A personal loan is a loan of money that you can use for many different things. For example, you could use a personal loan to pay off your debts, fix up your house, or plan your dream wedding. You can get a personal loan from a bank, a credit union, or an online lender. You have to pay back the money you borrow over time, often with interest. Personal loans may also come with fees from some lenders.
- Personal loans are loans that can be used to pay for a wide range of personal costs.
- Banks, credit unions, and online lenders all offer personal loans.
- Personal loans can be secured, which means you have to put up collateral to get the money, or unsecured, which means you don’t have to put up collateral.
- When it comes to interest rates, fees, amounts, and how long you have to pay back the loan, personal loans can be very different.
Understanding a Personal Loan
With a personal loan, you can borrow money to cover personal costs and pay it back over time. Personal loans are a type of debt with monthly payments that let you get a lump sum of money. You could, for example, use a personal loan to:
- Moving expenses
- Debt consolidation
- Medical bills
- Wedding expenses
- Remodeling or fixing up a house
- Funeral costs
- Vacation costs
- Costs you didn’t expect
Other installment loans, like student loans, car loans, and mortgage loans, are used to pay for specific things (i.e. education, vehicle purchase, and home purchase).
A personal line of credit is also not the same as a personal loan. The second one is not a one-time payment but works like a credit card. You have a credit line that you can use to spend money, and as you do, the amount of credit you can use goes down. Then, you can make a payment towards your credit line to free up your credit.
With a personal loan, there is usually a set date when the loan must be paid back. On the other hand, a personal line of credit can stay open and available to you forever as long as your account is in good standing with your lender.
Types of Personal Loans
There are both secured and unsecured personal loans. A secured personal loan is one for which you have to put up some kind of collateral. For example, you can use a cash asset like a savings account or certificate of deposit (CD) to secure a personal loan. You can also use a physical asset like your car or boat. If you don’t pay back the loan, the lender could take the security to pay off the debt.
For a personal loan that isn’t secured, you don’t have to put anything up as collateral. Personal loans can be secured or unsecured. Qualified borrowers can get both types of loans from banks, credit unions, and online lenders. Most banks think that the second one is riskier than the first one because there is no collateral to collect. If you do this, you might have to pay a higher interest rate on a personal loan.
How a Personal Loan Works
You have to go to a lender to get a personal loan. Again, this can be a bank, a credit union, or a website that gives out personal loans.
In most cases, you would first have to fill out an application. The lender looks at it and decides whether or not to give the loan. If you get the loan, you can either agree to the terms or turn them down. If you agree with them, the next step is to finish the paperwork for your loan.
When that’s done, the lender will fund the loan, which means they’ll give you the money. Depending on the lender, you may get a direct deposit into your bank account or a check. After the loan is paid off, you can do what you want with the money. Then you have to start paying back the loan based on the terms in your loan agreement.
Example of a Personal Loan
When thinking about getting a personal loan, it helps to know how much it might cost. Based on the interest rate and fees, the annual percentage rate (APR) of a personal loan shows how much it will cost to pay back the loan over a year. The APR and the length of the loan can affect how much interest you pay in total over the life of the loan.
For instance, say you get a personal loan for $10,000 with an APR of 7.5%. The loan needs to be paid back in 24 months. With those terms, your monthly payment would be $450, and you would pay $799.90 in interest over the life of the loan.
Now, let’s say you borrow the same amount of money, but the loan terms are different. You have three years to pay back the loan instead of two, and the interest rate is 6% instead of 7.5%. Your monthly payment would go down to $304, but the total interest you pay would go up to $951.90.
If you want to get the lowest monthly payment or pay the least amount of interest on a personal loan, you need to compare the numbers in this way. Using a simple online personal loan calculator can help you figure out what kind of payment amount and interest rate will work best for your budget.
Important: Some lenders don’t charge any fees for personal loans, but others might charge a credit check fee, a loan origination fee, or a prepayment penalty if you pay off the loan early. If you pay late, you might have to pay a late payment fee.
Where to Find Personal Loans
Your current bank or credit union may be the first place you look for personal loans. Your personal banker can tell you what kinds of personal loans are out there and which ones you’re most likely to be able to get.
You can also find personal loans online. There are many online lenders who offer personal loans. You can apply online, get a decision in minutes, and get the money in as little as 24 to 48 hours after the loan is approved.
Pay close attention to the details when you compare personal loans, whether you do it online or in person. In particular, think about the following:
- Interest rate
- Repayment terms
- Borrowing limits (minimum and maximum)
- Collateral requirements
Important Tip: At AnnualCreditReport.com, you can check your credit report for free. Look for mistakes that could be hurting your score and don’t be afraid to dispute them.
It’s also a good idea to see if you meet the minimum requirements for a personal loan. When it comes to your credit score, income, and the amount of debt you have compared to your income, lenders can have different requirements. This can help you figure out which loans might be best for you based on your credit and finances.