What Is a Personal Loan?

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

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. If you’re using the loan to consolidate debt, some lenders will send the money directly to your creditors rather than depositing it into your bank account.

Repayment usually starts about 30 days after you’ve received funds. 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.

On-time loan payments can help build your credit score, but missed payments hurt it.

» MORE: How does a personal loan affect your credit score?

Lenders vary in their personal loan offerings, but here are some features you can expect on a personal loan.

• 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.

Personal loans can be used for almost anything, but they’re best for large, one-time expenses that leave your finances in a better position than when you got it. Here are some of the common uses for personal loans.

» MORE: Pros and cons of 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.

» MORE: 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 contacting a local financial assistance program, borrowing from a friend or family member or looking for other ways to make money.

» MORE: Payday loan alternatives

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

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.

» MORE: How long does it take to get 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 of 690 or higher) and a credit history showing on-time payments toward other loans and credit cards often qualify for the best rates.

There are lenders that offer personal loans for borrowers with fair or bad credit scores (689 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.

» MORE: How to get a personal loan with low 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%.

» MORE: Calculate your debt-to-income ratio

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 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.   

2. 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.

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.

» MORE: How to get a personal loan

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 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. 

» MORE: Personal loan features to compare