How Do Personal Loans Work?

The way personal loans work is pretty simple. As a borrower, you get a certain amount of money from a lender. You agree to pay it back, with interest, over a certain period.

Most personal loans are unsecured, which means that you don't have to put up any collateral like your house or your car.

MoneyLion offers a service to help you find personal loan offers based on the info you provide, you can get matched with offers for up to $50,000 from our top providers. You can compare rates, terms, and fees from different lenders and choose the best offer for you.

How Do Personal Loans Work for Borrowers and Lenders?

A personal loan involves two parties: the borrower and the lender. Here's how it works for each of them.

For borrowers:

• You apply for a specific amount of money to be repaid over a specific period of time at a specific rate of interest.

• When approved, the bank gives you a lump sum.

• You make monthly payments, which consist of principal and interest.

• Use the money for whatever you want.

• If you miss payments or make them late, your credit may be affected, and you can be charged late fees.

For lenders:

• Lenders assess the applicant's creditworthiness to determine if they want to lend to them, and at what interest rate.

• Lenders give the borrower a lump sum of money when the loan is approved.

• The lender collects the payments each month. The interest is their profit on the loan.

• If the borrower defaults, the lender could lose the money.

How Does Taking Out a Loan Work?

Here are the steps to take to get a personal loan.

1. Research lenders to find the best rate

2. Apply for the loan, providing personal information and proof of your income

3. Agree to a credit check

4. Get approved by the lender and sign the loan agreement

5. Receive the money in a lump sum

6. Make monthly payments as agreed until the loan is paid off

How Does Interest Work on a Personal Loan?

When a bank loans money, they charge interest — this is their profit for lending the funds. Interest works on personal loans as the cost lenders charge you to borrow money, typically through an annual percentage rate (APR).

For a personal loan, the interest is calculated based on:

• Interest rate

• Amount borrowed

• Length or term of the loan

Is a Personal Loan Right for You?

A personal loan is a good choice for you if:

• Need a lump sum fast

• Have good or excellent credit

• Can make the monthly payments

You shouldn't take out a personal loan if you:

• Can pay cash or qualify for cheaper financing

• Can't afford the monthly payments

• Don't have a clear need for the funds

How Personal Loans Can Help You Move Forward

Once you know how a personal loan works, you'll have a better chance of getting ahead on your finances, control your debt and make life easier to manage.

You can use a personal loan to consolidate debt, cover an emergency or for a major purchase. When personal loans are used wisely, they can be an incredible tool to improve your financial situation and meet your goals.

FAQs 

Can I get a personal loan with bad credit?

You may be able to, but your interest rate will likely be high. If you decide to apply, make sure you understand how much you'll pay each month, and be sure it fits into your budget.

How long does approval take?

Approval for a personal loan can take a day or two, or up to a week or more, depending on the lender.

Will a personal loan hurt my credit score?

Your credit score may take an initial hit when you apply for a personal loan. You may also see a decline in your score when you get the loan, as your credit utilization may go up. As you pay the loan on time, your score should bounce back again.

Can I pay off the loan early without a penalty?

Sometimes you can pay off a loan early without a penalty, but this depends on the particular loan. Be sure to check your loan documents carefully before you sign.

What happens if I miss a payment?

If you miss a payment, you may be charged a late fee. If you miss more than one or two, your loan may go to a collection agency. Your credit score will be negatively affected if either of these things happen.