The millennial guide to getting a personal loan

Personal loans have made something of a comeback over the last few years thanks to the rise of online lending. According to TransUnion, the number of consumers who are using personal loans jumped by 18% between Q3 2013 and Q3 2015. Millennials, in particular, are increasingly relying on them to consolidate debt or finance big purchases. Here's a rundown of what 20-somethings need to know about applying for a personal loan.

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Online Lenders and Traditional Banks Aren't the Same

In the past, if you needed to borrow money you had to head to a brick-and-mortar bank to do it. The online personal loan industry has changed all that and millennials have more choices when they need loans. There are, however, some differences to keep in mind.

Because online banks tend to have fewer overhead costs, they can often afford to offer the most credit-worthy borrowers lower interest rates than traditional banks. They may also charge fewer fees. With a regular bank, however, you've got the advantage of dealing with a loan officer face-to-face, which may come in handy if you have a question or a problem later on.

Many online lenders also take a different approach when it comes to underwriting. Upstart and SoFi, for example, cater to millennial borrowers and both consider not just your credit score and your income but your long-term financial outlook when making lending decisions. With a traditional bank, your personal merits are less likely to factor into whether or not you're able to get approved.

Check Your Credit Before You Apply

Even though online lenders may be a bit more flexible, they're still going to take a look at your credit score when you apply. Considering that some online lenders charge interest rates as high as 36%, you need to know what kind of deal you can expect to get.

Take a look at your credit report from each of the three credit reporting bureaus – Equifax, Experian and TransUnion – to make sure your accounts are being reported properly. If you see an error, it's best to dispute it as soon as possible. Otherwise, it could pull your score down and you could end up with a higher interest rate on a personal loan.

If you're still in your 20s and you don't have a substantial credit history yet, you might face an uphill climb to getting a loan. Paying your student loans and other bills on time each month and applying for a secured credit card with a low limit are two effective ways to establish credit. Payment history accounts for 35% of your FICO score so it's a good idea to focus on that area if you're aiming to get a personal loan with the best rates.

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Crunch the Numbers on the Payoff

Personal loans aren't open-ended, which means you have a fixed amount of time to pay them back. Depending on the lender, the loan term may last anywhere from one to five years.

If you're in your 20s and you're not making a lot or you're balancing student loan payments, you need to be sure that you can afford the monthly personal loan payments. Missing a payment could do serious damage to your credit. Doing the math is also important where the interest is concerned.

Try out our student loan calculator.

For example, let's say you want to borrow $5,000 to consolidate credit card debt. Bank A offers you a 3-year loan with a 12% simple interest rate while Bank B is offering you a 5-year term at a 10% simple interest rate. On the surface, the lower rate seems like the better deal but if you go with Bank B, you'll end up paying at least $700 more in interest.

If you're on the lookout for a loan, using our personal loan calculator can help you figure out the true cost of borrowing.

Photo credit: ©iStock.com/Lorraine Boogich, ©iStock.com/filo, ©iStock.com/GlobalStock

The post The Millennial Guide to Getting a Personal Loan appeared first on SmartAsset Blog.

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