Most of the time, it seems like legitimate lenders only offer larger loans, whether they are mortgage loans, auto loans, or even student loans. But sometimes you need a small amount of money, say $5,000 or less, to cover life’s little incidentals.
You might need that money for last-minute travel, medical emergencies, or pressing car repairs. Regardless of what you need the money for, it might not seem like you have your pick of lender when it comes to choosing someone to finance you. Because let’s face it, when it comes to getting a few thousand dollars quickly, you often run into predatory lenders.
These are lenders who use the allure of quick cash to lock you into extremely high interest rates that can ultimately lead to a never-ending cycle of debt. In other words, these are lenders you should avoid at all costs. But don’t worry, because there are legitimate lenders—the ones you trust to distribute larger, more traditional loans—that also offer small personal loans.
A personal loan is one of the most flexible loans out there. You can use it for just about anything. In fact, one SoFi customer used our personal loan to take a road trip across America. Personal loans tend to have lower interest rates than the average credit card, which can save you hundreds of dollars on monthly payments over the life of your loan.
When Would you Need a Small Personal Loan?
Think of a personal loan as a nice safety net to have when life becomes unpredictable. Some of the most common reasons for taking out a personal loan are:
• Debt management and consolidation
• Paying for legal expenses
• Paying for medical expenses
• Paying for moving expenses
• Paying for a funeral
• Paying for a home refresh
It’s especially helpful to get a personal loan if it can help you avoid damaging your credit profile. For example, if you were to use a personal loan to cover a medical bill so it doesn’t go into collections, that would help you avoid a blemish on your credit history.
In addition, people use personal loans for necessary expenses they can’t quite cover, like replacing a car that’s on its last breath. If you need the car to get to work, using a personal loan makes good financial sense.
You can also use a small personal loan to fund your side hustle, which could be especially necessary if you’re just getting it off the ground. For example, trying to drive for a ride service like Uber but need a new car to join? Use a personal loan to purchase a new ride, and start making your income sooner than if you had saved up month over month.
Keep in mind that signing on for a personal loan is still a big financial responsibility. You’ll want to make sure you understand the loan terms you’re agreeing to, and make a plan for paying the loan back on time.
Are Smaller, Short Term Loans the Same as Predatory Loans?
Depends on who is lending. Predatory loans exploit people’s need for fast cash to trick them into an unfair loan agreement they can’t afford. Their goal is to make sure that you can’t pay them back, so that they can get more money out of you using high interest rates and hidden fees.
Major lenders have a minimum amount of money you can borrow for personal loans—it’s often $3,000 or $5,000. That means that if you need less than $3,000 or $5,000, the lenders available to you are not the most credible.
If you’re not sure if a lender is predatory or legit, here are a few red flags to look out for:
• Promises that you’ll be approved for the loan regardless of your credit score or credit history
• Loans with extremely high interest rates and fees, like prepayment penalties
• Loan contracts that say it’s illegal for a borrower to take future legal action against the lender in the event of fraud
What is the Smartest Way to Get a $5,000 Loan?
Getting a personal loan under $5,000 is like biking in traffic without using the bike lane. Yes, you can get to where you want to go, but there’s a greater chance you’ll get into an accident (or rather, get snared into a predatory loan). Plus, you have to take so many precautions, it might not be worth the trip.
But getting a $5,000 loan from a legitimate lender—as opposed to getting a smaller loan from a questionable lender—is much more like biking in the bike lane. You’re still getting to where you want to go, but you’re reducing the risk you’re taking so you can get to your location unharmed.