At a Glance
From planning a big purchase or event, to needing to fund an unexpectedly large expense, to consolidating debt, personal loans can be a great tool for your financial needs.
Easy to apply for online through traditional banks, credit unions, or online lenders, personal loans typically have lower interest rates than other options, flexible loan amounts and terms, and you can get the funds quickly.
In this article, you’ll learn:
- What is a personal loan?
- How do personal loans work?
- How to prequalify for a personal loan
- Types of personal loans
- Reasons to get a personal loan
- Pros and cons of personal loans
- Alternatives of personal loans
- What rate should I expect on a personal loan?
- How do I compare and choose the best personal loan?
- What are the requirements to apply for a personal loan?
What is a personal loan?
A personal loan is a type of loan you can receive from a traditional bank, credit union, online lender, or peer-to-peer lender. The funds can be used for almost any reason, and with fixed terms and fixed interest rates, you can quickly and easily calculate how much the loan will cost and know when it will be repaid.
With a personal loan, you can typically borrow between $1,000 and $100,000 with loan repayment terms ranging from 12-84 months. The loan is repaid in monthly installments to pay it back in full, plus interest. Terms and interest rates can vary based on the lender, your credit score and history, and other factors, but if you have excellent credit, the rate is typically lower than credit cards or some other loan options.
They are also typically unsecured, meaning they are not backed by collateral like your car or house.
Personal loans are easy to apply for, with most applications existing online, and the approval and funding process is often quicker than other options, getting you the money you need faster.
How do personal loans work?
When you take out a personal loan, you’re borrowing the money for a fixed period of time, called a loan term. You then pay back the loan through monthly payments and will be charged interest over the life of the loan.
Most lenders allow you to pre-qualify or apply for a personal loan online instead of having to visit a branch in person, and once you’re approved, you’ll receive the lump sum of cash to be used for whatever you need.
Depending on your credit score and history, as well as other factors, you can qualify for a better term and lower interest rate, which can save you money – especially if you’re using the loan for debt consolidation.
Once you apply, a loan specialist will likely contact you to discuss your options and verify your information. Once you’ve reviewed and accepted the loan, you’ll sign the loan documents and the money will be transferred to you.
Learn more: How Do Personal Loans Work
What can I use a personal loan for?
The nice thing about personal loans is you can use them for almost anything you want. Unlike other types of loans, for example student loans, personal loans don’t typically have stipulations for what the funds can and can’t be put toward.
For example, you can use personal loans for:
- Consolidating debt
- Home renovations
- Medical bills or procedures that aren’t covered by insurance
- Financial emergencies
- A motorcycle, boat, or RV
- Auto repairs
- Funding an adoption
Essentially, if you need a larger sum of money than what you have in savings for virtually any purchase, you can take out a personal loan to fund what you need.
How can I prequalify for a personal loan
Many lenders offer potential borrowers the ability to prequalify for a personal loan. This means that before applying for the loan, you can submit certain information (like the total loan amount you need, your income, housing situation, credit score, and other information) to learn what kind of loan amounts, interest rates, and repayment terms you’re likely to qualify for.
This process typically requires a soft credit inquiry, so it won’t hurt your credit score and you can shop around until you find the right loan for you.
For some lenders, prequalification takes just a few minutes and can completed online. However, just because you’re prequalified doesn’t mean you’re approved for a loan, and the amount, term, or interest can change after you submit additional information for the actual loan.
Read more: What Is a Pre-Qualified Personal Loan?
Types of personal loans
When applying for personal loans, there are ultimately four types to consider: unsecured vs. secured loans, and fixed-rate vs. adjustable-rate loans. The most common type of personal loan is an unsecured, fixed-rate loan.
1. Unsecured personal loans
Unsecured loans mean that there is no collateral required to guarantee the loan. So, you don’t have to put your car, house, or other assets at risk in order to be approved.
The downside to unsecured loans is because there is no physical asset backing it, these loans are riskier to the lender, so you’ll likely need an excellent credit score (around 660 or higher) and credit history, or potentially a co-signer to qualify. And, if you make late payments (or don’t make payments at all), it can significantly decrease your credit score.
2. Secured personal loans
Secured loans require some type of collateral to guarantee the loan, such as a car, house, savings account, or other asset. While the downside to this is you could lose that asset if you don’t make the loan payments, the advantage is you can likely qualify for a secured loan even if you don’t have great credit. These loans also may have lower interest rates because they are less risky since the lender can repossess your assets if you don’t pay.
3. Fixed-rate personal loans
Fixed-rate personal loans mean the interest rate stays the same throughout the life of the loan, and therefore, your monthly payment also stays the same. This makes it easy to budget for your repayments and you can calculate exactly how much interest you’ll pay on the loan.
You can also use a personal loan calculator to help you estimate your payments and interest paid.
