What is a personal loan?


Apersonal loan is a sum of money you borrow from an online lender, a bank down the street or a credit union you belong to. Once you receive funds, you begin repaying the lender on a predetermined schedule until you’ve paid back the loan in full.

The best part about personal loans — and one reason they have surged in popularity — is the fact that these loans come with a fixed interest rate and fixed repayment term. Unlike credit cards, which come with variable rates and variable monthly payments based on how much you charge, personal loans come with predictable monthly payments.

Types of personal loans

While most personal loans work in a similar fashion, there are some differences between loan products and personal loans offered through various lenders. Here are the main types of personal loans you should be aware of:

Unsecured personal loans: Most personal loans are unsecured, meaning you don’t have to put down any collateral to qualify. With an unsecured personal loan, you’ll receive a lump sum of cash, then repay your loan with fixed monthly payments over a fixed repayment timeline.
Secured personal loans: Secured personal loans require you to put down collateral to qualify. In lieu of putting down cash as collateral, you may be able to use other assets, such as a home, a boat or a car.
Credit-builder loans: Credit-builder loans don’t actually extend you a line of credit. These loans are deposited into savings account that the lender controls, and you make payments on your balance for the duration of the loan. During this time, lenders report your payments to the credit bureaus in order to help you build a history of responsible credit use. At the end of the loan, you receive your payment in full, minus loan fees.
Credit cards: Credit cards are not actually personal loans, but you can use them to borrow money just the same. The main difference is the fact that, unlike personal loans that give borrowers a flat sum of cash, credit cards offer a line of credit you can use to charge purchases. Credit cards also come with variable interest rates, and your monthly payment will vary depending on your balance.
Specialized lenders: Some service-oriented companies offer personal loans to their clients and customers as a means of helping them afford their products or services. These loans are typically convenient, but they don’t always offer the best rates and terms.
What personal loans can be used for

One big benefit of personal loans is the fact that you can use your loan proceeds however you want. This makes personal loans incredibly diverse and flexible. Here are some of the most common applications.

Debt consolidation

Debt consolidation loans are unsecured personal loans offered to consumers who need to consolidate high-interest credit card debt or debt from other loans. These loans tend to come with lower interest rates that can help consumers save money on interest or secure a lower monthly payment.

Expensive events

Consumers with a pricey event like a wedding, a honeymoon or a graduation party often take out personal loans to fill the gaps in their budget. Once the event is over, they get the benefit of repaying their loan with fixed monthly payments and a fixed interest rate over time.

Investing in yourself

It’s common to take out personal loans for educational purchases, such as pursuing a workplace certification or attending a career-boosting seminar. You can also take out a personal loan to pay for procedures that improve your self-image, such as dental implants or cosmetic surgery.

Small home improvement projects

While home equity loans and home equity lines of credit (HELOCs) are popular with consumers who want to take on remodeling projects, these home improvement loans require you to put your home up as collateral. Many consumers turn to unsecured personal loans instead of home equity products for this reason. They can borrow the money they need for their project with affordable rates and terms, yet they don’t have to put their home on the line.


Personal loans also work well for emergencies, such as surprise medical bills, an urgent roof replacement or even funeral expenses. Since some personal loans let consumers apply online and receive funding within a few business days, they can provide exceptional peace of mind and financial support when an emergency strikes.

How personal loans work

Consumers who need to borrow money can apply for a personal loan through their local bank or credit union, or through any online lender. Once an application has been processed and the loan has been approved, it’s common for borrowers to receive their loan funds via direct bank deposit within a few business days.

Here’s an explanation of all the moving parts that make personal loans what they are:

Interest rates: Personal loans charge borrowers a fixed APR, or annual percentage rate, on top of the loan amount (or principal). This APR can vary depending on creditworthiness, income and other factors. The personal loan interest rate determines how much interest borrowers pay over the life of the loan.
Monthly payment: Personal loans come with a fixed monthly payment that you’ll make for the life of the loan, calculated by adding up the principal and the interest. You can typically secure a lower monthly payment if you agree to pay your loan off over a longer stretch of time.
Repayment timeline: Repayment timelines vary for personal loans, but consumers are often able to choose repayment timelines between one and seven years.
Origination fees: Some personal loans charge an initial origination fee on top of the original amount of your loan. While origination fees vary, it’s common to see origination fees as high as 6 percent of your loan amount.
How to get approved for a personal loan

Each lender has its own criteria to determine who qualifies for its personal loans and other financial products. Still, here are the main factors to keep in mind in order to get approved for a personal loan:

Have a good or excellent credit score: The higher your credit score, the more likely you are to get approved for a personal loan with the best rates and terms. For superior results, it helps to have a credit score of 720 or above.
Keep an eye on your debt-to-income ratio. Lenders also look at your debt-to-income ratio, which is the amount of debt you have compared to your income. The lower your debt-to-income ratio, the better off you’ll be. Also note that some personal lenders won’t give you a personal loan if your debt-to-income ratio is too high.
Have steady employment and a predictable income. Lenders like to see a steady history of employment and a steady income — both can be used to gauge your ability to repay your loan.
Be willing to put down collateral if required. If you have a high credit score, it’s likely that you will have the option to take out an unsecured loan. However, if your credit score and other factors don’t prove your creditworthiness to lenders, you may be required to put down collateral.
The bottom line

If you need to borrow money and prefer the stability of a fixed repayment schedule and fixed monthly payment, a personal loan could be exactly what you need. To get the best loan rates and terms, make sure you take steps to become an attractive borrower by improving your credit score and keeping other debts at a minimum.

It’s also important to shop around and compare loan rates with multiple lenders in the personal loan space, including companies that offer personal loans online. For more information, try starting with Bankrate’s list of the best personal loan rates.

Learn more:
Where to get a personal loan
How to get a personal loan
Is a personal loan right for you?

Comments are closed, but trackbacks and pingbacks are open.