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Personal Loans
What is a personal loan?
Updated Jan 17, 2026
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Key takeaways:
A personal loan lets you borrow a lump sum of money and repay it over time in equal payments.
Most personal loans are unsecured, so you don’t have to own anything of value that you can borrow against.
Personal loans are commonly used to consolidate multiple smaller debts or cover a large expense.
It’s hard to hammer a nail into the wall using a screwdriver. Just like construction, personal finance has its own toolbox. There’s a purpose for all the different tools, and using the right one makes the job a heck of a lot easier.
Let’s dive into what a personal loan is—and what it isn’t—so you can decide whether this type of loan can help you reach your financial goals.
What is a personal loan?
A personal loan is money you borrow from a bank, credit union, or online lender and repay in fixed monthly payments over a set term. Most personal loans are unsecured, so approval depends on your credit, income, and debts. Funds are flexible, but it’s still a debt you must repay on time.
You qualify for an unsecured personal loan based on your income, current debt situation, and creditworthiness. No collateral (something of value that backs the loan) is required. Personal loans are generally for a fixed amount that you get as a lump sum after approval.
The key parts of a personal loan are the principal amount (how much you borrow), the interest rate, and the repayment term. You'll also want to know the monthly payment and how much interest you'll pay overall. Some personal loans also have extra fees, like origination fees.
For example, let’s say you borrow $5,000 using a one-year loan from an online personal loan lender. Your loan has:
Principal of $5,000
18% interest rate
12-month repayment term
Monthly payment of $458.40
Total interest of $500.80
All in all, you'll wind up paying a total of $5,500.80 for the loan by the time it's paid off.
How a personal loan works
You can learn more about how personal loans work so you get the right loan for your needs. The factors to watch if you’re pricing out a personal loan include the interest rate, repayment schedule, and how your personal finances may affect your application.
The interest rate directly sets how much your loan will cost. The higher the rate, the more you’ll pay overall.
The same is true of the repayment period—if you stretch your loan payoff over a longer period of time (say, three years instead of two), you’ll have a lower monthly payment but pay more in interest.
Your personal finances determine whether you’re approved and at what interest rate. You stand a better chance of approval and a lower interest rate if your credit score is in good shape. You also need a debt-to-income ratio that shows you can afford the loan.
Smart ways people use personal loans
You can use a personal loan for many purposes, from consolidating credit card debt to covering emergencies or home remodeling projects. Some lenders restrict certain uses, like school tuition or investing, so check your loan agreement or ask the lender.
Is a personal loan a good idea? It might be, if you’re hoping to pay for one of the following:
Debt consolidation. Since personal loans often come with lower interest rates than other unsecured debts like credit cards, using one to pay off high-interest debts could both save you money on interest and make debt payoff simpler.
Medical bills. A personal loan for medical bills could be a good alternative to more expensive financing options.
Home improvements. If you don’t want to borrow against your home (say, with a home equity loan or line of credit) but want to tackle a project at home, a personal loan could be a good fit.
Emergencies. If you don’t have an emergency fund, a personal loan might pay for an unplanned vet bill, homeowners insurance deductible, or a car repair.
Before you sign on the dotted line, know exactly how the cash will help you with your finances. Run the numbers to see how it will impact your budget and your other financial goals.
Benefits and factors to consider
The benefits of personal loans could make them ideal for certain types of expenses:
Predictable payments. Your payments on a personal loan will be the same every month, and you typically get a set payoff date and fixed interest rate as well.
No collateral in most cases. Most personal loans are unsecured, meaning they’re not backed by collateral (an asset you own that the lender can take if you fail to repay what you owe).
Flexibility. You can use a personal loan for nearly anything.
Lower cost than other unsecured debt. Credit cards have an average interest rate of more than 21%—a personal loan is often a cheaper way to borrow without collateral.
Consider these important points about personal loans:
Interest rate. Personal loans are unsecured, so they often come with higher rates than secured loans, like HELOCs and car loans. Boosting your credit score before applying could help you save money, if you qualify for a lower rate on a personal loan.
New monthly bill. Taking on a personal loan means finding space in your budget for a new monthly loan payment.
