Personal loans are a popular option for consumers who need to borrow for just about any reason.
The best personal loans are easy to understand, easy to find, and take little time to get. You can borrow with a personal loan for almost any reason, including:
- Consolidating debt
- Building a credit history
- Paying for travel
- Financing a wedding or other special event
- Covering a medical procedure
- Improving your home
Learn more about personal loans including what they are, how they work, where to find them, when and how to use them, and how to pay less for a personal loan.
What Is a Personal Loan?
Personal loans are unsecured loans that come with a variety of interest rates and terms. When a loan is unsecured, it means that you haven’t put up collateral such as a house or car to guarantee the loan.
Many lenders offer personal loans, and each lender determines their own interest rates, loan terms, and credit scores of their borrowers. Below are some common characteristics of personal loans.
- Unsecured (no collateral like a car that can be repossessed)
- Interest rates are usually fixed
- Terms usually range from 1 to 10 yrs
- Amounts range from $1,000 to $100,000
- Credit rating is very important
While personal loans can have variable interest rates, the safest come with low fixed interest rates, a monthly payment that won’t catch you by surprise, and a set repayment timeline that lets you know exactly when you’ll be debt-free.
The main characteristic that makes a personal loan “personal” is that it is unsecured.
There is no house, car, boat, or other property to take away if you don’t pay it back.
All the lender has is your personal guarantee. Personal loans are also called “signature loans” or “unsecured loans.”
Other personal loan features:
- Typically comes with a fixed interest rate
- Closed-end–you repay the loan over a set term, usually one to five years
- Usable for any legal purpose
- Approval depends on income, debts, and credit rating
- Most loan amounts range from $1,000 to $35,000b, ut some companies offer loans exceeding $100,000
How Personal Loans Work
When you sign up for a personal loan, you agree to borrow a sum of money and repay it over a predetermined term.
The most common terms range from one to five years, but some lenders offer longer terms. In most cases, your interest rate and monthly payment are fixed and won’t change during the loan term.
This makes budgeting and getting out of debt easier.
Pay Off an Installment Loan Faster
Suppose you borrow $20,000 to consolidate high-interest credit card debt, and you have excellent credit.
In that case, your lender may offer you a five-year repayment and an annual percentage rate (APR) as low as 6.5%.
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The AmONE installment loan calculator shows that you’d be paying $391.32 monthly for five years, and your credit card debt will be gone.
If your loan amount is higher than $35,000 to $40,000, and/or you want a repayment term that exceeds five years, you need to make that clear when shopping for a loan.
Not all lenders offer those terms, but many do.
One big benefit of personal loans is the fact you can shop, apply and receive your money without ever leaving your home.
Many online loan websites also let you compare multiple personal loan offers in one place, saving you time and money.
Best Uses for Personal Loans
There is no one “right way” to use a personal loan.
Whether it’s the right way for you to meet a financial need depends on your resources, your credit rating and income, and why you’re borrowing.
Still, there are plenty of common uses for personal loans. Here’s how they work.
Debt Consolidation
Debt consolidation is a popular use for personal loans. One reason is that, according to the Federal Reserve, the “spread” between personal loan interest rates and credit card interest rates is higher than it’s been in a while.
So you may be able to nail down a lower interest rate — and that rate, unlike credit card rates, is likely to be fixed.
Consolidating debt with a personal loan can even improve your credit score. By reducing credit card balances, you’ll drop your credit utilization ratio, which is the percentage of your credit card limits you use.
Utilization makes up 30% of your FICO score. You normally want to keep utilization below 30%.
Wedding Expenses
Wedding experts at TheKnot.com report that the average cost of a wedding was $28,000 in 2021 and is expected to be even higher when 2022 numbers are analyzed. This figure includes the cost of a venue, the dress, food, entertainment, and more.
One issue many faces when planning a wedding is that much of the cost must be paid upfront, sometimes up to a year in advance.
That’s why many people turn to personal loans to fund wedding expenses.
You can borrow money now with a fixed interest rate and then repay it over time.
Ideally, you’ll have the loan paid off before the wedding or at least be able to clear your balance with cash wedding gifts.
