A personal loan is a type of loan that offers funding for a wide range of financial needs. Lenders generally provide personal loans for almost any purpose — including debt consolidation, unexpected expenses, home improvement and more. However, some lenders may place restrictions on the types of expenses that can be covered.

Personal loan amounts, interest rates and terms can vary by lender, as well as the area in which they are offered, and they may not be available in all states. Due to their simple application process and flexible repayment terms, personal loans are a widely popular loan option for borrowers.

How do personal loans work?

Personal loans often come in the form of installment loans, which are repaid over a period of time that is specified in the loan application process. When taking out a personal loan, a borrower will receive a lump sum payment in their bank account if they are approved for financing. Then, the borrower must pay back the loan amount at an additional cost over their repayment term, also known as the loan term.

Automatic payments are commonly offered as a convenient payment method on many personal loans. This feature, often referred to as autopay, automatically deducts loan payments from the borrower’s bank account, making it easier to avoid missed payments and late fees.

What are the costs of a personal loan?

A quick and simple way to get a clearer picture of the overall costs of taking out a personal loan is to use a personal loan calculator like the one offered by Experian.

In general, the costs of taking out a personal loan are determined by factors such as:

  • Interest rate
  • Loan terms
  • Loan amount
  • Origination fees
  • Any added loan fees

If a personal loan has an origination fee, the fee amount may be deducted from the principal loan amount. This means that the amount of money the borrower can expect to receive will be lower than the actual loan amount. Interest is usually charged on each payment and represented in the loan’s annual percentage rate (APR).

What is a good APR for a personal loan?

The annual percentage rate, or APR, of a personal loan is the total yearly cost of taking out the loan. An APR is representative of the loan’s interest rate and fees and is represented as a percentage. So, a “good” APR for a personal loan is one that reflects minimal loan fees and/or the lowest rates when compared to similar loan offers on the market. Keep in mind that a “good” APR also depends on where you are financially. You should always consider realistic APR ranges based on your credit score.

It’s worth noting that there are two types of interest rates that an APR can consist of:

  • Fixed interest rates


  • Variable rates

Fixed interest rates will not change throughout the life of a loan, so if you find an APR that’s ideal for your finances, you can lock it in. Variable rates may change over the course of a loan. In this case, you could end up paying more or less interest, depending on whether interest rates are declining or on the rise.

How much can I take out for a personal loan?

The amount of money you can borrow when taking out a personal loan depends on a variety of unique factors, including:

  • The lender providing the loan
  • Your personal credit history
  • Your credit score or FICO score
  • The state in which you live

That being said, personal loan amounts can range anywhere from $100 to $100,000. When applying for a personal loan, it is important to keep in mind that higher loan amounts usually mean larger loan payments.

How much time can I have to repay my personal loan?

Personal loans are repaid in regularly scheduled loan payments, also referred to as installments, which are spread out over the loan term. This repayment period can be as short as six months or as long as five years. You should expect to make monthly payments over the course of the loan, but you can often repay early with no prepayment penalties.

There will usually be a due date by which a personal loan must be paid off, making them different from open-ended credit options like a line of credit. Failure to repay by this due date could result in late fees, although some lenders offer grace periods of 10 to 15 days. If available, signing up for automatic payments, or autopay, can help you avoid late fees.

How can I use a personal loan?

While personal loans can be a flexible loan option, restrictions set in place by the lender may limit what the funds can be used for. It also may not make financial sense to use a personal loan to pay for certain expenses. When the overall costs of taking out a personal loan outweigh the financial benefits, you may want to seek other alternatives.

Is it smart to pay off credit card debt with a personal loan?

Paying off a credit card with a personal loan may be better than continuing to repay the credit card debt directly in some cases. For example, if you have racked up a considerable amount of debt on a high-interest credit card, you may be able to qualify for a personal loan with a lower interest rate. In this scenario, you could potentially save money by paying off the high-interest debt with the personal loan.

When deciding whether to pay off credit card debt with a personal loan, it helps to find out the loan rates and terms you’re eligible for, to see if it makes sense for you.

Can I use a personal loan for home improvement or debt consolidation?

Generally speaking, lenders will offer personal loans for almost any expense, including home improvement or debt consolidation. That being said, you can often find a variety of financial solutions for these purposes. So, it’s a good idea to compare the different ways you can consolidate existing debt or cover the costs of home improvement first.

