What Is a Personal Loan?
A personal loan is an amount of money you can borrow to use for a variety of purposes. For instance, you
may use a personal loan to consolidate debt, pay for home renovations, or plan a dream wedding. Personal
loans can be offered by banks, credit unions, or online lenders. The money you borrow must be repaid over
time, typically with interest. Some lenders may also charge fees for personal loans.
Understanding a Personal Loan
A personal loan allows you to borrow money to pay for personal expenses and then repay those funds over
time. Personal loans are a type of installment debt that allows you to obtain a lump sum of funding. For
example, you might use a personal loan to cover:
● Moving expenses
● Debt consolidation
● Medical bills
● Wedding expenses
● Home renovations or repairs
● Funeral costs
● Vacation costs
● Unexpected expenses
A personal loan is also different from a personal line of credit. The latter is not a lump sum amount; instead,
it works like a credit card. You have a credit line that you can spend money against and, as you do so, your
available credit is reduced. You can then free up available credit by making a payment toward your credit
With a personal loan, there’s typically a fixed end date by which the loan will be paid off. A personal line of
credit, on the other hand, may remain open and available to you indefinitely as long as your account
remains in good standing with your lender.2
Types of Personal Loans
Personal loans may be secured or unsecured. A secured personal loan is one that requires some type of
collateral as a condition of borrowing. For instance, you may secure a personal loan with cash assets, such
as a savings account or certificate of deposit (CD), or with a physical asset, such as your car or boat. If you
default on the loan, the lender could keep your collateral to satisfy the debt.
An unsecured personal loan requires no collateral to borrow money. Banks, credit unions, and online
lenders can offer both secured and unsecured personal loans to qualified borrowers. Banks generally
consider the latter to be riskier than the former because there’s no collateral to collect. That can mean
paying a higher interest rate for a personal loan.3
How a Personal Loan Works
To get a personal loan, you need to apply to a lender. Again, this can be a bank, credit union, or online
personal loan lender.
Generally, you would first complete an application. The lender reviews it and decides whether to approve or
deny it. If approved, you’ll be given the loan terms, which you can accept or reject. If you agree to them, the
next step is finalizing your loan paperwork.
When that’s done, the lender will fund the loan, which means paying you the proceeds. Depending on the
lender, these may arrive through a direct deposit into your bank account or a check. After the loan is
funded, you can use the money as you see fit. You then have to begin repaying the loan according to the
terms established in your loan agreement.
Defaulting on a personal loan could cause significant damage to your credit score. You could also lose your
collateral with a secured loan or risk being sued by your lender to collect the debt.
Example of a Personal Loan
When considering a personal loan, it’s helpful to understand how much it may cost. The annual percentage
rate (APR) on a personal loan represents the annualized cost of repaying the loan based on the interest
rate and fees. The APR and loan term can determine how much you pay in interest total over the life of the
For example, assume you get a $10,000 personal loan with an APR of 7.5%. The loan has a repayment
term of 24 months. Using those terms, your monthly payment would be $450 and the total interest paid over
the life of the loan would be $799.90.
Now assume you borrow the same amount but with different loan terms. Instead of a two-year term, you
have three years to repay the loan, and your interest rate is 6% instead of 7.5%. Using those terms, your
monthly payment would drop to $304, but your total interest paid would increase to $951.90.
Comparing the numbers this way is important if you want to get the lowest monthly payment possible or pay
the least amount of interest for a personal loan. Using a simple online personal loan calculator can help you
determine what kind of payment amount and interest rate are the best fit for your budget.
Though some lenders charge no fees for personal loans, others may levy a credit check fee, a loan
origination fee, or—if you decide to pay off the loan early—a prepayment penalty. Paying late could trigger
a late payment fee.
Where to Find Personal Loans
The first place to look for personal loans may be your current bank or credit union. Your personal banker
can advise you on what types of personal loans may be available and the borrowing options for which
you’re most likely to qualify.
Personal loans can also be found online. Numerous lenders offer personal loans online. You can apply
electronically, get a decision in minutes and, in some cases, get funding in as little as 24 to 48 hours after
When comparing personal loans online or off, pay close attention to the details. Specifically, consider the
● Interest rate
● Repayment terms
● Borrowing limits (minimum and maximum)
● Collateral requirements