What is a personal loan?

If you’re looking to make a big purchase, a number of small purchases or consolidate existing debt, you might wonder if a personal loan is the right choice for you. Not all loans are made equal, so familiarize yourself with your options before jumping into an application.

What is a personal loan?

A personal loan is money you borrow from a financial institution and repay monthly with interest. Both the principal and interest must be repaid by the end of the loan term, which is usually between one and seven years. You may be able to borrow between $1,000 and $100,000, though it varies by lender. APRs typically range from 4% to 36% depending on your creditworthiness and financial situation.

You can usually find personal loans offered by online lenders, brokers, banks, credit unions and peer-to-peer lenders. Personal loans can be used for almost any legitimate purpose, including consolidating your debts, making a large purchase or going on vacation.

What types of personal loans are available?

When you’re ready to get started, there are a few different types of personal loans to consider:

• Fixed- vs. variable-rate loans. Ask your lender how it intends on calculating interest. Fixed rates guarantee a certain interest over the life of the loan, while variable rates can fluctuate based on the lending market. You can learn more about the features of each with our guide to fixed-rate versus variable-rate loans.
• Secured vs. unsecured loans. When comparing loans, ask if you need to put up an asset as collateral. A secured loan requires collateral, but will generally have better terms. On the other hand, an unsecured loan doesn’t require collateral and will usually have less competitive terms, but you don’t risk losing an asset if you default. To help you decide which is right for you, check out our guide to secured versus unsecured loans.

Compare types of personal loans

How can I get a personal loan?

Many lenders allow you to apply for a personal loan online, though some banks and credit unions might ask you to visit a local branch to sign you loan documents in person. Before you apply, check that you’re eligible — many lenders have credit and income requirements you need to meet. If you think you qualify, confirm the loan is offering everything you’re looking for, gather any required documents you need and begin the loan application process.

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Is it better to have a fixed- or variable-rate loan?

It depends on the loan you need and your individual situation. A fixed-rate loan will guarantee you a certain rate for a specific amount of time — you’ll know what your repayments will be no matter what happens in the market.

Variable-rate loans give you more flexibility. You may find your repayment amounts fluctuate with the market. This can lead to paying less interest than your original terms — though lenders usually have a base rate you’ll have to pay — but it also means you might pay much more than you originally expected.

Bottom line

A personal loan allows you to borrow money from a bank, credit union or online lender to cover a major expense, consolidate your debts and more. You usually have the choice between fixed or variable rates and can opt to back it with collateral for a more competitive deal.

You can learn more about how they work and compare lenders with our guide to personal loans.

Frequently asked questions

How do I repay a personal loan?

Repayment options differ between lenders. You usually have the choice between direct debits from a bank account, electronic funds transfers, checks or phone repayments.

Can I repay my loan early?

This depends on the lender. Some lenders offer loans with no prepayment penalties while others may charge a fee if you pay off your loan early.

Should I get a secured loan to buy a car?

It’s likely a good idea if you’re interested in a loan with the most competitive rates. Since secured car loans are backed by the car you’re purchasing, lenders usually offer lower rates than they would with an unsecured personal loan. However, this also means if you default on your loan, the lender can take your car to cover the loss. You can learn more with our guide to car loans.

Can I make extra repayments on a loan?

You can usually make extra repayments, though you may be charged a fee. Check with your lender first to make sure you understand the costs you may incur.

What fees can I be charged for a personal loan?

It depends on your lender, though you may be charged application fees, origination fees, monthly or annual fees, prepayment penalties or late fees — among others. Explore our page on personal loan fees to learn more about potential costs.