What Is a Personal Loan? Features, Rates and How It Works
A personal loan can provide the cash you need for a major expense or to pay off credit cards and other high-interest debts. This guide explains how personal loans work, who they’re best for and how to apply for one.
MoneyLion offers a service to help you find personal loan offers. Based on the information you provide, you can get matched with offers for up to $100,000 from our top providers. You can compare rates, terms, and fees from different lenders and choose the best offer for you.
Key Takeaways
A personal loan is a fixed-term installment loan you borrow from a bank, credit union, or online lender, receive as a lump sum, and repay in equal monthly payments — making it a flexible option for covering large expenses or consolidating high-interest debt.
Your credit score has the biggest impact on your rate: Borrowers with scores of 670 or higher are likely to qualify for competitive APRs, while those with lower scores may face rates above 30%.
Most personal loans are unsecured, meaning you don't need collateral to qualify, but you'll generally need to meet the lender's minimum credit and income requirements.
Loan amounts typically range from $1,000 to $50,000 with repayment terms of 24 to 84 months, so it's important to choose a term whose monthly payment fits comfortably in your budget.
To get the best deal, check your credit score and prequalify with multiple lenders before you apply so you can compare APRs and fees without triggering a hard credit inquiry.
Summary generated by AI, verified by MoneyLion editors
How Do Personal Loans Work?
A personal loan is a general-purpose loan you can use for nearly anything and repay in monthly installments.
Loan term: The length of time you have to repay the money, usually 24, 36, 48, 60 or 84 months.
Interest: A percentage of the loan amount charged by the bank for loaning you the money. Lenders also post the annual percentage rate (APR), which is the actual annual cost of the loan, including interest and fees.
Monthly payments: You’ll repay the lender in monthly installment payments.
Loan amount ranges: Personal loans range from a few hundred dollars to $100,000 or more, but most are $1,000 to $50,000.
What Do You Need To Apply for a Personal Loan?
The lender will verify your identity, income and credit before approving your loan. Having the right information and documents ready when you apply can help expedite the process. Here’s what to know about personal loan requirements:
Eligibility Checklist
Age: You must be at least 18 years old.
Income: You’ll need a steady, reliable source of income.
Credit score: Lenders prefer credit scores of at least 670. Approval with lower scores is possible, but you’ll pay a higher APR.
Debt-to-income ratio (DTI): Debt-to-income ratio compares your debt payments to your income. Calculate it by dividing your total monthly debt payments by your gross monthly income. It's generally recommended to keep your DTI below 36%.
Documents You’ll Need
Government-issued photo ID, such as a driver's license, passport, military ID or state ID
Social Security number
Proof of address, such as a utility bill, lease agreement or mortgage statement, if your ID doesn’t show your current address.
Proof of employment and income, such as recent W-2 and pay stubs for employees, or 1099s and bank statements or tax returns for the self-employed.
Can a Co-Signer Help?
A co-signer can increase your chances of having your loan approved if you might not qualify on your own. They can also help you get a better rate than you’d otherwise qualify for. Because the co-signer agrees to repay the loan if you stop making payments, they’ll need good credit, sufficient income and a qualifying DTI.
What Can Personal Loans Be Used For?
Some personal loans can be used for nearly any legal purpose, but there are exceptions.
Allowed Uses
Consolidate high-interest debt
Pay for emergency medical or vet bills, home and auto repairs, and other unexpected expenses
Make home improvements without having to use your home as collateral
Finance a major life event, such as a wedding or bucket-list vacation
Commonly Restricted Uses
College tuition
Down payment on a home
Business expenses
Investments
What Types of Personal Loans Are There?
Many types of personal loans are available. Here's a breakdown of the most common varieties.
Unsecured Personal Loans
Most personal loans are unsecured, meaning they don't require collateral to "secure" the money you're borrowing. However, you'll generally have to meet a lender's minimum credit score requirements to get an unsecured loan.
Secured Personal Loans
Secured personal loans are backed by collateral, such as your car or funds in a savings account. If you don't have a good credit score, getting a secured personal loan could be easier than finding an unsecured option.
Debt Consolidation Loans
Debt consolidation combines multiple debts, such as credit card balances, into a single monthly payment.
Co-Signed or Joint Loans
A co-signer can improve your chances of approval, especially if your credit score isn't high enough. If you aren't able to repay the loan, the co-signer will be on the hook to make payments.
Joint loans are another option. Whereas co-signers don't get any of the loan funds, a joint applicant does. So you're essentially applying for the loans and sharing the money.
Fixed-Rate and Variable-Rate Loans
Most personal loans have a fixed interest rate. This is helpful because you'll know exactly how much you'll pay every month.
While variable-rate personal loans are less common, you may come across this option. The downside is that your payment amount may change over time, reducing predictability.
Personal Loan Rates and Fees: At a Glance
Many loans come with a variety of fees, including application fees, origination fees, late payment fees and prepayment penalties.
As the chart below shows, stronger credit improves your chances of qualifying for a loan with a competitive APR and fewer fees.
Credit Score | Typical APR | Common Fees | Approval Likelihood |
|---|---|---|---|
Below 580 | 32.09% | Highest origination and application fees likely | Poor except for small loans |
580 to 669 | 30.22% | High origination and application fees, especially for scores at low end of range | Fair for smaller loans |
670 to 739 | 22.83% | Competitive origination fee, possibly no application fee | Good, likely to have choice of loans |
740 to 799 | 14.35% | Low origination fee, possibly no application fee | Very good |
800 and up | 11.66% | Low or no origination or application fee | Excellent |
Quick Cost Example
Your credit has a strong impact on your loan APR, but lenders also factor in the amount you borrow and your loan term. You can see how this breaks down into different monthly payment amounts and how much you might pay in total to borrow money.
