A personal loan is a type of unsecured loan issued by banks, credit unions, and other lenders. Personal loans are generally repaid in installments and can be used for a wide range of expenses, from home renovations to weddings.
Explore what personal loans are and how they differ from other common loans and credit types in our personal loan guide.
Know your options: Personal loans are flexible and can be used for things like consolidating debt, financing big purchases, or covering unexpected expenses.
Understand the costs: Pay attention to interest rates, fees, and repayment terms to choose a loan that fits your budget and goals.
Check your eligibility: Your credit score and income play a big role in determining your loan terms—consider prequalifying to see your options without impacting your credit.
Borrow smartly: Only borrow what you need and ensure your monthly payments fit comfortably in your budget to stay financially secure.
Before applying for a loan, here are a few key questions to ask yourself.
A wide range of loans exist to fit different needs and goals.
Personal loans
Personal loans are flexible and can be used for nearly any purpose, like consolidating debt or financing home renovations. Most personal loans are unsecured, meaning they don’t require you to give up an asset like a car or house if you can’t pay the loan. (The house or car are considered collateral.)
Credit cards
Credit cards are a form of short-term revolving credit, typically used for everyday spending. To avoid high interest rates, pay off your balance each month.
Student loans
If you need money to pay for education costs, federal student loans have fixed interest rates while private loans may have fixed or variable rates. Before taking out a student loan, remember that grants or scholarships may be an option, too.
Auto loans
Auto loans are designed for vehicle purchases and require the car to act as collateral. They generally have terms of 84 months or less.
Mortgages
Mortgage loans are used to buy a home and may offer fixed or variable rates. Missing payments could result in foreclosure, which means losing the home.
Home equity loans and home equity lines of credit (HELOCs)
These allow you to borrow money, using the equity in your home. For instance, if your home is worth $400,000 and you still owe $150,000 on your mortgage, you may be able to borrow up to $250,000 using equity. A home equity loan provides a lump sum, while a HELOC functions like a revolving credit line.
The amount you can borrow depends on a number of factors, including your credit score. Generally speaking, the principal amount often sits somewhere between $1,000 and $25,000, though some banks offer higher loan amounts for their customers. In considering how much to borrow, make sure you feel comfortable making the monthly payments.
Tip: Only borrow what you need.
It can be tempting to take out a larger loan than necessary, especially if you qualify for a higher amount. But remember, every dollar you borrow comes with interest. Stick to borrowing only what you need to achieve your goal, and avoid unnecessary debt.
Personal loan disbursal timelines may vary by lender, but most people receive funds within a few days of being approved. Once approved, you receive the principal in one lump sum payout. Typically, the funds are deposited into your account, but some lenders may issue a check if you request it.
If you're using a personal loan to consolidate debt, some lenders may transfer the funds directly to your creditors. It's a good idea to talk to your bank or lender's team to understand how disbursal works, especially for debt consolidation.
A personal loan is an installment loan. That means you owe a fixed amount each month until you pay off the entire amount. Most personal loans have a payback period between 12 and 60 months. The term of a loan is the amount of time it takes to pay off the entire amount – assuming you make all your payments on time.
Personal loans may be either short-term (1 to 5 years) or long-term (up to 30 years). Either way, by the time your term is complete, you will need to have paid off the principal (the lump-sum amount you receive). You’ll also need to factor in monthly interest.
Depending on the amount needed for your loan, and your current (or projected) financial standing, you’ll want to consider:
Many (though not all) personal loans are unsecured. An unsecured loan doesn’t require the borrower to put up collateral, such as a home or car, to match the value of the amount borrowed.
Unsecured also means if you were to default on the loan, the lender wouldn’t be able to claim your property as they would in the case of a secured loan. To offset this risk, lenders will often charge higher interest rates.
In addition to interest, loans often come with additional charges and fees. The Truth in Lending Act requires that interest and fees are disclosed in a clear and uniform manner:
Did you know?
Personal loans often have lower interest rates than credit cards, potentially making them a smarter choice for larger expenses or debt consolidation.
When you apply for loans, potential lenders will pull your credit history to help determine whether or not they are willing to loan you money. This type of credit check is usually considered a hard inquiry, which can cause your score to dip.
It may not be a big deal if you have strong credit. But if you have concerns about your credit standing, talk to your lender and ask for loan applications that only use a soft inquiry, which doesn't affect your score.
Did you know?
Adding a personal loan to your credit profile could improve your credit mix, which is a factor in your credit score. A healthy mix of credit types -- like credit cards, installment loans and mortgages -- can show lenders you’re capable of managing different kinds of debt.
Do some comparison shopping. Rates and fees can vary between lenders, so it’s best to review each lender’s terms and weigh your options before applying.
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