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Personal Loan Definition, Types, and How To Get One

What is a personal loan?

Understanding the Personal Loan

The types of personal loans available

What is a Personal Loan?

Example of a Personal Loan

How to find Personal Loans

By Rebecca Lake

Last updated August 09, 2021.

Reviewed by Thomas Brock

Facts confirmed by Katrina Munichiello

What Is a Personal Loan?

Personal loan is an amount of money that you are able to get to use for various reasons. You could, for instance, make use of a personal loan to consolidate your debt, fund home renovations, or plan a dream wedding. Personal loans can be provided by credit unions, banks or online lenders. The money you get from them is due to be paid back over time, usually with interest. Some lenders may additionally charge fees to personal loans.

Important Takeaways

Individual loans are loans that are able to cover various personal expenses.

Personal loans through banks, credit unions, and even online lenders.

Personal loans can be secured, meaning that you need collateral to borrow money, or unsecured, and there is no collateral required.

Personal loans can be very different in terms of rates of interest, fees, amounts, and repayment terms.

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Understanding the Personal Loan

A personal loan can allow you to borrow money to pay for personal expenses and then repay the loan over time. Personal loans are a type of installment debt that allows you to receive an amount of money in one lump. You could, for instance, take advantage of a personal loan to pay for:

Moving expenses

Debt consolidation

Medical bills

Wedding expenses

Home improvements or repairs

Funeral expenses

Vacation costs

Unexpected costs

These loans differ from other installment loans—such as student loans and auto loans and mortgage loans. They can be used to finance particular expenses (i.e. education, vehicle purchase, and home purchases).

Some personal loan lenders restrict the ways you can make use of a personal loan. For instance, you might not be eligible for an individual loan to pay for fees for college tuition, fees or other expenses.

Personal loan is distinct than a private line of credit. It isn’t a lump sum , but instead, it works similar to credit card. There is credit line you can use to spend money and, as you do so your credit line will be reduced. Then, you can make available credit by paying a loan to your credit line.1

When you take out a personal loan usually, there’s an end date fixed at which the loan is due to be paid back. The personal credit line, in contrast, may remain open and accessible to you for so long as your account remains at a good state with your lender.2

The types of personal loans available

Personal loans may be secured or unsecured. The term «secured» refers to a loan can be described as one which requires a certain type of collateral in order to meet the requirements of borrowing. In other words, you can secure a personal loan by using cash assets like a savings bank account or certificate of deposit (CD) or a physical asset, like your car or boat. If you default on the loan the lender may keep your collateral to satisfy the debt.

An unsecured personal loan doesn’t require collateral to borrow money. Credit unions, banks and online lenders can offer both secured and unsecured personal loans to those who meet the criteria. The banks generally view the latter to be riskier than the former, as there’s no collateral available to collect. This could mean paying an interest rate that is higher for a personal loan.3

How Personal Loans Work

To get a personal loan it is necessary to submit an application to the lender. This could be a credit union, bank or an online personal loan lender.

In general, you’ll need to submit an application. The lender will review it and decides whether to approve or deny it. If approved, you’ll be provided with loan conditions that you are able to decide to accept or not. If you’re in agreement then the next step is the finalization of your loan application.

When that’s done then the lender will then fund the loan and pay you the money. Depending on the lender, these could be made via a direct transfer in your banking account, or a check. Once the loan is approved then you can make use of the money as you see appropriate. Then, you must begin paying back the loan in accordance with the terms established in your loan agreement.

A default on the personal loan can cause serious damage to your credit score. You may also lose collateral with secured loan or face being pursued by the lender to recover the amount owed.

An example of a personal loan

If you’re considering a personal loan it is important to know how much it may cost. Annual percentage rates (APR) for a personal loan represents the annualized cost of repaying the loan based on the interest rate and fees. The APR as well as the loan term determines how much you spend in interest throughout the life of your loan.

As an example, suppose you receive a personal loan with an APR of 7.5 percent. The loan has a repayment term of 24 months. Using those terms the monthly installment would be $450 and the total amount of interest you pay over the duration of the loan will be $799.90.

Now assume you borrow the same amount but with different loan terms. Instead of a two-year loan, you have three years to pay back the loan, and your interest rate is 6.6% instead of 7.5%. Using those conditions, your monthly payments would drop to $304, but your total interest paid would increase to $951.90.

The way you compare the figures is crucial for you to ensure that you get the lowest monthly installment or pay the lowest amount of interest when you take out a personal loan. A simple internet-based personal loan calculator can help determine what kind of payment amount and interest rate are the best fit to your budget.

While some lenders don’t charge fees for personal loans However, other lenders may charge fees for credit checks or the loan origination charge, or, if you choose to pay off the loan earlier, a prepayment fee. If you pay late, you could be charged an additional late payment charge.

Where to Find Personal Loans

The first place to search for personal loans could be through your current bank or credit union. Your personal banker can advise you about what kinds of personal loans are available and the borrowing options for which you’re most likely eligible.

Personal loans can be found on the internet. Many lenders provide personal loans online. Apply online and get a response in minutes , and in some cases, get funding in just up to 48 hours following loan approval.

When comparing personal loans online or off, pay close attention to the specifics. Specifically, consider the following:

Interest rate

Fees

Repayment terms

Borrowing limits (minimum and maximal)

Collateral requirements

You can check your credit report for free at AnnualCreditReport.com. If you do, be sure to look for any errors that may harm your score, and don’t hesitate to dispute the errors.

It is also beneficial to determine the minimum requirements needed to qualify for personal loan. There are different requirements for lenders in relation to financial score of the applicant, their income and debt-to-income ratios that are acceptable to be accepted for a personal loan. This will help narrow down the loans that are most suitable for your financial and credit profile.

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