What Is a Personal Loan?
A personal loan is money borrowed from a lender that you pay back in monthly installments.
Many, or all, of the products featured on this page are from our advertising partners who compensate us when you take certain actions on our website or click to take an action on their website. However, this does not influence our evaluations. Our opinions are our own. Here is a list of our partners and here's how we make money.
Updated · 4 min read
Written by
Lead Writer & Content Strategist 
Edited by
Head of Content, Personal & Student Loans 
Co-written by
Lead Writer A personal loan is a type of installment loan that you get from a bank, credit union or online lender and use for almost any purpose. It can be a helpful financial tool to cover a large, one-time expense or consolidate debt.
Lenders typically offer personal loans from $1,000 to $50,000, though you can find loan amounts as low as $250 and as high as $100,000.
Repayment terms are usually from two to seven years, and rates are typically 6% to 36%.
» MORE: Best personal loans
How do personal loans work?
Most personal loans are unsecured, meaning they’re not backed by collateral. Instead, lenders look at factors like credit score, debt-to-income ratio and cash flow to assess if a borrower qualifies and at what rate.
If you’re approved for a personal loan, the lender will send the funds in a lump sum. However, some lenders will send the money directly to your creditors rather than depositing it into your bank account if you’re using the loan to consolidate debt.
You’ll repay the amount you’ve borrowed, plus interest, in monthly installments. Personal loans have fixed interest rates, so the monthly payment is the same for the life of the loan.
Let’s say you took out a personal loan for $5,000. Your annual percentage rate (APR) is 10%, and the loan term is three years. Your monthly payment would be about $161, which wouldn’t change while you’re paying it off. Overall, you’d repay $5,808 — the original $5,000 principal, plus $808 in interest.
Repayment usually starts about 30 days after you’ve received funds. On-time loan payments can help build your credit score, but missed payments hurt it.
Personal loan basics
| Where to get one | Banks, credit unions, online lenders. |
| APR range | 6% to 36%. |
| Typical loan terms | 2 to 7 years. |
| How much can you borrow? | $1,000 to $100,000. |
| Common uses | Debt consolidation or a major expense (like a home improvement project, medical bills or wedding). |
Common features of personal loans
Lenders vary in their personal loan offerings, but here are some features you can expect on a personal loan.
- Repayment of principal plus interest: When you take out a personal loan, you’ll need to repay the principal (the original amount you borrowed) plus interest (what the lender charges you for borrowing money).
- Origination fee: An origination fee covers the cost of processing a personal loan. Not all lenders charge this fee — it’s more common with online lenders than banks and credit unions — but those that do typically charge 1% to 10% of the total loan amount. This fee can be subtracted from the loan proceeds, leaving you with less money than you requested, or it may be added to the loan balance.
- Fixed monthly payments: Personal loans typically have fixed interest rates and monthly payments that stay the same throughout the life of the loan. A fixed monthly payment can be easier to budget for than one that fluctuates.
- No collateral: Most personal loans are unsecured, meaning borrowers don’t have to pledge collateral to get one. Unsecured loans typically have higher interest rates than secured loans, but a lender can’t take your assets if you fail to repay an unsecured loan. Some lenders offer secured personal loans that let the borrower secure the loan with a savings account or vehicle, usually to lock in a lower interest rate or loan terms they wouldn’t qualify for based on their credit profile.
- Repayment terms of two to seven years: A longer repayment period usually means lower monthly payments but more interest paid overall. A shorter repayment term can save you money, but your monthly payments will be higher.
» MORE: Pros and cons of personal loans
What can I use a personal loan for?
Personal loans can be used for almost anything, but they’re best for large, one-time expenses that positively impact your overall finances. Here are some common uses for personal loans.
Debt consolidation
You can consolidate credit cards and other high-interest debt into a single monthly payment using a personal loan. Debt consolidation loans are usually only a good idea if the loan’s rate is lower than the rate on your existing debts, meaning you’ll save money and pay off the debt faster.