4. Adjustable-rate personal loans
Adjustable-rate loans, or variable interest rate loans, mean that your interest rate can change over time. While these loans often start with a lower interest rate, it will likely increase, therefore increasing your monthly payment and causing you to spend more over the life of the loan.
Typically, there are caps in place to prevent you from having to pay more than a certain amount of interest, but it makes it difficult to budget each month and know how much you’ll end up paying in interest.
Reasons to get a personal loan
Sometimes, a personal loan can be the best way to fund a large purchase, project, or bill you can’t afford upfront. There are a number of reasons to consider getting a personal loan:
- Most personal loans are unsecured , meaning you don’t have to use collateral or assets to
back the loan.
- Typically, personal loans have fixed interest rates , making it easier to budget each month and know how much interest you’ll pay over the life of the loan.
- They are easy to prequalify and apply for online.
- The funds can be used for just about anything you need, including debt consolidation, home improvements, moving costs, medical expenses, large purchases, higher education, and building a credit history.
Learn more: Reasons to get a personal loan
Pros and cons of personal loans
There are several advantages to taking out a personal loan if you need it, but there are also some disadvantages to be aware of and consider before applying:
Learn more: The Pros and Cons of Personal Loans
Learn before you take out a personal loan
Taking out a personal loan can have an impact on your credit score and overall finances, so you’ll want to explore all of your options and do the necessary research to make sure taking out a loan is right for your situation.
Alternatives of personal loans
In some cases, you may have determined that a personal loan isn’t right for you. There are cheaper alternatives to financing available, such as a 0% APR credit card. During an introductory period, you will not need to be concerned with incurring interest on balances you carry on the credit card.
However, it’s important to use this introductory period to pay off your balances, rather than incur more debt. Additionally, you may also seek out a personal line of credit where you only draw what you need and pay interest on the sum you took out. There are a variety of reasons a personal loan may not be the right choice for you, but the two alternatives above are excellent choices.
What rate should I expect on a personal loan?
The interest rate you’ll receive on your personal loan will depend on your credit score and credit history. On average, you may pay:
|Credit Score Range||Estimated APR|
|Lower than 299||Unlikely to qualify|
The higher your credit score, the more likely you are to be approved for the highest loan amount and lowest interest rate. However, even if you have a lower credit score, you may still qualify through an online lender or credit bureau as long as you meet other requirements.
How do I compare and choose the best personal loan?
When comparing personal loans, you’ll want to pay close attention to:
- Whether the loan is unsecured or secured
- Whether the interest rate is fixed or variable
- The loan amounts
- Loan terms
- Average interest rates
- Special features, such as discounts or financial coaching
If you can prequalify for the loan, doing so can show estimates of the loan amount, term, and interest rate you’d be approved for, which can help you make a more personalized and accurate decision.
Because most lenders have an online presence, you can find most of this information on their company website. Or use comparison sites to look at features and information side-by-side.
What are the requirements to apply for a personal loan?
When applying for a personal loan, you may have to provide information and documentation to support your approval. Be prepared to provide:
- A completed loan application
- Proof of identity , such as driver’s license, passport, state-issued ID, certificate of citizenship, birth certificate, military ID or Social Security card
- Employer and income verification,such as pay stubs, tax returns, W-2s and 1099s, bank statements, employer’s contact information, or bank statements
- Proof of address, such as utility bill, lease or rental agreement, mortgage statement, proof of insurance on your home or vehicle, voter registration card, property tax receipt, or bank or credit card statement
You may have to provide multiple documents as proof, so be prepared to have at least two forms of identification. Check with the specific lender to learn their qualifications.
Does a personal loan hurt your credit?
Most lenders allow you to prequalify for a loan with a soft credit check, which does not affect your credit score. However, once you apply for the loan, this triggers a hard inquiry, which can temporarily decrease your score by a few points. A hard inquiry stays on your credit report for two years, but only will affect your score for the first year.
As you repay your loan, you’re building credit history, which is one of the most important factors in calculating credit scores. By paying your bill on time and in full each month, you’ll build and improve your credit in the long-term.
However, if you make a late payment (more than 30 days past due) or miss a payment altogether, it can drop your credit score by 100 points or more, depending on your starting score.
If you use a personal loan to consolidate debt, this can improve your credit due to lowering your credit utilization ratio, which is how much of your available credit you use.
Additionally, it can also help improve your credit mix in your revolving credit.
What is better:
Personal loan vs Line of credit
A personal line of credit (PELOC) is a set amount of money from which you can borrow – up to the limit – for a given period of time called your draw period. It’s like a credit card in that you can withdraw from the available balance and only take out what you need, and you only pay interest on that amount.
While funds are flexible and you only pay interest on what you use, most of the time they have higher interest rates, fees, and are difficult to obtain unless you have an excellent credit score (700 or above).
