At a Glance

Need to get your hands on some cash fast in order to consolidate your debt, fund a renovation or purchase, or pay your bills? A personal loan may be the right choice for you.

In this article, learn more about:

How do personal loans work?

Personal loans can be used for just about anything. Offered by most banks, credit unions, online lenders and peer-to-peer lenders, personal loans:

  • Are unsecured, meaning they are not backed by collateral like your car or house.
  • Come in amounts ranging from $1,000-$100,000.
  • Typically have fixed interest rates, meaning the monthly payment stays the same over the life of the loan.
  • Have interest rates ranging from 2.49% to 35.99% depending on your credit score, credit history, income, and other factors.

Applying for a personal loan can typically be done online, and the application process is quick. Once you’re approved, which can take around 2-7 business days, the funds will be deposited into your bank account in one lump sum. This transfer can take as little as 24 hours up to one week depending on your institution and the lender, but once you receive the funds, you can use them for whatever you need.

Then, you’ll start making monthly payments on the loan principal and interest.

Learn more: How Do Personal Loans Work

Reasons to get personal loans

It’s important to carefully consider your financial situation and goals before taking on a loan, especially because it can impact your credit score and you’ll have to pay interest.

However, personal loans can be a great way to finance a large purchase, project, or event that you can’t afford to pay for up front. A few reasons to get a personal loan include:

  • Consolidating debt: If you have multiple other loans or credit cards, you can use a personal loan to pay off this debt, especially since personal loans can have a lower interest rate, which would save you money.
  • Building credit history: If you don’t have a long credit history or your credit score could use improvement, taking out a personal loan and making the payments on time each month can help.
  • Completing home improvements: Upgrade your home or complete necessary repairs using funds from a personal loan, especially if you don’t want to get a HELOC or home equity loan.
  • Paying off student debt. You can use a personal loan to consolidate or pay off private student loans.

Related: Can you use a personal loan to pay off student loans

  • Funding higher education: Even if you have student loans to pay for post-secondary education, those funds typically can’t be used for rent or utilities, books, or other types of costs. Personal loan funds can help ease that financial burden.
  • Paying medical expenses: Even if you have health insurance, it may not always cover any or all of the cost of a service or procedure, leaving you stuck with a large medical bill. If you don’t have health insurance, these costs can be even higher. Use a personal loan to help pay these bills.

Related: Medical Loans – Compare Best Options of 2022

  • Moving: Moving costs can add up quickly, especially if you have to rent a moving truck and equipment or hire a moving company. Pay for these expenses, buy new furniture or appliances, or handle other costs using personal loan funds.

Related: How to get help with moving expenses

  • Vacation loans: Vacation loans are personal loans that are used exclusively for vacation expenses. That can include airfare for travel, renting a hotel room or cottage, rental cars, and spending money.

Related: Vacation Loans – Compare Best Options of 2022

  • Wedding loans: A wedding loan is a type of personal loan that can be used to finance wedding-related expenses. They usually have a fixed interest rate and a repayment period of three to five years. They can cover everything from the cost of a wedding dress, wedding rings, the honeymoon, and other wedding-related bills.

Related: Wedding Loans – Compare Best Options of 2022

  • Auto loans: Auto loans are a type of loan that is specifically used to finance the purchase of a vehicle. The loan is typically secured by the vehicle itself, which means that if you default on the loan, the lender can repossess the car. They typically have relatively low interest rates and monthly payments, making them a popular choice for financing a new car.

Related: Personal Loans to Buy a Car – Find & Compare Best Options

  • Covering emergency or unexpected expenses: Protect your savings and don’t worry about not being able to afford emergency or unexpected expenses by using a personal loan.

