What is a Personal Loan?

A personal loan is a sum of money that can be borrowed for various purposes. For instance, a personal loan can be used to consolidate debt, fund home improvements, or finance a dream wedding. Personal loans are available from financial institutions like banks, credit unions, and online lenders. The borrowed funds must typically be repaid over time with interest. Personal loans may incur fees from certain lenders.

• Personal loans are loans that can be used to cover a variety of personal expenses.

• Personal loans are available from financial institutions like banks, credit unions, and online lenders.

• Personal loans can be secured, meaning collateral is required to borrow money, or unsecured, with no collateral required.

• Personal loan interest rates, fees, amounts, and repayment terms can vary greatly.

How to Get the Personal Loan


Understanding About Personal Loan

A personal loan enables you to borrow money for personal expenses and repay the funds over time. Personal loans are a form of revolving credit that enable you to obtain a lump sum of money. For instance, a personal loan could be used to cover:

• Moving expenses

• Debt consolidation

• Medical bills

• Wedding costs

• Home renovations or repairs

• Funeral expenses

• Vacation expenditures

• Unexpected costs

These loans are distinct from other installment loans used to fund specific expenses, such as student loans, auto loans, and mortgages (i.e. education, vehicle purchase, and home purchase).

Some personal loan lenders place restrictions on how a loan can be utilized. For instance, you might not qualify for a personal loan to cover college tuition, fees, or other expenses.

A personal loan and a personal line of credit are also distinct. The latter is not a lump sum, but operates similar to a credit card. You have a credit line against which you can make purchases, and as you do so, your available credit decreases. Then, you can release available credit by paying down your credit line.

Typically, a personal loan has a predetermined repayment deadline. A personal line of credit, on the other hand, may remain available indefinitely so long as your account remains in good standing with the lender.

Types of Personal Loans

Loans for individuals may be secured or unsecured. A secured personal loan is one that necessitates the use of collateral. For example, you can secure a personal loan with cash assets, such as an savings account or certificate of deposit (CD), or with a physical asset, such as your automobile or boat. If you default on the loan, the lender may retain the collateral to satisfy the obligation.

To qualify for an unsecured personal loan, no collateral is required. To qualified borrowers, banks, credit unions, and online lenders may offer both secured and unsecured personal loans. Banks consider the latter to be riskier than the former because they cannot collect collateral. This may result in a higher rate of interest on a personal loan.

How Personal Loans Works

To apply for a personal loan, you must approach a lender. This could be from a financial institutions like bank, credit union, or online lender.

Typically, you would submit an application first. The lender evaluates the application and decides whether to accept or reject it. If approved, you will be presented with loan terms that you can accept or reject. If you accept their terms, the next step is to finalize your loan documentation.

The lender will then fund the loan, which means you will receive the proceeds. These may arrive via direct deposit into your bank account or by check, depending on the lender. After the loan is funded, you are free to use the funds however you wish. The loan must then be repaid in accordance with the terms outlined in the loan agreement.

A default on a personal loan could have severe consequences for your credit score. With a secured loan, you could also lose your collateral or be sued by your lender to collect the debt.

Personal Loan - Example

When considering a personal loan, it is useful to be aware of the potential costs. A personal loan's annual percentage rate (APR) is the annualized cost of repaying the loan, based on the interest rate and fees. The APR and loan term can influence the total amount of interest paid over the life of a loan.

Consider, for instance, a $20,000 personal loan with a 7.5% APR. The loan has a 24-month repayment period. The monthly payment would be $900, and the total interest paid over the life of the loan would be $1,599.90.

Now suppose that you borrow the same amount, but on different terms. You now have three years to repay the loan instead of two, and the interest rate has been reduced from 7.5% to 6%. Your monthly payment would decrease to $608, but your total interest paid would increase to $1903.90 under these conditions.

Comparing the numbers in this manner is essential if you want the lowest possible monthly payment or to pay the least amount of interest on a personal loan. Using a straightforward online personal loan calculator can help you determine the optimal monthly payment and interest rate for your budget.

Although some lenders do not charge fees for personal loans, others may assess a credit check fee, a loan origination fee, and a prepayment penalty if the loan is repaid early. A late payment may incur a late payment fee.

Where to Find and Get Personal Loans

Your current bank or credit union may be your first stop for personal loans. Your personal banker can advise you on the personal loan options for which you are most likely to qualify.

There are also personal loans available online. Numerous online lenders offer personal loans. You can apply online, receive a decision within minutes, and in some cases receive funding within 24 to 48 hours after loan approval.

Pay close attention to the specifics when comparing personal loans online or off. Consider in particular the following:

• Rate of interest

• Fees

• Repayment terms

• Limits on borrowing (minimum and maximum)

• Collateral requirements


AnnualCreditReport.com provides a free credit report check. When doing so, keep an eye out for any mistakes that could be lowering your score, and don't be afraid to dispute them.

Checking the minimum requirements to qualify for a personal loan is also helpful. Acceptable credit score, income, and debt-to-income ratio requirements for a personal loan can vary depending on the lender. This can help you narrow down your loan options to those that fit your credit and financial profile the best.