In particular, low-interest credit card balance transfers and other types of debt consolidation loans can eliminate the need for a personal loan. To pay for household repairs, you can also opt for a home equity loan which may come with lower interest rates or monthly payments.

Can I use a personal loan to fund my business?

Most personal loans may be used for business expenses, such as starting a company or purchasing new equipment. With monthly payments that can be comparable to business financing, personal loans can often be a solid alternative for business owners.

Keep in mind that some lenders may not offer personal loans for business purposes, so it’s best to check with the lender. Fortunately, there are many different loan options for small business owners out there, such as:

The Small Business Administration (SBA) also offers business funding options such as the Paycheck Protection Program (PPP) to those who have been impacted by COVID-19. In addition, SBA-backed loans can come with generally lower interest rates, but they do often require excellent credit scores to qualify.

What are my personal loan options?

Personal loans are available through financial institutions like banks and credit unions, as well as online lenders and peer-to-peer networks. You might even be able to find a lender who delivers funds as soon as the next business day.

A personal loan can be either secured or unsecured, depending on the lender. Secured loans require a form of collateral such as savings or investment accounts. An unsecured loan only requires your signature as a guarantee of repayment.

What do you need to qualify for a personal loan?

In most cases, a borrower’s credit score or FICO score will determine their eligibility for a personal loan. Lenders will also look at credit reports in the underwriting process to see the loan terms, interest rates and loan amounts they can offer. However, some online lenders provide personal loans that you can qualify for based on more than just your credit score. In which case, your eligibility would depend on the information in your online application.

While qualifications vary by lender, the following are common requirements to apply:

  • Active bank or checking account
  • At least 18 years of age or older
  • S. citizenship or permanent residency
  • Social security number
  • Government-issued ID (e.g., driver’s license or social security card)
  • Proof of income and/or employment

If you’re unsure of the requirements for a personal loan, you can usually find them in the FAQ page on the lender’s website.

Is it hard to get a personal loan from a bank or credit union?

Personal loans offered by banks and credit unions have requirements that are often similar to online loans. Still, there are some key differences which can make getting approved more challenging. You’ll usually need an excellent credit score to qualify for a personal loan from a bank. You also may have to visit the bank in person to apply, unless you already have a bank account with them.

Credit unions may be more willing to lend to those with poor or bad credit. Keep in mind that you’ll need to become a member of the credit union before applying in most cases.

No matter which loan option you choose, it’s recommended that you check the Nationwide Multistate Licensing System (NMLS) to ensure your lender is licensed to conduct business in your state. If you borrow from a bank, it’s also a good idea to check that it is insured by the Federal Deposit Insurance Corporation (FDIC) to be safe.

What is a good credit score to get a personal loan? 

You may be able to get a personal loan with a lower credit score than you’d expect, depending on the type of lender you choose. So, even if you think you have a bad credit score, you may still be able to qualify. However, having a good credit score can make you more likely to get approved and receive the lowest rates. It’s also worth noting that not all lenders use the same credit scoring system.

As a commonly used rating, your FICO score can give you a better idea of your likelihood for approval. Here’s an overview of how FICO scores are generally rated:1

  • Excellent: 750 — 850 points
  • Good: 700 — 749 points
  • Fair: 650 — 699 points
  • Poor: 550 — 649 points
  • Very poor: 300 — 549 points

Do personal loans hurt your credit score?

Whether or not a personal loan will hurt your credit score depends on a few factors. While a hard credit inquiry will cause your credit score to drop by up to five points when you first take out a loan, the impact will only be temporary.2

A personal loan may also bring more variety to your credit mix — or the different types of credit you have under your name — which can help boost your credit score. In addition, you can improve your credit score by making timely payments on your personal loan, which can help build positive credit history. So, it’s important to consider both the pros and cons when it comes to assessing the overall impact that a personal loan can have on your credit.


The information in this article is provided for educational and informational purposes only, without any express or implied warranty of any kind, including warranties of accuracy, completeness or fitness for any particular purpose. The information in this article is not intended to be and does not constitute financial, legal or any other advice. The information in this article is general in nature and is not specific to you the user or anyone else.

1Experian. (n.d.). What is a Good Credit Score?

2FICO. (2020. Credit Checks: What Are Credit Inquiries and How Do They Affect Your FICO* Score?  

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