If you need to borrow $5,000 or less, a personal loan might be your best option. But how do you qualify for a personal loan? How much income do you need, and what’s the minimum credit score? Can you afford the monthly payment? What other options are there to borrow $5,000?
Personal loan providers want to know that you will repay them before they approve and you get a $5,000 loan. They examine your credit history and score to determine your willingness to pay your debts. And they analyze your debts, employment, and income to understand your ability to repay the loan you want.
What Credit Score Should You Have to Get a $5,000 Loan?
Personal loan providers often specialize in borrowers with specific credit scores. Some only want top-drawer applicants with credit scores over 700 or even higher. Others work with applicants whose credit scores are as low as 580 — and you can go even lower with a co-signer. Interest rates are higher for people with fair or low credit scores and lower for people with high credit scores. However, rates for people with identical scores vary considerably among personal loan providers — you want to find the lender with the best rate for your credit grade.
How Much Do You Have to Make Per Month?
Personal loan providers look at two factors before granting (or not granting) loan approval — your income and your debts. Then they calculate your debt-to-income ratio (DTI). Your DTI equals the total of your housing costs (rent or mortgage) and other monthly accounts (minimum credit card payments, auto loans, student loans, etc.) divided by your monthly gross (before tax) income. Living expenses like food and utilities don’t count. If your rent plus debt payments equals $2,000 per month, and your gross income is $5,000 per month, your DTI is 40% ($2,000 / $5,000). Lenders set maximum DTI anywhere from 36% to 50%.
Lenders also consider the source of your income. Do you have a stable work history? Or do you change careers often and have extended stretches of unemployment? Your income must be ongoing, steady, and enough to cover your expenses and your loan payment for loan approval.
What Will the Monthly Payment Be?
Your monthly payment depends on three factors: the loan’s interest rate, loan amount (including setup costs), and term.
- Interest rates typically range from under 6% to 36%.
- Most lenders set their minimum loan between $1,000 and $5,000. Maximum loan amounts can be as high as $100,000.
- Terms range from one year to more than ten years.
The chart below shows how a $5,000 loan payment varies according to its term and interest rate.
| Term | Interest Rate | ||||||||||
| (Yrs) | 6% | 9% | 12% | 15% | 18% | 21% | 24% | 27% | 30% | 33% | 36% |
| 1 | $430.33 | $437.26 | $444.24 | $451.29 | $458.40 | $465.57 | $472.80 | $480.09 | $487.44 | $494.84 | $502.31 |
| 2 | $221.60 | $228.42 | $235.37 | $242.43 | $249.62 | $256.93 | $264.36 | $271.90 | $279.56 | $287.34 | $295.24 |
| 3 | $152.11 | $159.00 | $166.07 | $173.33 | $180.76 | $188.38 | $196.16 | $204.13 | $212.26 | $220.56 | $229.02 |
| 4 | $117.43 | $124.43 | $131.67 | $139.15 | $146.87 | $154.83 | $163.01 | $171.41 | $180.03 | $188.86 | $197.89 |
| 5 | $96.66 | $103.79 | $111.22 | $118.95 | $126.97 | $135.27 | $143.84 | $152.68 | $161.77 | $171.10 | $180.66 |
You can find the payment for any set of loan terms with a personal loan calculator.
Pros and Cons of Personal Loans
Personal loans are straightforward products with few moving parts. Their advantages are clear:
- Personal loans are usually unsecured (you do not pledge an asset the lender can take from you like a car or house). That makes them quick to process because there is no property to appraise.
- Most personal loans have fixed interest rates. That makes budgeting easier.
- Minimum loan amounts are low — as low as $1,000.
- Consolidating credit card debt with a personal loan can raise your credit score quickly.
- Personal loans require no home equity.
- Personal loans can be used for nearly any purpose.
However, no financial product is perfect for everyone or every need. Personal loans have a few drawbacks:
- Because there is no collateral, personal loan interest rates are highly dependent on your credit score. A mortgage borrower with poor credit might pay 6% when one with excellent credit pays 3%. The same borrower might pay 36%, while the prime applicant is offered 6% for a personal loan.
- When you apply with several mortgage or auto lenders in a short time, all credit inquiries related to your search are treated as one to protect your credit rating. But every personal loan application creates a separate credit inquiry. You can avoid this by working with lenders that allow prequalification before applying for loan approval.
Frequently Asked Questions
What are the alternatives to a $5,000 personal loan?
There are several options if you can’t get a $5,000 loan:
- If you’re using the money to buy an asset, you might get a better rate with a secured loan like an auto loan or boat loan.
- Credit cards with low introductory rates can be better if you pay back the balance before the low rate expires.
- Home equity loans can be expensive to set up. But home equity lines of credit can be obtained with no setup costs from some lenders.
- Friends and family can be a source of money if you are confident that you’ll repay them as agreed. Put the agreement in writing.
- Sell assets you don’t need on eBay or have a garage sale.
- Take a temporary second job for extra income.
- Payday and auto title loans are last resorts. Take one only in an emergency and pay it off. Rolling over such loans can get you into deep trouble fast.
Can you get a $5,000 loan with no credit check?
No. Any loan advertised as a personal loan with no credit check is either a payday loan, auto title loan, or a scam.
How can you find the best personal loan?
Personal loan rates and terms vary widely among lenders. You don’t want to harm your credit by applying with lenders that will decline you or pay too much by applying with lenders that target people less qualified than you. You can find lenders that operate in your zone by reading reviews and articles. You can prequalify with multiple lenders and then accept the best offer. Or you can fill out an online inquiry form with a matching service and then apply with recommended lenders.
About the Author
Gina Freeman writes about personal finance and has been featured on AmOne.com, The Mortgage Reports, MSNMoney, Fox Business, Forbes, The Motley Fool, and other fine websites. Her background includes tax accounting with Deloitte, over 20 years in mortgage sales and underwriting, systems consulting for Experian, and several years in bankruptcy law. Gina enjoys helping consumers make confident and intelligent financial decisions.