Related: Personal loans for unexpected expenses

Features to consider before taking out a personal loan

Before taking out a personal loan, you should ask yourself the following questions to ensure it’s the right move for your financial situation:

  • Why do I need a loan? Don’t take out a loan just to have the extra funds, especially because you’ll have to pay interest on it, which means you’ll end up paying more than the original amount. Make sure it’s really necessary to borrow.
  • What is the cost of borrowing? Add up the total cost, including fees and interest, to ensure it’s something that can fit into your budget. Some lenders allow you to prequalify without impacting your credit score, which can help you better understand costs.
  • Can I handle more debt? Do you already have debt? Are you struggling to pay it back? If so, it may not make sense to take on more debt (unless using it to consolidate).
  • Are the monthly payments affordable? Using a personal loan calculator to estimate your monthly payments, be sure it fits into your budget and you’ll be able to make the payments each month.

Once you’ve decided to take out a personal loan, there is likely one out there that will fit your needs. However, before applying for a loan, it’s important to shop around for the best one. Here are a few features to research and compare:

1. Costs

When you take out a loan, you will have to make a monthly payment to pay it back. Not only should you ensure your budget can accommodate the payment, be sure to consider the two parts: annual percentage rate (APR) and principal.

  • Principal is the total amount you borrow, and it decreases as you pay it back each month.
  • Annual percentage rate (APR) represents the full cost of the loan, including interest rate and additional fees.

Part of your monthly payment will go toward paying off the loan principal, while the other part will go toward the APR.

Use a personal loan calculator to estimate what rate, loan amount, and term can get you monthly payments you can afford.

2. Repayment terms

The repayment term is how long you must repay the loan. Often portrayed in months, a personal loan term typically ranges from 12 to 84 months.

The term can affect your monthly payment because the smaller the term, the higher the monthly payment, but the lower the interest costs. The longer the term, the less your monthly payment will be, but you’ll pay more in interest over the life of the loan.

When comparing lenders, look for a term that keeps the payments within your budget, but also saves you on interest.

3. Loan amount

Personal loans can range from $1,000 to $100,000 depending on the lender. You should only take out a loan that covers what you need, since you’ll be paying interest on the total. Be sure you qualify for the loan amount you need with the lender you choose.

4. Fees/penalties

Some lenders charge origination fees, application fees, late payment fees, or others. You could also face prepayment penalties if you pay off your loan faster than the term. Read the fine print and understand when you’d have to pay fees or penalties, and how much they will cost.

5. Special features

Some lenders offer additional features to convince you to fund your loan through them, such as quick approval and/or funding, credit building tools, financial education assistance, or others. If you are having a hard time narrowing down lenders, investigate features they may offer that others don’t.

How to choose the best personal loan

Once you’ve narrowed down lenders that provide the personal loan features you’re looking for, and you’ve calculated what you can afford, it’s time to decide. Narrow down your options by analyzing:

Feature Questions to ask
Credit check Can you prequalify for the loan with a soft credit check, which won’t affect your credit score?
APR Is the APR affordable? Are there ways you can improve your credit score to secure a lower APR?
Repayment Terms Do you have the option to have a shorter term, making your monthly payments slightly higher but paying less in interest? Or, can you have a longer term, making your monthly payments lower, but having to pay more in interest over the life of the loan? Which is the best option for your financial situation?
Loan Amount Can you secure a loan for the amount you need?
Fees What are the fees? Are there prepayment penalties?
Special Features Does the lender offer discounts? Protection? Coaching or education? Other perks?
Customer service Can you find reviews or ratings from existing customers? Are they positive? What do people say about the customer service, getting their questions answered, and assistance they receive?

For most borrowers, the best personal loan is one with a lower APR, affordable monthly payments, manageable repayment terms, and little or no fees or penalties. If you’re on the fence with multiple lenders that meet your needs, look into the special features, customer service and reviews.

Benefits of choosing a personal loan over other types of debt

There are multiple different types of debt that you can incur depending on your needs and financial situation. However, taking out a personal loan can have several benefits compared to other types of debt:

  • Credit cards typically have a much higher interest rate than personal loans. This means if you don’t pay off your credit cards in full each month, the interest will increase the total amount you owe much faster. Personal loans typically have a lower interest rate, and if you use a personal loan to consolidate credit card debt, it can save you money in the long-run.

