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.
Quick Take
What is it: Personal loans are money you borrow from a bank, credit union or online lender. Repayment is done with monthly installments.
Annual percentage rates (APRs): Range from less than 6% to 36% or more
Terms: You typically have 24 months to 84 months to repay the loan.
Amounts: Can range from several hundred dollars to $100,000 or more
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 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.
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): DTI 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, to streamline multiple debt payments into one monthly sum.
Cosigned 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, so you have less 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 ahead of time will help you know if you meet lenders' requirements.
Compare lenders and rates: You should look across the best 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 that the monthly payment fits into 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
Final Takeaways
A personal loan can pay for many types of expenses, including debt consolidation, medical and household emergencies and major life events.
Loan amounts range from a few hundred dollars to $100,000 or more.
Common personal loan terms include 24, 36, 60, 72 and 84 months.
The APR is the annual cost of the loan.
Strong credit and low DTI help you qualify for larger loans and low APRs.
Always consider less expensive ways to pay expenses before you take out a personal loan.
Key Terms To Know
APR: The annual cost of a loan, including interest and fees.
Credit check: Lenders do a soft credit check to verify information in your credit report. They may also do a hard credit check to review your credit history to make a lending decision.
Interest rate: The percentage of the loan amount charged by the lender.
Origination fee: A percentage of the loan amount charged by the lender to originate, or create, the loan.
Term: The number of months or years you have to repay the loan.
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, where you get 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 cosigner 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.
Sarah Silbert contributed to the reporting for this article.
Photo Credit: iStock.com
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