What Is a Personal Loan?
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What is a personal loan?
How do personal loans work?
Common features of personal loans
- 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 the borrower with less money than they requested, or 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, which lets the borrower secure the loan with a savings account or vehicle.
- 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.
What can I use a personal loan for?
Debt consolidation
Home improvement projects
Emergencies
Discretionary spending

When is a personal loan a good idea?
- 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.
How to qualify for a personal loan
Credit
Income
Existing debt
How to get 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 are approved, you can expect the funds within a week.
How to compare personal loan offers
- 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 after 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
- 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. Military Lending Act. Accessed May 2, 2025.
- 4. Center for Responsible Lending. Unsafe Harbor: The Persistent Harms of High-Cost Installment Loans. Accessed May 2, 2025.
- 5. Consumer Financial Protection Bureau. What are the costs and fees for a payday loan?. Accessed Jun 6, 2025.
- 6. Center for Responsible Lending. Unsafe Harbor: The Persistent Harms of High-Cost Lending. Accessed Jun 6, 2025.
- 7. Internal Revenue Service. Retirement Topics - Plan Loans. Accessed Apr 8, 2025.
- 8. Consumer Financial Protection Bureau. What is a payday loan?. Accessed Apr 4, 2025.
- 9. The Pew Charitable Trusts. Payday Loans Cost 4 Times More in States With Few Consumer Protections. Accessed Apr 4, 2025.
- 3. Federal Reserve. Military Lending Act. Accessed Apr 4, 2025.
- 11. Internal Revenue Service. Retirement topics: Exceptions to tax on early distributions. Accessed Apr 8, 2025.
- 12. Administrative Office of the U.S. Courts. Bankruptcy Basics. Accessed Apr 8, 2025.
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