A personal loan is an amount of money you can borrow to use for a variety of purposes. For instance, you may use a personal loan to consolidate debt, pay for home renovations, or plan a dream wedding. Personal loans can be offered by banks, credit unions, or online lenders. The money you borrow must be repaid over time, typically with interest. Some lenders may also charge fees for personal loans.
All you need to know
A personal loan allows you to borrow money to pay for personal expenses and then repay those funds over time. Personal loans are a type of installment debt that allows you to obtain a lump sum of funding. For example, you might use a personal loan to pay for:
- Moving expenses
- Debt consolidation
- Medical bills
- Wedding expenses
- Home renovations or repairs
- Funeral costs
- Vacation costs
- Unexpected expenses
These loans are different from other installment loans — such as student loans, car loans, and mortgage loans — that are used to fund specific expenses (i.e. education, vehicle purchase, and home purchase).
A personal loan is also different from a personal line of credit. The latter is not a lump sum amount; instead, it works like a credit card. You have a credit line that you can spend money against and, as you do so, your available credit is reduced. You can then free up available credit by making a payment toward your credit line.
With a personal loan, there’s typically a fixed end date by which the loan will be paid off. A personal line of credit, on the other hand, may remain open and available to you indefinitely as long as your account remains in good standing with your lender.
Personal loans may be secured or unsecured. A secured personal loan is one that requires some type of collateral as a condition of borrowing. For instance, you may secure a personal loan with cash assets, such as a savings account or certificate of deposit (CD), or with a physical asset, such as your car or boat. If you default on the loan, the lender could keep your collateral to satisfy the debt.
An unsecured personal loan requires no collateral to borrow money. Banks, credit unions, and online lenders can offer both secured and unsecured personal loans to qualified borrowers. Banks generally consider the latter to be riskier than the former, as there’s no collateral to collect. That can mean paying a higher interest rate for a personal loan.
To get a personal loan, you need to apply to a lender. Again, this can be a bank, credit union, or online personal loan lender. Generally, you would first complete an application. The lender reviews it and decides whether to approve or deny it. If approved, you’ll be given the loan terms, which you can accept or reject. If you agree to them, the next step is finalizing your loan paperwork.
Once that’s done, the lender will fund the loan, which means paying the proceeds to you. Depending on the lender, this may be done through a direct deposit into your bank account or a check. After the loan is funded, you can use the money as you see fit. You then have to begin repaying the loan according to the terms established in your loan agreement.