» COMPARE: Best debt consolidation loans
Home improvement projects
A personal loan can help you finance a costly home improvement project, like a kitchen or bathroom upgrade. Ideally, the project will increase the value of your home, making up for what you pay in interest. Compare home improvement financing options before you borrow to find the one with the best rate and terms.
» MORE: Best home improvement loans
Emergencies
You can get a personal loan to cover emergencies such as an unexpected car repair or medical bill. Because interest rates can be high, consider more affordable options first, like borrowing from a friend or family member or looking for other ways to make money.
» MORE: Best emergency loans
Discretionary spending
A personal loan is one way to pay for a discretionary expense, like a vacation or wedding, but because they can have high rates and long repayment terms, financial experts advise against using personal loans for those types of expenses. The interest-free way to pay for discretionary expenses is with savings, but if you need financing, compare all your options to find the most affordable one.
» MORE: How to pay for your wedding
When is a personal loan a good idea?
A personal loan can be a good idea if:
- It’s your lowest-rate option. The financing option with the lowest annual percentage rate (APR) is the most affordable one. Compare personal loans with other borrowing options to find the most affordable choice.
- You can afford the monthly payments. If you miss payments, you could be charged late fees and your credit score could drop. Use a personal loan calculator to see what rate and repayment term you’d need to get a personal loan with monthly payments that fit your budget.
- You don’t want to provide collateral. Most personal loans are unsecured and don’t require borrowers to pledge collateral. That means that a lender can’t take your property if you miss payments.
- You need funds fast. A personal loan is often one of your fastest financing options. Many lenders can approve and fund a loan within a week — some can do so within a day or two.
When to avoid a personal loan
A personal loan may not be the best choice for financing if:
- You have a cheaper borrowing option. Explore options like balance transfer credit cards or a home equity lines of credit (HELOC) to see if you can qualify for a lower APR.
- You can’t lower the APR on your existing debts. If you’re consolidating debt, look for a loan that has a lower APR than your existing debts. A personal loan for debt consolidation generally isn’t a good idea if you’ll pay more in interest over the long run.
- You aren’t sure how much money you need. Though personal loans usually have lower interest rates than credit cards, you’ll pay interest on the entire lump sum. If you’re not certain how much money you’ll need, using a credit card or personal line of credit could make sense since you’ll only pay interest on the amount you spend. With credit cards, you can avoid paying interest altogether if you pay off your balance at the end of the billing cycle.
How to qualify for a personal loan
Your creditworthiness and finances are major factors on a personal loan application. Here’s what lenders consider.
Credit
A strong credit profile gives you a better chance of qualifying for a personal loan and getting a low interest rate. Borrowers with good credit (a score in the mid-600s or higher) and a history of on-time payments often qualify for the best rates.
There are lenders that offer personal loans for borrowers with fair or bad credit scores (mid-600s or lower), usually at higher interest rates.
» COMPARE: See your bad-credit loan options
Income
Your income helps lenders determine whether you have the means to pay back the money you borrow. In general, a high income will help you qualify for a low rate.
You can usually include multiple types of income, including income from employment, on a personal loan application. Many lenders view freelance earnings, alimony, child support or Social Security benefits as acceptable sources of income.
Existing debt
In addition to ensuring you have income to repay your loan, lenders want to know your income isn’t tied up paying back other debt. A high debt-to-income ratio (DTI) may signify you’ll have a hard time making payments. Consider paying down debt before applying for a personal loan if your DTI is above 36%.
Co-signer or co-borrower
If you can’t qualify to borrow money at a competitive rate based on your own credit or income, adding a co-signer or co-borrower to your application could help. A co-signer agrees to make payments if you default on the loan but doesn’t have access to loan funds. With a co-borrower, you take out a joint loan and share access to loan funds and responsibility for making payments.
How to get a personal loan
Many lenders have online personal loan applications but some banks and credit unions may require you to apply in-person. Here are three steps to getting a personal loan.
- Check your credit. Your credit is one of the most important factors on a personal loan application. Check your credit report and resolve any mistakes that might be hurting your score before you apply. You can get a free credit report with NerdWallet or at AnnualCreditReport.com.