Home Improvement Projects
Home improvement is another popular use for personal loans. While home equity financing is often the cheapest option for the largest projects, it’s not always appropriate.
For example, you can’t take out equity on your home if it’s listed for sale or you don’t have enough home equity, but you may need to make some crucial home repairs before you can sell your house.
Additionally, you may find it harder to use the equity in an investment property or second home for improvements or repairs.
That’s where a personal loan for home improvements can help. You can use a personal loan for almost anything, and the process is fast—no waiting for an appraisal on your home.
Interest rates, especially if you have good credit, are fairly competitive with home equity financing.
Pay for a Major Purchase
Many consumers put major purchases on credit cards because it’s convenient or because they get cash back or other rewards.
While credit cards might be the best way to buy a big-ticket item, they’re not usually the best way to finance a large purchase. Interest rates are relatively high, and since they are dependent on the prime interest rate, they can increase at any time.
In addition, credit card use can damage your credit score. If you have a $10,000 credit limit and use $1,000, that’s good. If you carry more than $3,000, that isn’t good for your utilization ratio and your FICO score.
So, if you can’t pay off your purchase within the next billing cycle, consider a personal loan to protect your credit score and save you money.
Medical Bills
Medical providers frequently demand payment upfront for non-emergency procedures such as plastic surgery or dental procedures.
A personal loan for medical costs can be the best financial arrangement for such costs especially because you can get one without leaving home — a consideration if you’re not feeling well.
You can also use a personal loan for optional procedures not covered by insurance, such as medical tourism and cosmetic surgery.
Moving Expenses
Moving can be expensive. In fact, the average out-of-state move costs $4,300. You may have to move when it’s financially difficult.
For example, you may be switching jobs or dealing with a family emergency.
Moving loans make sense when they are your lowest-cost option when you’re moving a longer distance (enlisting your friends and buying a pizza won’t cover it), and you need to move immediately.
You don’t have time to save up for the experience.
If you’re moving for a new job and the employer covers the cost, you might still have to come out-of-pocket and wait for reimbursement. In that case, a personal loan can get you where you need to be as soon as possible.
What Are Personal Loan Fees?
It’s important to understand that many personal lenders don’t charge any fees for their personal loans.
The best loan for you offers the lowest cost combination of fees and interest rates.
Personal loans with no fees and the best interest rates tend to go to consumers with great credit.
You may have to pay fees if your FICO score is lower than 740.
Loan fees don’t have to be a deal-breaker, however. Here’s a list of common fees. But it doesn’t matter what they are called. It’s the bottom line cost of fees and the total interest that should concern you.
Common Personal Loan Fees
How to Qualify for a Personal Loan
Exact requirements for personal loans vary among lenders. Some specialize in credit-challenged applicants.
Others prefer only highly-qualified borrowers. The better your package, the more choices you’ll have.
Credit
Minimum credit scores for personal loans range from 500 to 740.
Interest rates range from under 6% to over 36% and depend mostly on your credit score. Loans advertised as “personal loans with no credit check” are usually predatory loans and could end up costing you up to 500% in interest.
These loans include payday loans, check advance loans, or title loans. It’s best to avoid them.
Income
You need proof of your income for a personal loan. Loans that don’t require proof of income might be called personal loans, but they’re not.
They are title loans or check advance loans disguised as personal loans. Stay away.
You can typically prove your income with pay stubs or tax returns.
Your personal loan approval depends on having a stable and sufficient income.
Debts
Lenders consider the relationship between your income and other debts when deciding how much to loan you.
Personal loan companies set maximum debt-to-income (DTI) ratios between 36% and 50%.
What’s a DTI?
A DTI is your debts, including rent or mortgage, plus the minimum monthly payments on your other accounts like auto loans, student loans, and credit cards, divided by your gross (before tax) monthly income.
Living expenses like food and utilities don’t count.
If your income is $4,000 a month your rent is $1,000 and you have no other debts, your DTI is 25%. that’s $1,000 / $4,000.
If you wanted to borrow $10,000 at 8%, your payment would be about $203. So your debts would be $1,203 and your DTI would increase to just over 30%.
