval odds. Here’s how to manage this step:

• Obtain your credit report: Obtain a copy of your credit report from the major credit bureaus (Equifax, Experian, TransUnion). You’re entitled to one free report from each bureau annually through AnnualCreditReport.com.
• Review for errors: Scrutinize your credit report for any inaccuracies or errors. If you find discrepancies, dispute them with the credit bureaus to ensure your report is accurate.
• Credit improvement: If your credit score is lower than desired, take steps to improve it. This process may involve paying down existing debts, making payments on time, and avoiding new credit inquiries.

PRO TIP! Building your credit is easier than you think. It starts with knowing and understanding your score, creating goals, and then monitoring your credit as you take steps to help build it.

4. Gather necessary documents

Lenders will require specific documents to process your loan application efficiently. These documents typically include proof of income, identification, bank statements, and other financial information. Organize these documents in advance to streamline the application process and expedite your approval.

5. Fill out and submit the loan application form

With your financial documents in order, complete the loan application form accurately and provide all the requested information. Be ready to furnish details about your income, employment history, and outstanding financial commitments. Read and understand all the terms and conditions before submitting your application.

6. Accept the loan and repay

Once accepted, follow the provided instructions for repayment. Timely monthly payments not only repay the loan but can also contribute to improving your credit score, enhancing your financial health in the long run.

A Path to Financial Success 

Personal loans are a type of credit, which means that you need to use them sparingly and wisely. Like any other tool, these loans can help you or hurt you, depending on how you use them. If you use them responsibly, a personal loan can be a lifeline in a time of need. But, if you get in over your head and fall behind on the payments, you’ll risk ruining your credit and accumulating more debt. You may also end up paying higher rates in the future.

Take out a small personal loan with a reasonable interest rate and always make your payment on time, and you could see your credit score increase. Fall behind on your payments, and your score may be worse off than when you took out the loan.

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