10 things to know before applying for a personal loan

By Gina Freeman

Reviewed by Jill Cornfield

Jun 26, 2024

Read time: 4 min

Woman  with calculator and paperwork  before applying for a personal loan

Key takeaways:

  • Personal loans are simple, helpful products for people who need to borrow money.

  • Personal loans could help you reach a financial goal and build strong credit at the same time.

  • Understanding personal loan rules can help you make good borrowing choices. 

Ready to take control of your financial future? A personal loan offers a versatile and convenient way to reach your financial goal, whether it's consolidating debt, funding a home improvement project, or covering unexpected expenses. Once you know how personal loans work and what to look for, you can make informed decisions that align with your priorities. Let's explore the key aspects of personal loans.

Here are some crucial facts to know about personal loans before you apply—and how they can affect you. 

1. Personal loans are usually unsecured

Unsecured loans don’t require collateral (something that you pledge as a guarantee that you’ll pay back the loan. If you don’t, the lender can take the collateral). 

Why is this important? You don’t need to own (or pledge) something of value, like a car or a home, to apply for the loan. This is easier for you and could shorten the time it takes to process and decision your loan application.

2. You can use a personal loan for almost any legal purpose

Many loans are tied to the reason you want them—student loans finance higher education, auto loans finance cars, and mortgages finance real estate. But personal loans can be used for many things. Your lender will ask you why you want the loan, and they’ll let you know about any restrictions.

Why is this important? Because it can make life simpler. You could, for instance, consolidate credit card debt, cover a home maintenance expense, or move across the country, all with the same loan. 

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3. Personal loans are installment loans

Installment loans require regular payments (usually monthly) until the balance is zero. 

Why is this important? Unlike credit cards, you know exactly when your debt will be clear (as long as you make your payments on time). That can help with long-term financial planning. 

4. Personal loan interest rates are usually fixed

Most personal loans come with interest rates and payments that don’t change during the life of the loan. 

Why is this important? Fixed personal loan interest rates and payments that don’t change can make budgeting easier, and could protect you from the possibility of rising interest rates. 

5. Personal loan lenders offer a variety of terms. 

Most lenders offer repayment terms between one and five years, and some lenders may offer longer terms. 

Why is this important? So you can choose a term that allows you to borrow what you need at a payment you can afford. 

6. You may be able to borrow with a co-signer

Many personal loan providers allow co-signers. A co-signer shares responsibility for repaying the loan. 

Why is this important? Having a qualified co-signer on your personal loan could improve your chances of getting a loan or getting more favorable terms, or could help you qualify for more than you could borrow on your own. 

7. Personal loans can be refinanced

You could refinance a personal loan. That means you could get a new loan and use it to pay off the old loan. People consider refinancing when they are likely to qualify for a new loan with better terms than the old one.

Why is this important? Refinancing could allow you to take advantage of lower interest rates or get better loan terms. That may help you save on interest charges or get a lower monthly payment.

8. Personal loans can be funded quickly 

Many sources of personal loans, especially those that operate online, fund loans extremely quickly. 

Why is this important? Fast funding helps people avoid expensive loans (like payday loans or title loans) when they need money right away. 

9. You can prequalify for a personal loan

You don’t have to apply for a personal loan to know if you can get one. Many lenders allow you to prequalify with a soft credit check before formally applying. 

Why is this important? Prequalification allows you to explore your options and find out what you might qualify for, without risk to your credit score, before you’re ready to apply. 

10. Personal loans could help improve your credit score

Most personal loan providers report their loans to at least one credit bureau.

Why is this important? First, paying your loan on time helps you build a strong payment history, and that’s the factor that influences your credit score the most. 

Second, part of your credit score is based on your credit mix—whether you have experience with different kinds of credit accounts. If your borrowing is mainly on credit cards, adding an installment loan (like a personal loan) could help you improve your score. 

Third, using a personal loan to consolidate credit card debtcould help you lower your credit utilization. Utilization means your credit card balances compared to the credit limits on your cards , and it’s the second most important factor in credit scoring after payment history. 

There are pros and cons to all financial options, and personal loans are no exception. But under the right circumstances, a personal loan is a tool you could use to accomplish something that’s important to you.

Gina Freeman - Author

Gina Freeman has been covering personal finance topics for over 20 years. She loves helping consumers understand tough topics and make confident decisions. Her professional history includes mortgage lending, credit scoring, taxes, and bankruptcy. Gina has a BS in financial management from the University of Nevada.

Jill Cornfield

Jill is a personal finance editor at Achieve. For more than 10 years, she has been writing and editing helpful content on everything that touches a person’s finances, from Medicare to retirement plan rollovers to creating a spending budget.

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