Personal loans are available from banks, credit unions and online lenders. They are often used to cover unexpected expenses or to pay down debt, which can improve financial health over time. But before you apply, you should research lenders and compare loan terms, interest rates and fees.
Ronita Choudhuri-Wade is a former NerdWallet writer who covered personal loans.
1. What is a Personal Loan?
A personal loan is money you borrow to finance a purchase, pay off debt or invest in yourself. It’s an unsecured type of credit, meaning you don’t have to use your home or car as collateral. Personal loans usually come with a fixed interest rate, fixed monthly payments and a set repayment term, though these terms can vary depending on the lender you choose to borrow from.
You can find personal loans through banks, credit unions and online lenders. When applying for a personal loan, review the lender’s minimum credit score and loan amount requirements, as well as its interest rate table to get an idea of what you might expect in terms of rates and repayment terms. Many lenders also require you to provide your annual income and debt-to-income ratio (DTI) as part of the application process. If your credit scores and DTI fall short of lender requirements, you may still be able to qualify for a personal loan with a co-signer who agrees to take responsibility for the debt in case you default.
Once you select a lender and complete an online application, you’ll receive an offer with the amount you can borrow, along with its terms and conditions, including the interest rate and repayment period. If you agree to the terms of your personal loan, you’ll typically be able to receive funds within one business day, via direct deposit into your bank account.
Using a personal loan for a variety of purposes can be a smart financial strategy, such as paying for medical expenses or making a large consumer purchase that you can’t afford to make with savings. It can also help you save on interest costs by consolidating high-interest debt into a single, lower-interest debt payment.
However, a personal loan can be expensive in the long run and may not be the best option for everyone. If you’re unsure about whether a personal loan is the right choice for your goals, consider speaking to a financial advisor for advice. In some cases, it might be better to consider other types of debt, such as a home equity loan or a credit card, depending on your unique situation.
2. Why Get a Personal Loan?
A personal loan is a great way to fund a one-time expense that requires quick funding. It’s an ideal choice for a wedding, an expensive vacation, or any other event that’s important to you but would be difficult to finance with cash alone. It’s also useful for covering medical expenses, especially if you don’t have insurance or the funds to cover out-of-pocket costs.
Personal loans are typically unsecured, meaning you don’t need to offer up an asset such as your house or car to qualify for the financing. They’re available to borrowers with good credit scores and can be disbursed in one lump sum, making them an excellent option for financing unexpected expenses.
It’s important to note that a personal loan comes with interest rates, so you should be sure you can afford the monthly payments before applying. It’s also a smart idea to compare rates before selecting a lender, as some may be able to offer you lower ones than others.
Another reason to consider a personal loan is to pay off high-interest debt, such as revolving credit card balances. This could improve your credit score by lowering your credit utilization ratio and help you avoid paying extra in fees and interest charges.
Finally, if you’re looking to start a business, a personal loan can help you get the startup capital you need. This is particularly true for aspiring entrepreneurs who need to fund inventory, rent an office space, or cover other startup costs.
Keep in mind that when you apply for a personal loan, the lender will do a hard credit inquiry, which can impact your credit score temporarily. It’s best to apply for a personal loan only when you have a clear plan for how to use the money, and be sure to pay off your debt within the loan terms to avoid penalties and additional interest charges. To reduce the impact of a hard credit pull, consider applying for a personal loan with a co-borrower who has a higher credit score and better payment history. A co-borrower can also help you get the most competitive rate and reduce your overall borrowing cost.
3. How to Get a Personal Loan
If you want to take out a personal loan to pay for expenses, consider your options carefully. Be aware of your credit score and income to ensure you can meet the terms of repayment and avoid paying unnecessary fees.
You can borrow a personal loan from a bank, credit union or online lender. Some lenders offer a quick and simple application experience, while others require more detailed documentation to approve the loan. Before you apply, check a lender’s website for requirements and a list of available rates. You can also use a personal loan calculator to estimate your monthly payments, and consider whether you may be able to qualify for a lower rate by adding a cosigner or making additional reductions in debt or expenses.
A personal loan can provide an affordable, flexible solution for planned purchases and unplanned expenses, and it can help you build a good payment history. However, it’s important to remember that a personal loan is still debt and can contribute to a negative credit mix when paid late or in default. Additionally, it may be difficult to qualify for a personal loan if your income is unstable or you have a lot of existing debt.
To improve your chances of getting a personal loan, work to raise your credit score and pay down debt before applying. Shop around for the best personal loan rates and terms, and be sure to choose a term that aligns with your financial goals.
It’s also a good idea to consider whether you need to borrow a personal loan in the first place. If you have sufficient cash reserves, a short-term personal loan might not be the right solution, as it could increase your overall debt load and cost of borrowing. You should also avoid using a personal loan to finance non-essential luxuries or vacations. A better option is to save up for these expenses, or use cash savings, which can also help you stay within your budget and reduce interest charges. You can also try to pay off your personal loan sooner than the designated repayment term if you have the means to do so. In most cases, a personal loan will not have a prepayment penalty, but it is important to review your lender’s terms and conditions to confirm this.
4. What to Look for in a Personal Loan
There are several factors to consider when choosing a personal loan, including the rate, fees and repayment terms. Be sure to shop around to find the best rates and terms. Consider lenders that allow you to prequalify without impacting your credit score. Also, check out whether the lender has a low minimum income requirement to qualify for the loan. This could be helpful if you depend on variable income like commissions, tips or overtime.
It is important to remember that taking on debt comes with a cost, and if you are not careful, you may find yourself struggling to keep up with your payments. Be sure to use personal loans only for expenses you can afford to pay back.
Personal loans typically have lower interest rates than credit cards, making them a good choice for major purchases, life milestones or debt consolidation. Be aware of any fees or prepayment penalties, and be sure to calculate the total loan cost including principal, interest and fees to ensure it fits your budget. Beware of lenders who promise approval before checking your credit or require a down payment before funding the loan. If you see suspicious activity on your credit report, file a dispute with the credit bureaus. You should also be wary of payday lenders, who charge high fees and often have interest rates higher than a personal loan. Credit unions are a great alternative and can offer lower rates than banks. In addition, adding personal loans to your credit profile can help you build a more diversified debt mix, which can improve your credit score. Getting started: Visit Experian to get matched with personal loans that are right for you, based on your unique financial profile.