On the other hand, when you have a personal loan, you get the entire amount up front and can use the funds however you choose, repayment starts immediately upon distribution of the loan, and you’ll pay interest on the full amount.
Learn more: Personal Loan vs. Line of Credit
Personal loans vs credit cards
The biggest downside to credit cards compared to personal loans is that their interest rates will likely be much higher. However, credit cards are revolving credit, so you only borrow the money as you need it, and your payments are based on your outstanding balance at the time.
An advantage to credit cards is they may offer a 0% APR introductory offer, they can come with rewards (like cash back, points or miles), and you don’t owe interest if you pay off the balance in full each month.
Learn more: Personal loans vs. credit cards
Personal loans vs debt consolidation
Personal loans are often used for debt consolidation. This is because their interest rates can be lower than other types of debt, especially credit cards. You can take out a personal loan with a shorter term and lower interest rate, and use it to pay off your outstanding debt. Then, you’ll only have one fixed monthly payment to make, and you can make a better plan for getting out of debt.
Read more: Personal loans vs. debt consolidation
The total loan amount you’ll be approved for can depend on factors like your credit score, credit history, and income. Typically, the maximum loan amount you could apply for and get is $100,000.
There’s technically no limit to how many personal loans you can have at once. You can have more than one loan with the same lender, or multiple loans with multiple lenders. However, some lenders do set their own restrictions for how many you can have at once with them.
Also keeping in mind that a personal loan is debt, and you’ll be paying interest on the balance, it’s not wise to take out more loans than you absolutely need.
Getting approved for a personal loan typically takes between one day and one week, depending on the lender. Then, once approved, the funds are dispersed usually within 24-48 hours. Depending on your bank or financial institution it can take a couple of business days for the funds to post, but the whole process in general is pretty quick.
It is possible to get a personal loan even if your credit score could be improved. While some lenders, like credit unions or online lenders, may offer options to people with poor credit, they will likely pay a higher interest rate. To get the best rate and increase your chances of being approved, consider adding a co-signer or getting a secured loan.
Related: Personal Loans for Bad Credit
Generally, it’s not difficult to get a personal loan. In fact, it can actually be easy if you meet the lender’s requirements, have a great credit score, and apply online. It can be slightly more difficult if you don’t have a high enough credit score because you may have to add a co-signer or opt for a secure loan, or if you don’t provide all of the information and documentation the lender requires up front.
Many lenders let you prequalify for a loan, meaning you can get an estimate of your loan amount, term, and interest rate, which allows you to calculate how much your monthly payment will be. Or you can use a personal loan calculator which takes your principal balance, interest rate, and repayment term length and gives you a total monthly amount.
COVID-19 will not affect you taking out a personal loan, but it could influence debt relief options you could qualify for. Through the pandemic, many lenders are offering debt relief options such as waived fees or deferred payments for borrowers who are affected by financial hardship due to the pandemic.
A coronavirus hardship loan is a small personal loan offered by some lenders that typically offers low interest rates, short repayment terms, and quick funding time. They may also come with deferred payments or waived fees. In general, you can use these loans for any expense, though some lenders may have limitations for their use.
- A completed loan application
- Proof of identity, such as driver’s license, passport, state-issued ID, certificate of citizenship, birth certificate, military ID or Social Security card
- Employer and income verification, such as pay stubs, tax returns, W-2s and 1099s, bank statements, employer’s contact information, or bank statements
- Proof of address , such as utility bill, lease or rental agreement, mortgage statement, proof of insurance on your home or vehicle, voter registration card, property tax receipt, or bank or credit card statement
Yes, if you’re using it wisely. If the only purpose of the loan is to build credit, take out a smaller amount and shop around for the best interest rate. Be sure to make your payments on time, and pay the full monthly balance each month. You should also avoid taking on other kinds of debt while you have the loan to keep your debt-to-income ratio and credit utilization low.
Factors that determine the APR include your credit history, credit score, employment history, and income. Specifically for personal loans, APR is the sum of the interest rate and any fees, calculated on an annual basis.
Yes, you can refinance a personal loan, but you should only do so if you qualify for a lower interest rate.
Installment loans are loans that borrowers must repay with regularly scheduled payments or installments. Most personal and commercial loans are considered installment loans. Each monthly payment includes a portion of the principal balance owed, and pays interest on the loan.
Learn more: Installment Loans – Compare Best Options of 2022
Most lenders allow you to pay off a personal loan early. However, be sure to read the fine print of your loan agreement because other lenders charge prepayment penalties for paying off a loan early.
If you provide an alternative source of income, like alimony or child support, you can get a personal loan without a job. However, you may also be required to put up collateral or find a cosigner to qualify. You must be able to show the lender you can repay the loan.