Personal Loan

Personal loan summary:

• A personal loan provides a lump sum of money from a lender that you could use for just about any purpose. You'd pay it back over time, usually with interest.

• Most personal loans are unsecured. That means you’ll qualify based on your creditworthiness and financial details. You don’t have to own something valuable that you could borrow against.

• The interest rate you pay for a personal loan largely depends on your credit score, the loan amount, the repayment term, and current economic conditions.

Personal loan definition and meaning

A personal loan is a lump sum of money that you borrow from a bank or other financial institution, which you can use with few or no restrictions (depending on the lender). Common uses for a personal loan include debt consolidation, home improvements, medical bills, and large expenses. 

Personal loans can be secured or unsecured. Secured means guaranteed by collateral (something of value that you own). An unsecured loan isn't attached to any collateral. 

When you get a personal loan, you receive money once and pay it back to the lender over time. Lenders can charge both interest and fees for personal loans.

More about personal loans

Personal loans are loans that provide you with funds to meet personal needs. For example, you might get a personal loan to consolidate high-interest credit card debt, pay off medical bills, or cover an emergency visit to the vet. 

A personal loan could be a better option than a credit card if you're able to qualify for a low rate and choose a lender that doesn't charge excessive fees. 

How does a personal loan work?

Personal loans work by letting you borrow money that you repay to the lender over time. 

A typical personal loan amount may range from $5,000 to $100,000. The amount you can borrow is determined by your choice of lender, your credit scores, and your income. 

Personal loan rates are usually fixed, which means the interest rate doesn't change over the life of the loan. Your monthly payment won't change either, which makes it easier to budget for repayment. 

Secured vs. unsecured personal loan

Secured personal loans are tied to collateral, which is something that you own. Collateral is a safety net for the lender. If for some reason you don’t repay your loan, you could lose your collateral. The lender can take steps to sell it and recover the money you owe. Many people get secured loans, such as mortgages and car loans, every day. But secured personal loans are less common.  

Unsecured personal loans don't have a collateral requirement. You qualify based on your credit standing and financial situation. 

How to qualify for a personal loan

Each lender sets its own qualification criteria for personal loans. Typical personal loan requirements include:

• Minimum credit score, often 620 or better

• Steady income and employment history

• A low debt-to-income (DTI) ratio (which measures how much of your income goes to debt repayment each month)

If you have poor credit or limited experience with credit accounts, you might consider applying with another person. A co-applicant who has a stronger credit profile could help you qualify for a loan.  

A co-signer is someone who agrees to share responsibility for the loan with you. Personal loans with a co-signer may be easier to get, and your interest rate could be lower too (compared to applying on your own).