Loan Amount | Loan Term | APR | Monthly Payment | Total Repayment |
|---|---|---|---|---|
$5,000 | 24 months | 12% | $235 | $5,649 |
$10,000 | 36 months | 13% | $337 | $12,130 |
$15,000 | 60 months | 14% | $349 | $20,940 |
$20,000 | 84 months | 16% | $350 | $29,400 |
How Do You Get a Personal Loan?
To get a personal loan, follow these steps.
Check your credit score: Knowing your credit score in advance will help you determine whether you meet lenders' requirements.
Compare lenders and rates: Look across lenders and banks for personal loans to secure the best deal.
Prequalify if possible: Some lenders allow you to prequalify by sharing some basic financial info, which can give you an idea of how much money you can borrow without undergoing a hard credit pull, which can cause a dip in your credit score in the short term.
Gather needed documents: You'll need to provide proof of identity and income.
Submit your application: You can either apply online or in person, depending on whether you go through a bank, credit union or online-only lender.
Get approved and receive funds: Some lenders offer same-day approval, while others take a few business days to approve your application and deliver your funds.
Pros and Cons of Personal Loans
Understand the pros and cons of a personal loan before you get one.
Pros | Cons |
|---|---|
Fast access to cash | High interest rates if you have bad credit |
No collateral needed — in most cases | Increased debt |
Fixed payments | May hurt credit score if not repaid on time |
The biggest thing to keep in mind when borrowing money through a personal loan is that you should only borrow what you can afford to repay. Find a repayment term that works for you and ensure the monthly payment fits your budget.
Is a Personal Loan Right for You?
Personal loans have distinct advantages and disadvantages that determine who they are best suited for.
Good Fit If:
You need a lump sum of money quickly
You have a solid plan to repay it on time
You qualify for a lower interest rate than a credit card
You're consolidating high-interest debt into one payment
Not Ideal If:
You're unsure you can keep up with monthly payments
You have unstable income or poor credit
You're tempted to borrow more than you need
Other options, like 0% APR credit cards or payment plans, are available and would cost less
Personal Loan FAQs
Learn more about personal loans with these frequently asked questions.
What is a personal loan?
A personal loan is an installment loan in which you receive the borrowed money up front and pay it off in regular monthly installments.
How fast can I get one?
Some lenders offer personal loans as fast as the same or next day, while others take a few days to approve your application and deliver funds.
Can I get one with bad credit?
Some lenders specialize in bad-credit personal loans. However, you’ll pay a higher APR, and you may need to apply with a co-signer if you don't meet the lender's minimum credit and income requirements.
What happens if I miss a payment?
Missing a personal loan payment can hurt your credit score, and the lender may charge a late fee and additional interest.
Key Terms
Personal loan: A general-purpose loan you receive as a lump sum from a bank, credit union or online lender and repay in fixed monthly installments over an agreed term.
Annual percentage rate (APR): The yearly cost of borrowing expressed as a percentage, including the interest rate and any lender fees — the most accurate figure to use when comparing loan offers.
Installment loan: A loan in which you receive the full borrowed amount upfront and repay it in scheduled, equal payments over a set period.
Debt-to-income ratio (DTI): Your total monthly debt payments divided by your gross monthly income; lenders use it to assess your ability to repay, and a DTI below 36% is generally recommended.
Origination fee: A one-time upfront charge — typically a percentage of the loan amount — that covers the lender's cost to process and fund the loan.
Unsecured loan: A loan that doesn't require you to pledge an asset as collateral; approval is based on your creditworthiness and income instead.
Collateral: An asset — such as a car or savings account — pledged to secure a loan; if you default, the lender may claim it to recover the funds.
Co-signer: A creditworthy person who agrees to repay a loan if the primary borrower doesn't, which can improve your approval odds or help you qualify for a lower rate.
Sources:
Summary generated by AI, verified by MoneyLion editors
Sarah Silbert contributed to the reporting for this article.
Jasmin Baron, CCC™, contributed to editing this article.
Photo Credit: iStock.com
You may like
Similar Posts
Disclosures
MoneyLion does not provide, own, control or guarantee third-party products or services accessible through its Marketplace (collectively, “Third-Party Products”). The Third-Party Products are owned, controlled or made available by third parties (the "Third-Party Providers"). Should you choose to purchase any Third-Party Products, the Third-Party Providers’ terms and privacy policies apply to your purchase, so you must agree to and understand those terms. The display on the MoneyLion website, app, or platform of any of a Third-Party Product or Third-Party Provider does not-in any way-imply, suggest, or constitute a recommendation by MoneyLion of that Third-Party Product or Third-Party Financial Provider. MoneyLion may receive compensation from third parties for referring you to the third party, their products or to their website.
This material is for informational purposes only and should not be construed as financial, legal, or tax advice. You should consult your own financial, legal, and tax advisors before engaging in any transaction. Information, including hypothetical projections of finances, may not take into account taxes, commissions, or other factors which may significantly affect potential outcomes. This material should not be considered an offer or recommendation to buy or sell a security. While information and sources are believed to be accurate, MoneyLion does not guarantee the accuracy or completeness of any information or source provided herein and is under no obligation to update this information. For more information about MoneyLion, please visit https://www.moneylion.com/terms-and-conditions/.