What Is a Personal Loan?

A personal loan allows you to borrow a specific amount of money from a lender and pay it back over a set term with fixed monthly payments. Many banks, credit unions and online lenders offer personal loans. Consumers often choose to take out personal loans versus other types of financing such as credit cards because they typically come with more favorable repayment terms, such as lower interest rates and longer payment periods.

Personal loans are available in both secured and unsecured forms. A secured personal loan is backed by collateral, such as your car or a savings account, which the lender can claim should you fail to make your loan payments. Unsecured personal loans are not backed by any assets and instead depend on the borrower’s financial history to qualify for the loan. In general, borrowers with better financial histories can qualify for personal loans with more favorable terms, including lower interest rates.

Once you are approved for a personal loan, your lender will send you funds through an electronic bank transfer or paper check. You can then use the funds for your intended purpose. You can also choose whether to go with a fixed or variable rate, which determines your monthly payment and how much you will owe at the end of the term. Some lenders base variable rates on a well-known index and can cap them so they won’t rise too high.

The amount of money you can borrow from a personal loan depends on several factors, such as your income and debt-to-income ratio (DTI). You should do some research to learn more about personal loans and to decide if one is the best option for you. Using a loan calculator can help you determine how much you will have to repay at the end of your term.

If you miss your loan payments, your lender may report information to the credit bureaus about your failure to repay. This negative information can lower your credit score and make it harder to qualify for future borrowing. In some cases, the lender will hire third-party debt collectors to collect on your behalf.

A personal loan can be used for almost any reason. Consumers commonly take out personal loans to consolidate debt, cover an expensive event or finance home improvements. Other people use personal loans to fund a vacation or purchase a new vehicle. In some cases, a lender might only allow the funds to be used for a specific type of purchase, such as a new car or appliances.

Before applying for a personal loan, you should consider the reasons why you need the money and how you will pay it back. Then, shop around and compare rates to find the best deal. Remember to factor in fees when calculating your total cost. You can also save time by shopping for a personal loan with an online lender that will provide quotes from multiple lenders automatically. Taking steps to improve your credit score and keeping other debt to a minimum can help you qualify for a better rate.