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What Is a Personal Loan?

A loan is a fixed-rate loan paid monthly for a set term period, usually between one and five years. Personal loans are often referred to as unsecured loans as there are typically no assets (collateral) required to secure the loan.

Collateral is a type of asset that can be taken and sold in order to repay a loan. For example, a home being funded serves as collateral for the loan.

Personal loans are typically approved by lenders based on the creditworthiness.

When opposed to home and car loans, personal loans are relatively simple to apply for and qualify for. As a result, they can be used for everything from minor home improvements to large purchases.

You can spend the money on almost anything, but it’s best to borrow only what you need and only for items that will benefit your finances or have a huge effect on your life.

Secured Loans

secured loan is one that you take out against something you own, generally a vehicle or a home. The asset is considered collateral. If you default on the loan, the lender will seize the collateral to help pay off the loan.

    Secured Loans Examples

  • Mortgages

  • Home equity line of credit

  • Home equity loans

  • Auto loans

  • Recreational vehicle loans

Unsecured Loans

An unsecured loan does not involve any type of collateral. With this type of loan, the only recourse the lender has on your default is to freeze your account.

They can then attempt to collect your debt using a debt collection service.

This will cause damage to your credit report and possibly prevent you from taking out any other loans or getting a mortgage for a long time after you resolve the issue.

The lender generally ties the amount of money you can borrow using an unsecured loan to your debt-to-income ratio, assets, and credit history.

Because the lender is taking on more risk, an unsecured loan usually carries a higher interest rate.

An unsecured loan may be referred to as a personal loan or signature loan. These types of loans are generally reserved for those with above-average or higher credit ratings.

    Unsecured Loan Examples

  • Personal lines of credit

  • Personal loans

  • Student loans

  • Credit cards

How Personal Loans Work

When you get a personal loan, the money is usually given to you in a lump sum, and you repay it over time with fixed monthly payments.

However, the specifics vary from lender to lender, and there are a few variables to consider.

Interest Rates

Your interest rate is determined by your credit score and could be lower than credit card rates. You will be able to borrow in the single digits if you have excellent credit.

The interest rates on personal loans are usually fixed. Because your interest rate does not adjust, you can make the same monthly payment for the duration of your loan.

They may also have variable rates, but this is a less common alternative. With a variable rate, you may end up paying more or less interest depending on whether interest rates rise or fall.

Warning: If you have a bad or limited credit history, your repayment rates may be similar to credit card rates. You may also need a co-signer that is creditworthy for the loan.

Generally, the interest rate on a secured loan is lower than an unsecured loan, because the risk is lower. In fact, you may even be able to negotiate a lower interest rate on a secured loan.

Repayment Term

Personal loans are typically repaid over one to five years, although other terms are available. Personal loans, as opposed to credit cards, will minimize the amount of interest you pay and have a set repayment date.

There is no prepayment penalty on many personal loans, so you can pay off your loan early and save money on interest.

Origination Fees

For personal loans, some lenders charge origination fees, while others include all expenses in the interest rate. When you pay origination fees, the lender takes a one-time payment depending on the amount of money you borrow.

The origination fee usually ranges from 1-8% of the loan amount and is determined by your credit score.

How to Get Approved for a Personal Loan

Lenders will have different requirements and evaluate your application based on creditworthiness. Here are the factors they consider:

Credit History

Lenders also review your credit history or obtain a credit score to determine how you’ve treated credit in the past.

Your credit reports provide information about past loans, late payments, and public documents that lenders might be interested in knowing about.

Note: Alternative credit scoring tools can also be used by lenders. They may, for example, look at your history of on-time rent and utility payments to predict how you’ll repay a loan.


Lenders must check that you have sufficient income to repay the loan. They can inquire about your jobs and income. They can also examine your existing debt to ensure that adding a loan payment would not absorb too much of your monthly income.

Types of Personal Loans

If you decide to try a personal loan, there are several sources to borrow from.

Standard Personal Loans

Personal loans have long been available from banks and credit unions. You can also apply in person or online and get funds deposited into your checking account within a few days.

Online Lenders

Loans from investors and financial institutions are made available via peer-to-peer (P2P) platforms and other online lenders.

These programs are the most likely to employ alternative credit scoring models, and the application process is often straightforward.

Because of the competitiveness in the current lending marketplace, lenders are offering hyper-competitive rates for loans online.

Traditional lenders, such as loans from banks or credit unions, are no longer always the cheapest place to get a loan. 

Here is a comparison of some of the most popular online loans:

Company Overall Rating Times Chosen
5KFunds 4.3 50,801 View Company
BadCreditLoans.com 3.6 71,416 View Company
Blue Trust Loans 4.5 13,091 View Company
CashUSA 3.9 19,477 View Company
Check Into Cash 4.4 11,761 View Company
CreditFresh 3.0 1,599 View Company
Fast5KLoans 4.0 3,604 View Company
Figure 4.3 70 View Company
Jora Credit 4.2 5,977 View Company
LendKey 4.6 367 View Company
MaxLend 3.0 5,714 View Company
MoneyKey 3.9 26,589 View Company
OppLoans 2.6 4,309 View Company
Payoff 4.4 36 View Company
PersonalLoans.com 4.5 21,699 View Company

Specialized Lenders

Some lenders have direct relationships with service providers. They may help pay for dental work, fertility medication, or landscaping projects.

Borrowing is easy, so it’s a good idea to shop around and compare prices.

Note: Credit cards are essentially personal loans as well. They are, however, revolving loans that operate differently from what most lenders refer to as a personal loan.

Other Loan Types

In addition to personal loans, you can also apply for payday loans, auto loans, mortgages, and business loans.

