What Is a Personal Loan?

A personal loan is money borrowed from a lender that you pay back in monthly installments.
Ronita Choudhuri-Wade
By Ronita Choudhuri-Wade 
Edited by Kim Lowe

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Nerdy takeaways
  • A personal loan is unsecured, meaning it doesn’t require collateral.

  • You can get a personal loan with an online lender, bank or credit union.

  • Personal loan approval is based on your creditworthiness and financial profile.

  • The cheapest loan is often the one with the lowest APR.

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What is a personal loan?

A personal loan is money borrowed from a bank, credit union or online lender that you pay back in fixed monthly payments or installments. Lenders typically offer loans from $1,000 to $50,000, with repayment terms of two to seven years.

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 when assessing a borrower’s application.

Personal loans have fixed interest rates, so the monthly payment is the same for the life of the loan. On-time loan payments can help build your credit score, but missed payments hurt it.

What can I use a personal loan for?

Personal loans can be used for almost any purpose, including:

  • Debt consolidation. 

  • Home improvement projects.

  • Medical bills. 

  • Emergencies.

  • Refinancing an existing loan.

  • Weddings. 

  • Vacations.

Personal loans work best when they are used to reach a financial goal. For example, a personal loan can finance a home improvement project that increases the value of your home, while a debt consolidation loan can help you pay down debt at a lower interest rate.

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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.

  1. Check your credit. Your credit score 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. You can get a free credit report with NerdWallet or at AnnualCreditReport.com.   

  2. Pre-qualify. Most 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. The best offer typically has a low APR and monthly payments that fit your budget.

  3. 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 and the first loan payment is typically due in 30 days. Make sure to review your monthly budget and make a plan to pay off the loan.

How to qualify for a personal loan

A stronger credit profile gives you a better chance of qualifying for a personal loan and getting a lower interest rate. Borrowers with good credit (a score of 690 or higher) often qualify for the best rates.

There are lenders that offer personal loans for borrowers with fair or bad credit (689 or lower), usually at higher interest rates. Some lenders also prioritize alternative data, including education and work history, when evaluating applicants.

To boost your chances of approval, consider a personal loan that is secured or co-signed. Secured loans are backed by an asset like your home or car, and the lender can repossess your property if you default. Co-signed loans include an additional applicant with a strong credit profile who helps guarantee a personal loan. A co-signer, however, is on the hook for any missed payments.

How to pick the best personal loan

One of the best ways to evaluate a personal loan is to look at the loan’s annual percentage rate. The APR is the total cost of borrowing and includes the interest and any fees.

Personal loan rates are from 6% to 36%. Compare rates from multiple lenders before applying to find one with a low APR.

If you’re choosing between two low-rate offers, consider these other features.

  • Monthly payment: Look for a monthly payment that fits comfortably into your budget.

  • Fees: The most common personal loan fee is an origination fee. This fee is included in your APR, but it’s important to know whether a lender will charge it and if it will reduce your loan amount.

  • Funding time: For quick cash, consider lenders with fast approval or funding time. Some lenders deposit funds the same day after approval. 

  • Customer experience: Look for lenders that offer convenient features like autopay, mobile app to manage loan payments or flexible repayment options. 

See if you pre-qualify for a personal loan – without affecting your credit score
Just answer a few questions to get personalized rate estimates from multiple lenders.

on NerdWallet

Alternatives to personal loans

For discretionary expenses, consider cheaper alternatives than personal loans.

A 0% APR credit card can be one of the best ways to pay down credit card debt, particularly if you pay the balance back within the card’s promotional period. This period can last from 15 to 21 months, and no interest will be charged on your purchases.

You need good to excellent credit — a score of 690 or higher — to qualify for a 0% card.

A home equity loan is borrowed against the equity in your home. This type of loan can help finance a home improvement project at a low rate, with repayment terms up to 20 years.

A personal line of credit is another alternative. These are most commonly offered by banks and are a hybrid between a loan and a credit card. Like a loan, a lender will need to approve your application, but like a credit card, you draw only what you need and pay interest only on the amount you use.

For smaller expenses, consider using a cash advance app or "buy now, pay later." A cash advance app gives you a small advance on your next paycheck without interest but may come with fees. Buy now, pay later plans break a purchase into four installments paid over six weeks. While both options are convenient, they can lead to repeated borrowing or overspending.

See if you pre-qualify for a personal loan – without affecting your credit score
Just answer a few questions to get personalized rate estimates from multiple lenders.

on NerdWallet

Comparing options? See if you pre-qualify for a personal loan - without affecting your credit score
Just answer a few questions to get personalized rate estimates from multiple lenders.

on NerdWallet

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