- Pre-qualify. Many lenders let you pre-qualify for a personal loan to preview your potential rate and term. There is a soft credit check when you pre-qualify, so you can compare loan offers without impacting your credit score.
- Apply. A formal application requires documents verifying your identity and income. Lenders will perform a hard credit check, which may temporarily drop your credit score by a few points. If you're approved, you can expect the funds within a week. Once you get loan proceeds, consider setting up autopay to make repayment easier.
» MORE: How to get a personal loan
Choosing the best personal loan offer
Because pre-qualifying for a personal loan doesn’t affect your credit, you can check for offers with multiple lenders to find the best deal.
Annual percentage rate is the best apples-to-apples comparison tool to determine which personal loan offer is the most affordable. The APR represents the total cost of borrowing and includes the interest and any fees, like an origination fee.
If you’re choosing between two low-rate offers, consider these other features.
- Rate discounts: Some lenders will reduce your APR slightly if you are an existing customer or you set up automatic payments.
- Funding time: For quick cash, consider lenders with the fastest approval or funding time. Some lenders deposit funds the same day of approval.
- Customer experience: Look for lenders that have good reviews from customers and offer convenient features like flexible repayment options or a mobile app to manage loan payments.
Article sources
NerdWallet writers are subject matter authorities who use primary,
trustworthy sources to inform their work, including peer-reviewed
studies, government websites, academic research and interviews with
industry experts. All content is fact-checked for accuracy,
timeliness and relevance. You can learn more about NerdWallet's
high standards for journalism by reading our
editorial guidelines.
- 1. National Bureau of Economic Research. Prodigals and Projecture: An Economic History of Usury Laws in the United States from Colonial Times to 1900. Accessed May 2, 2025.
- 2. Federal Register. Federal Interest Rate Authority: A Rule by the Federal Deposit Insurance Corporation on 07/22/2020. Accessed May 2, 2025.
- 3. Federal Reserve Bank of St. Louis. Finance Rate on Personal Loans at Commercial Banks, 24 Month Loan. Accessed May 23, 2025.
- 4. Consumer Financial Protection Bureau. What Is a Debt Relief Program and How Do I Know if I Should Use One?. Accessed Jan 16, 2025.
- 5. Experian and Oliver Wyman. Financial Inclusion and Access to Credit. Accessed Jan 23, 2025.
- 6. Internal Revenue Service. Canceled debt – Is it taxable or not?. Accessed Apr 1, 2025.
- 7. National Credit Union Administration. Credit Union and Bank Rates 2024 Q4. Accessed May 23, 2025.
- 8. Federal Reserve. Military Lending Act. Accessed May 2, 2025.
- 9. Consumer Financial Protection Bureau. Consumer Use of Buy Now, Pay Later and Other Unsecured Debt. Accessed Jan 24, 2025.
- 10. Center for Responsible Lending. Unsafe Harbor: The Persistent Harms of High-Cost Installment Loans. Accessed May 2, 2025.
- 11. Angi.com. How Much Does It Cost to Make My Home Accessible?. Accessed Nov 12, 2024.
- 9. Consumer Financial Protection Bureau. Consumer Use of Buy Now, Pay Later and Other Unsecured Debt. Accessed Jan 27, 2025.
- 13. Internal Revenue Service. Retirement Topics - Plan Loans. Accessed Apr 8, 2025.
- 14. Consumer Financial Protection Bureau. What is a payday loan?. Accessed Apr 4, 2025.
- 15. The Pew Charitable Trusts. Payday Loans Cost 4 Times More in States With Few Consumer Protections. Accessed Apr 4, 2025.
- 8. Federal Reserve. Military Lending Act. Accessed Apr 4, 2025.
- 17. Internal Revenue Service. Retirement topics: Exceptions to tax on early distributions. Accessed Apr 8, 2025.
- 18. Administrative Office of the U.S. Courts. Bankruptcy Basics. Accessed Apr 8, 2025.
On this page
More like this