You May Need a Co-signer
If your credit isn’t that great, or your income is insufficient or unstable, you may need a co-signer.
The co-signer is responsible for repaying the loan if you don’t do it. In addition, if you make a payment late, you could damage your co-signer’s credit.
Your late payment will probably show up on their credit report.
Don’t ask anyone to co-sign a personal loan for you if you have doubts about repaying the loan responsibly.
Pros and Cons of Personal Loans
Personal loans have their advantages and drawbacks. They are the best choice for many consumers and circumstances. But always the cheapest or most appropriate financing available for others.
How to Apply for a Personal Loan
If you’re ready to commit to a personal loan, you’ll be happy to know that the application process is usually fast and easy.
You can do the whole thing online if you prefer, and it’s possible to have your loan funded online without visiting a bank.
Here are some steps you should take to find and apply for the best personal loan for your needs:
1. Check Your Credit Score
It can help to know where you stand regarding your credit score before applying for a personal loan.
You’re entitled to a free copy of your report every year from each of the major bureaus — Experian, Equifax, and TransUnion.
You can obtain your scores as well for a nominal fee. The government’s site, www.annualcreditreport.com, is the only non-commercial site that won’t charge you fees or sell your information.
2. Compare Loan Companies Online
It can also help to compare loan companies and their specific offerings online.
Look for a lender that offers loan amounts high enough to meet your needs, low-interest rates for consumers with credit scores in your range, and low loan fees.
3. Get Preapproved Without a Hard Inquiry on Your Credit Report
Once you’ve checked out several lenders, give precedence to online loan companies that let you get preapproved for a personal loan without a hard inquiry on your credit report.
Getting a pre-approval can help you gauge how much you might be able to borrow and the interest rate you’ll ultimately pay.
4. Use a Loan Calculator
Once you can estimate your interest rate, play around with an installment loan calculator to see what your payments could be.
This step can help you determine what kind of monthly payment you’ll end up with once you choose a loan amount and repayment term.
5. Receive Loan Funding in as Little as 2-3 Business aDys
Once you’re preapproved for a loan that suits your needs, complete the formal loan application online.
Your final approval may take just a few minutes or a few business days, depending on the lender you and the program you choose. You may get your funds as soon as the next business day.
Alternatives to Personal Loans
Personal loans are often the best way to finance a purchase of goods or services or to consolidate debt. But no product is right for all people or all uses.
Credit cards
Most of us have a few credit cards in our wallets because they offer convenience. Unlike personal loans, many credit cards offer cash-back or travel rewards for each dollar you spend.
Highly-qualified applicants may qualify for perks like 0% interest rates or airline miles.
However, while credit cards might be a great way to make purchases, they can be expensive to finance purchases.
Interest rates average about 17%, while personal loan interest rates, according to the Federal Reserve, average about 10%.
Credit cards can also make spending too convenient, which is why so many people who use credit cards excessively can end up in financial trouble.
Studies show that you are far more likely to make an impulse purchase when you use a card than when you carry cash.
Peer-to-peer (P2P) Lenders
You may want to consider peer-to-peer lenders in addition to traditional companies that offer personal loans.
While the original P2P model involved individuals lending to each other, that’s no longer true.
Large institutions fund many of these loans. But the competition from individuals keeps rates down.
Loans from peer-to-peer lenders work similarly to traditional personal loans.
And guidelines tend to be conservative. However, some lenders specialize in lower credit tiers, so consider these sources when shopping for unsecured financing.
Home Equity Loan
Homeowners with equity may want to consider borrowing against their homes to meet a need for cash.
Like personal loans, most home equity loans come with fixed interest rates, fixed repayment timelines, and fixed monthly payments.
This makes them easy to plan for and budget for — especially if you hate surprises.
Because the repayment period is long (usually ranging from 10 to 30 years), the payments can be quite low.
And because your home secures the loan, it’s less risky for the lender and your interest rate should be quite low.
The downside is that even with a low interest rate, your total interest expense can get very high if you stretch out your repayment for decades.
