What is a Personal loan?

Writer and editor - Bryan Robinson | Updated on 2023-03-05

A personal loan is a loan from a financial institution that can be used for any personal expenses, home repairs, medical bills or debt consolidation. Personal loans typically have fixed interest rates and monthly payments, making them a good option for borrowers who need predictability in their budget.

What is a personal loan?

A personal loan is a type of unsecured loan, which means it is not secured against any asset such as your home or car. Personal loans are usually for amounts between $1,000 and $25,000, over terms of one to five years, although you can sometimes borrow more – up to $100,000 in some cases – or spread the cost of repayments over longer. The actual amount and terms will be decided by the lender based on your creditworthiness (their assessment of how likely you are to repay the loan).

How do personal loans work?

Personal loan terms vary depending on the lender, but typically range from 12 to 84 months. The interest rate on a personal loan is usually fixed, meaning it won’t change over the life of the loan.

For example, let’s say you take out a $10,000 personal loan with a three-year repayment period and an interest rate of 5%. Your monthly payments would be $299, and you would pay $1,068 in interest over the life of the loan.

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Who can apply for a personal loan?

Almost anyone can apply for a personal loan. You’ll need to be at least 18 years old and a legal resident of the United States with a steady income and a good credit history. Some lenders may require additional information, such as tax returns or bank statements.

What are the benefits of personal loans?

There are many benefits of personal loans, which is why they are such a popular choice for financing. Here are some of the main advantages:

  • You can use the money for any purpose as stated earlier.
  • They are relatively easy to qualify for: Personal loans tend to have fairly lax qualifying criteria, which means that even if you have less-than-perfect credit, you may still be able to qualify for a loan.
  • You can get competitive rates: Because personal loans are so popular, there is a lot of competition among lenders. This means that you can often get a competitive interest rate on your loan.

What are the drawbacks of personal loans?

There are a few drawbacks to personal loans you should know about before you apply. First, personal loans tend to have higher interest rates than other types of loans, such as home equity loans or lines of credit. This means you’ll end up paying more in interest over the life of the loan.

Second, personal loans are often unsecured, which means they’re not backed by collateral. This makes them riskier for lenders and can result in higher interest rates.

Finally, personal loans are typically repaid in fixed monthly payments over a set period of time. This means you could end up with a higher monthly payment than you can afford if your financial situation changes.

How to compare personal loans

Personal loans can be a great way to finance a large purchase, consolidate debt or cover an unexpected expense. But with so many products on the market, it can be hard to know where to start when comparing personal loans.

Here are some things to look for when comparing personal loans:

  • Loan amount: The loan amount is the total amount you borrow from the lender. Make sure you compare loans with similar loan amounts to get an accurate comparison.
  • Interest rate: The interest rate is the amount you will pay in interest on your loan. A higher interest rate means you will pay more in interest over the life of your loan.
  • Repayment term: The repayment term is the length of time you have to repay your loan. A shorter repayment term will mean higher monthly payments, but you will pay less in interest over the life of your loan.
  • Fees: Some personal loans come with fees, such as an origination fee or a prepayment penalty. Be sure to compare apples to apples when looking at fees, and make sure you understand all of the fees associated with each loan before you apply.

See our lists online to compare

How to apply for a personal loan

Here are some steps to follow when applying for a personal loan:

  • Shop around. Compare rates from multiple lenders before choosing a personal loan. Keep in mind that the best rate may not be available from the lender you ultimately decide to use.
  • Check your credit score. Your credit score is one factor that lenders will consider when determining whether to approve your loan and what interest rate to charge you. The better your credit score, the lower your interest rate is likely to be.
  • Calculate how much you can afford to borrow. Be realistic about how much money you need and how much you can afford to repay each month. Don’t borrow more than you can afford to pay back with interest.
  • Compare terms and fees from multiple lenders. In addition to interest rates, compare the fees each lender charges. Some lenders charge origination fees, which can add hundreds of dollars to the cost of your loan, so be sure to take that into account when shopping around.
  • Read the fine print before apply for the loan. Once you’ve chosen a personal loan and are ready to apply, be sure to read all of the terms and conditions before signing on the dotted line. By reading the fine print, you can avoid any unpleasant surprises down the road.
Bryan Robinson

Bryan Robinson
Writer and editor

Bryan Robinson is a finance writer with expertise in lending and their interest rates, fees, contracts and more.
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