A personal loan can be handy in a number of situations. Maybe you need to consolidate debt, cover an unexpected car repair, or pay for a home improvement project.
With a personal loan, you receive a lump sum of money up front that you repay over time. Before you take out a personal loan, it’s important to understand how they work.
- How personal loans work
- Types of personal loans
- How to get a personal loan
- Getting a personal loan with poor credit
How do personal loans work?
You can borrow a personal loan through online lenders, banks, and credit unions. These financial products are installment loans, meaning you pay them back in equal monthly installments, with interest, over a predetermined period. Repayment terms for personal loans generally range from one to five years, though you can find loans with longer terms.
You can typically borrow between $1,000 and $50,000. However, loan amounts vary by lender, and you can find loans outside of that range. Most personal loan lenders direct deposit the loan funds, but some provide checks or debit cards or may even pay off your creditors for you (in the case of debt consolidation).Â
Since most personal loans are unsecured, you don’t have to pledge collateral, like your car. Instead, lenders will consider factors like your credit and income to determine if you qualify and what interest rate you’ll receive.
Before you move forward with a personal loan, here are some points to consider:
- Eligibility requirements: Most lenders require good to excellent credit, meaning a credit score of at least 670. But some lenders are willing to lend to borrowers with lower credit scores.
- Income: A lender may look at your income and your debt-to-income ratio (DTI) — your monthly debt payments divided by your gross monthly income — to determine if you’re able to repay the loan. Some lenders have minimum income requirements, but not all do.
- Interest rates: Personal loan interest rates are typically much lower than credit card rates. The interest rate you qualify for will largely depend on your credit score and DTI. In general, the higher your credit score, the lower your interest rate will be.Â
- Fees: Some lenders charge fees in addition to interest. These may include origination fees for processing your loan application, late fees, and prepayment penalties for paying off your loan early. Annual percentage rates (APRs) account for these lender-specific fees, so be sure to compare APRs (not simply rates) when shopping around.
- Funding times: Depending on the lender, you may be able to receive your funds as soon as the same day you get approved. But in general, you’ll receive your loan funds within a week. Keep in mind that lenders have different time frames for approval and loan disbursement. It could take up to three days to get approved and another five days to receive the money.Â
Types of personal loans
You can use personal loans for virtually any purpose. Most are unsecured, but you can also find secured personal loans.
A secured loan requires collateral, but you may qualify for a lower interest rate since the lender is taking on less risk. Carefully consider whether you can repay the loan before accepting a secured loan — if you can’t, the lender could seize your collateral.
Here are a few common types of personal loans:
- Debt consolidation loans: You can use it to roll multiple debts into a single loan, ideally with a lower interest rate. With a debt consolidation loan, you can simplify your repayment, since you don’t have to manage multiple payments and deadlines. You may also be able to save money on interest, especially if you’re consolidating high-interest debt, such as credit card debt.
- Home improvement loans: If you plan to remodel your kitchen, finish your basement, or complete any other major project, a home improvement loan is worth exploring.Â
- Medical loans: If you have anticipated or unexpected medical bills, these so-called medical loans can help you cover the out-of-pocket costs for medications, diagnostic tests, treatments, and surgeries.Â
- Cosigned loans: This type of personal loan includes a cosigner who becomes responsible for repayment if you default on the loan. If you have poor credit, a cosigner may help you get approved for a loan with a lower interest rate.Â
- Buy now, pay later loans: These loans let you split an online or in-person purchase into smaller installments. They can help you pay for large, one-time purchases without having a lot of cash up front. However, you may have to pay interest and fees.Â
How to get a personal loan
The personal loan application process varies by lender, but you’ll usually need to follow these steps:
- Check your credit report. Most lenders will evaluate your credit when you apply for a personal loan. It’s a good idea to request your credit report before applying for a loan to get a better idea of the loans you may quality for and dispute any errors that might be bringing down your score. You can request free copies of your credit reports from each of the main credit bureaus weekly through the end of 2023 by visiting AnnualCreditReport.com.Â
- Compare lenders and prequalify. Do your research and compare lenders to find the best personal loan for you. Many online lenders let you prequalify and check your offers without any impact to your credit. You can compare rates on personal loans from various lenders in minutes.
- Complete an application. Once you’ve chosen a lender, it’s time to complete an application. You can typically do this online. Be prepared to provide basic personal and financial details. The lender may also require you to submit documents to show proof of income, like pay stubs and tax returns.Â
- Receive your loan funds. If the lender approves your application, you’ll typically receive your funds via direct deposit, prepaid card, or check. Remember that funding times vary by lender.Â
Can I get a personal loan if I have poor credit?
If you have less-than-perfect credit, you may still be able to get a personal loan. Some lenders specialize in personal loans for borrowers with bad credit. They may consider factors beyond your credit history, especially if you can verify your income and prove that you have stable employment. Keep in mind that you’ll likely only qualify for higher interest rates if you have poor credit.Â
Another way to get approved for a personal loan with bad credit is with a cosigner. A cosigner can be a family member or friend with good credit that applies for the loan with you. But if you fail to make your payments, your cosigner will be responsible for them. This can potentially damage your relationship with your cosigner, so be sure to clearly lay out the terms together before accepting the loan. Achieve, LendingClub, and LightStream are three Credible partner lenders that accept cosigners.
Finally, you may want to consider a secured personal loan. These loans are easier to qualify for since they require collateral. Just keep in mind that a lender can take possession of your collateral if you fail to repay the loan.
If you’re unable to qualify for a personal loan, you have other options. Here are a few alternatives to personal loans:
| Financing type | What to know | Best for |
|---|---|---|
| Credit card | – Typically comes with a high APR – Can be a convenient option if you need fast funding – Can trap you in a cycle of debt if you make only the minimum payment each month | – Borrowers who can afford to make their full monthly payment |
| Cash-out refinance | – New mortgage that replaces your existing mortgage – New loan is higher than your existing mortgage, and you pocket the difference – Typically must have at least 20% equity in your home | – Homeowners who want to simplify loan management |
| Home equity loan | – Second mortgage – Uses your home as collateral – Must meet specific eligibility requirements – Lower interest rates since it’s a secured loan | – Homeowners looking to fund a large purchase or home improvement |
No matter which route you take, avoid predatory loans. These may include payday loans and title loans — these loans come with sky-high interest rates and can trap you in a cycle of debt.