Related: How to Consolidate Credit Card Debt

  • Some loans, such as HEL, HELOCs, or auto loans, require collateral like your car, house, or other asset. If you stop paying off the loan, the asset can be repossessed, or your home could be foreclosed on. Personal loans are unsecured, meaning they do not require collateral.
  • Federal student loans and some private student loans have restrictions for what the loan can be used for. For example, they can typically only go to pay tuition and for on-campus housing or other fees associated with tuition. You can use personal loan funds for almost anything.
  • If you have multiple kinds of debt, keeping track of payments, due dates, interest rates, and balances can be challenging. Using a personal loan to consolidate debt can make managing repayments easier since you can use the funds to pay off all of your outstanding debt and have only one monthly payment moving forward.

Related: Can I get a personal loan for debt consolidation?

  • Most personal loans have fixed interest rates, which means the interest rate will not change over the life of the loan and your monthly payments will also stay the same. Some debt has variable interest rates, which means the interest rate can change over time. This not only causes your monthly payment to vary, but it could also mean you end up paying more while you have the loan.
  • Unlike other types of debt, you can still qualify for a personal loan even if you don’t have great credit. And if you have a co-signer or do use collateral for the loan, you can still qualify for lower interest rates than other types of debt.

How to get a personal loan

The process of getting a personal loan is relatively easy, and in most cases can be done completely online:

  1. Start by shopping around, comparing different lenders to find one that offers the best term and interest rate for the loan amount you want. You can begin with your current bank, and then explore other banks, credit unions, and online lenders.
  2. Of these lenders, get prequalified if you can. This allows you to see your potential interest rates, terms, and monthly payments before you apply. And, because this only requires a soft credit check, your credit score will not be impacted.
  3. Once you’ve decided which lender to choose, it’s time to apply. You can fill out an application online, or you may have to initiate the process in person at a local branch. The initial application asks for information like:
    • Name
    • Address
    • Phone number
    • Date of birth
    • Social Security number
    • Loan purpose
    • Loan amount
    • Gross monthly income
    • Average monthly bill payments

    You may also need to supply two or more forms of documentation such as:

    • Proof of identity
      • Driver’s license
      • Passport
      • State-issued ID
      • Certificate of citizenship
      • Military ID
      • Social Security card
    • Employer and income verification
      • Paystubs
      • Tax returns
      • W-2s and 1099s
      • Bank statements
      • Employer’s contact information
    • Proof of address
      • Utility bill
      • Lease or rental agreement
      • Mortgage statement
      • Proof of insurance on your home or vehicle
      • Voter registration card
      • Property tax receipt
      • Bank or credit card statement
  4. Once you submit your application, it will be reviewed by the lender. They will contact you if they need additional information, but typically you will hear within 7-10 business days whether or not you were approved.
  5. If approved, you’ll receive the funds deposited in your account in as little as 24 hours or up to a few business days. If you weren’t approved, consider adding a co-signer or choosing a secured personal loan.

FAQs

Unlike other types of loans that can only be used for specific purposes, personal loans can be used for almost anything. This includes consolidating debt, covering moving costs or medical bills, paying for a wedding or vacation, supporting home renovations, and more.

Most lenders allow you to prequalify for a personal loan without a negative impact on your credit score. Most often you can do this online. Simply fill out the pre-qualification form, undergo the soft credit check, and find out if you’re approved. Then, you can formally apply for the funds.

If you’re struggling to manage your outstanding debt, you can get a personal loan to pay it off. This is called consolidating your debts, and you would use the personal loan to pay off your other debts so that you only have one monthly payment to manage. However, if the personal loan interest rate is higher than the interest rates on your current debt, it may not be a good idea because you’d end up paying more over the life of the loan.

When you apply for a personal loan, the lender will run a hard credit inquiry, which will temporarily decrease your credit score by a few points. However, if you make your payments on time and pay the full monthly balance each month, this can help your score because you’re showing you’re a responsible borrower. However, try to avoid taking on other kinds of debt while you have the loan to keep your debt-to-income ratio and credit utilization low; otherwise, you may see your score go down.