Loan fees. Many lenders charge origination fees to cover the cost of providing the loan. This comes out before you get the money. For instance, if you take out a $10,000 personal loan with a 1% origination fee, you’ll repay that full $10,000 (plus interest), but receive $9,900 in loan proceeds.
What a personal loan isn’t
In a few key ways, personal loans are different from other ways to borrow.
Not revolving credit
When you take out a personal loan, you get the money upfront and must pay it all back on a set repayment term. You can’t borrow, repay, and borrow again, like you can with a credit card or other line of credit.
Not a secured loan
Most personal loans are unsecured, making them different from a car loan, mortgage, or home equity loan or line of credit, where the home or car is collateral the lender can take if you stop repaying the loan.
Not a short-term loan
Personal installment loans typically have a minimum term of at least a year, though some lenders may have longer minimum terms. A personal loan doesn’t come with an exorbitant interest rate or a short payoff timeline of just a week or two, like a payday loan (a way to borrow that is best avoided).
Personal loan vs. secured loan vs. credit card
Here's how personal loans compare to other types of credit:
Factor | Personal loan | Secured loan | Credit card |
Repayment term | Set, often 2-5 years | Set, could be a few years (auto loan) to 30 years (mortgage) | No specific term; monthly minimum payments don’t cover entire balance owed |
Collateral required | Usually no | Yes | Usually no |
Flexibility | Funds can be used for nearly any expense | HELOC or home equity loan funds can be used flexibly; mortgage or car loan cannot | Can usually be used for purchases or balance transfers |
Keep learning about personal loans
Interested in learning even more about personal loans? You can find out how to choose the right personal loan term for your needs. Get to know the pros and cons of using a personal loan to consolidate credit card debt. If you’re self-employed, learn about some of the special considerations for personal loans.
If you’re ready to get started, you can check out Achieve Personal Loans today.
Author Information
Written by
Ashley is an ex-museum professional turned content writer and editor. When she switched careers, she could finally focus on her finances. In two years, she went from being deep in debt to owning a home. Ashley has a passion for teaching others how to manage their money better.
Reviewed by
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.
Frequently asked questions
Are there alternatives to a personal loan?
Yes, personal loans have a range of alternatives:
Home equity loan or home equity line of credit. If you own your home, you may be able to borrow against the equity.
Family loan. A loan from friends and family could come with less paperwork and more flexible repayment terms, which could be helpful if your income changes over time.
Credit card cash advance. For immediate expenses that have to be paid in cash, a credit card cash advance can give you almost instant access to cash. Cash advances tend to be expensive, and they add to your credit card debt. Carefully compare your other options and look at the long-term cost.
401(k) loan. Some employer 401(k) plans allow you to borrow money from your retirement account and pay it back over a few years. This could be a low-cost way to borrow, but it’s not without risk. For instance, you might have to repay the loan in full immediately if you separate from your employer for any reason.
Retirement plan hardship withdrawal. Your 401(k) plan may allow you to withdraw money from your 401(k) account for an immediate and heavy financial need like medical bills or disaster damage. You may be able to take the withdrawal penalty-free but it will permanently reduce the amount you’ll have in the plan at retirement and you’ll be taxed on the amount.
In-house financing for health care. Some doctors, clinics, and hospitals offer their own in-house financing. Be sure you understand the agreement and all the conditions.
Who can get a personal loan?
You may qualify for a personal loan if you:
Meet the lender’s minimum credit score requirement
Have enough income to afford the monthly payment
Don’t have any disqualifying red flags on your credit report
For instance, some lenders won't approve a loan if you have unpaid collection accounts.
The amount you can borrow will depend on how much you can afford to pay, so if your income is higher you may find it easier to qualify for a higher loan amount. You may be able to improve your chances of approval or increase the amount you can borrow if you apply with a co-borrower or co-signer. Co-signers and co-borrowers share responsibility for the loan.
Is a personal loan like a credit card?
A credit card has a credit limit that you can spend up to and repay repeatedly.
A personal loan is a one-time loan with repayment terms that are set up front. If you need more money later, you'll need to take out another loan.
Some lenders also offer personal lines of credit, which work more like a credit card.
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