Upfront costs like appraisals and title insurance can be higher than the amount you borrow.
And your home is on the line if you can’t make your payments.
Finally, because it involves real estate, a home equity loan creates a public record showing how much you borrowed and who you owe. Not everyone likes that.
In general, home equity financing is best for larger amounts.
Home Equity Line of Credit (HELOC)
Home equity lines of credit, or HELOCs, also require you to borrow against the equity in your home.
They generally have lower setup costs than home equity loans, are very flexible, and offer lower interest rates than personal loans.
However, they almost always carry variable interest rates. Your home is on the line if you can’t repay.
And HELOCs have another feature that can cause problems.
You only get to tap the credit line during the loan’s early years, and your minimum payment is just the interest on whatever you borrow.
Your payment may be very low — for example, a $20,000 balance at 5% has a payment of just $83 a month.
But then you enter the repayment phase. No more borrowing and you only have the remaining loan term to pay it back.
So if you take a 15-year HELOC with a 5-year drawing period, the payment on your $20,000 balance (assuming that your 5% rate doesn’t increase) goes to $212.13. Be prepared for this to avoid financial problems.
Borrow From Friends or a Family Member
Finally, don’t forget that you may be able to borrow the funds you need from family or friends.
You may even be able to do so at a low-interest rate (or even for free). But don’t ever put a relationship on the line over money.
You probably shouldn’t choose this option if you can’t qualify for a loan from other sources.
That’s because trained lenders have determined that your finances are not healthy enough to sustain a loan repayment.
Your family might not know this, and you might not know this either unless you’re a loan professional.
Suppose you want a better deal, and your family or friends are willing, or you have positive information that lenders aren’t allowed to consider (for instance, you’re expecting a windfall gift, inheritance, or settlement). In that case, this may be a good option.
Personal Loans Frequently Asked Questions (FAQ)
Can I get a personal loan if I have a low credit score?
Some personal loan sources specialize in lending to consumers with fair or bad credit scores.
You may have to borrow less than you want because debt-to-income guidelines may be more strict.
Expect to pay higher interest rates and fees. It’s important to shop among competing lenders, however—no need to pay more than necessary just because your credit score is low.
You might qualify for a better loan if your low score is not due to a bad credit history. If your problem is a short credit history or “thin file,” you may not have a problem getting a decent deal.
What information do I need to apply for a personal loan?
“How to apply for a personal loan?” is a normal question. The answer is it’s easy.
Lenders want information needed to pull a credit report (name, address, social security number, etc.).
You must prove your income with a pay stub and/or tax return unless your lender can pull it directly from your employer’s payroll processor.
You may also need to supply copies of bank statements or authorize the lender to verify your accounts with your bank.
Can I use a personal loan to get out of debt?
Debt consolidation is one of the most popular reasons consumers take out personal loans. Consolidating higher-interest debt can help you save money and get out of debt faster.
Understand, however, that your payment may go up even if your interest rate drops.
That’s because credit card companies let you make small minimum payments that keep you in debt for decades.
Personal loans require higher payments because your loan will be cleared at the end of its term.
This can range from one to ten years, with two to five years being the most common.
Also, be careful about running up your credit balances after clearing them with a personal loan.
Credit counseling and debt management may be better choices for you if you tend to carry balances.
Can I pay my personal loan early?
You can always repay a loan early.
However, some personal loans do come with prepayment penalties that add to your costs if you pay them off early.
If this is an issue for you, don’t accept an offer for a loan with a prepayment penalty. There are plenty of options without them.
Why might you choose a loan with a prepayment penalty? If the interest rate is lower, you don’t expect to pay it off before the end of its term.
Can I use personal loan funds for any purpose?
One big benefit of personal loans is the fact you can borrow for any reason and use your funds however you want.
You may be asked to list the reason for your loan on your application, but the bank will not follow up to see how you spent the money.
What will my monthly payment be?
Your monthly payment depends on how much you borrow, your interest rate, and the loan repayment timeline you choose.
If you’re curious about how much you may need to pay for your loan on a monthly basis, a personal loan calculator can help you get a good idea.