Why Get A Personal Loan

There are many reasons you might consider finding a personal loan online, such as making a large purchase, consolidating debt, or needing quick cash for a financial emergency.

    What you can spend a personal loan on:

  • Financial emergencies

  • Small home improvements

  • Expensive purchases

  • Debt consolidation

  • Investing in yourself

Financial Emergencies

Ideally, you should have emergency funds set aside for life’s unexpected events. However, there are periods when borrowing is the only choice. If you have large medical bills or another emergency, a personal loan might be a good option.

Small Home Improvements

Because you’re reinvesting in your house, it’s normal to use home equity loans for home improvement projects. However, if you do not need a large sum, a personal loan for home improvements can be less costly and easier to obtain.

Expensive Purchases

When you need to buy something large or costly but don’t have the cash, a personal loan will be able to help.

Debt Consolidation

If you owe money on credit cards with high interest rates, you can repay those debts with a lower-interest personal loan. Because less of each monthly payment goes toward interest rates, you can pay off debt faster.

Investing in Yourself

Personal loans can be able to provide financing while starting a company or learning new skills for your job. However, some lenders place restrictions on how you can use loan proceeds.

Some personal loans, for example, do not allow you to use them to pay for higher education expenses.

Different Ways to Borrow Money

If you need to borrow money, here are some different ways to do so.

Line of Credit (LOC)

A line of credit works like a credit card. The lender gives you a maximum balance, and you can then borrow as much as you would like from the line of credit – up to the agreed-upon maximum amount.

Unlike a credit card, though, there are different phases for a LOC.

The initial phase is the draw phase when you can actively use the cash in the LOC. Then comes the payment phase, which is when you start repaying the money you drew.

There may be an interest-only phase in between these phases, which is when you pay only the interest on the amount you have drawn.

Based on how the line of credit is arranged, you may be able to write checks through the account, or it may be linked to your debit card.

A line of credit may be either secured or unsecured.

Conventional Loan

Conventional loans are generally used for large purchases, such as real estate or vehicles. This type of loan could also include a home equity loan or personal loan.

The amortization and repayment terms for a conventional loan are consistent and predetermined, so you know precisely what your monthly payment will be and how long you have to pay.

A conventional loan may be secured or unsecured.

The value of consumer loans in 2021 at all commercial banks exceeds $1.53 trillion.

FRED Economic Data

Payday Loan

Payday loans are also known as cash advances. Consumers often use these loans as quick solutions for emergencies. This type of loan is secured against your next paycheck and intended to be a short-term solution only.

Bridge Loan or Interim Loan

A bridge or interim loan can also be referred to as a single-payment loan, and borrowers generally use it as short-term temporary financing.

Borrowers usually pay off a bridge loan in one lump sum rather than in scheduled installments.

In some cases, a bridge or interim loan may be used to purchase real estate, including building a new home.

How To Get the Best Online Loans

Getting a loan is easy. Lenders tend to judge your creditworthiness based on your credit score and your income to debt ratio.

Knowing those before applying for a loan will help you find the right lender. 

Step 1

Compare loan rates

Shopping around to find the right loan rate will ensure you are not paying more than you need to in interest and fees. 

Every time you apply for a loan, the lender will run a hard credit check. This will slightly drop your credit score for a little while. That is why we recommend shopping around before applying for loans. That way, you don’t get multiple hard credit checks in a short period of time, dropping your credit rating.

Step 2

Know your credit score

You can get a copy of your credit score for free once a year at www.ftc.gov. If you have low credit work on building up your credit score before applying. 

Take the time to carefully review your credit report from the three major reporting agencies: TransUnionExperian, and Equifax.

While you are reviewing your credit score, you can also resolve any flaws or errors. Keep in mind that lenders that require a credit check may also have minimum credit score guidelines. If you don’t meet that minimum, then there is no reason to apply.

Step 3

Draw up a budget

It’s essential to know how much extra cash you have to repay the loan regularly. Loan terms are usually over a few years, so make sure that you can cover the payments throughout that period.

Step 4

Understand the T&Cs

You must have a clear understanding of the loan terms before signing a final agreement. That includes knowing how much the loan repayments will be, the APR, and all fees associated with the loan. 

Before applying for a personal loan online, it’s essential to make sure you understand the application process. Not all loans require a credit check.

For instance, some payday loans or cash advances don’t need a credit check because your next paycheck is used as security.

But these are high-interest loans and should be used with caution.

Where Can I Compare Loans?

Financer.com has made it easy to find loans online in a wide range of categories. Simply select the type of loan you’re looking for, and Financer.com shows you a variety of lenders offering loan options suitable for you.

Personal Loan FAQs

What is a good credit score?

A good credit score is usually between 680 and 720, but the numbers aren’t as simple as you would think. Even though credit bureaus use the same information to calculate your credit score, their algorithms vary enough to result in different ratings.

How does my credit score affect my application?

Good credit scores demonstrate to lenders that you can manage credit and make on-time payments. And for many, it’s just a stepping stone on the path to good credit. While credit scores aren’t everything, they can have a big impact on certain aspects of borrowing, such as the interest rate you’re offered and the total amount you can borrow.

How can I improve my credit?

It’s fine to have good credit, but you might want to boost it. Your payment history, the length of time you’ve had credit, the type of credit you’ve used, and the amount of credit inquiries you’ve made all have an impact on your credit score.

  • Pay off open balances
  • Avoid opening new accounts
  • Keep opening balances low

Can I get an unsecured personal loan for business purposes?

Some lenders can permit you to use the proceeds of an unsecured personal loan for business purposes, while others will not. You will need to apply for a business loan.

Lorien is the Country Manager for Financer US and has a strong background in finance and digital marketing. She is a fintech enthusiast and a lover of all things digital.

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