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Personal Loan Basics: The Basics to Borrowing Money


If you need money, a personal loan is one of the easiest, most common ways to borrow. In fact, nearly 20 million Americans took out a personal loan in 2020. Getting a personal loan takes some thought and planning, so here's a comprehensive guide to help answer all your personal loan questions.

What is a Personal Loan?

A personal loan is a type of installment loan, which means you borrow a lump-sum amount of money and repay the loan over a set number of monthly payments.

Most personal loans have a fixed interest rate, meaning the rate and the amount you pay each month stays the same throughout the life of your loan, although there are options for a variable rate, which can change over your loan term.

Generally, personal loans are ideal when you need to pay for one-time expenses, versus continually tapping into a supply of funds, and when you have a basic idea of how much money you need to borrow.

Types of Personal Loans

Personal loans can be secured or unsecured, although most tend to be unsecured.

Secured Personal Loans

A secured personal loan is money you borrow from a lender that can be used for expenses such as home improvement and renovation projects or car repair costs. You can provide cash assets, such as savings accounts or certificates, or property, such as your home or vehicle, as collateral.

Unsecured Personal Loans

You can apply for an unsecured personal loan through a lender, and you don't have to provide collateral to secure the loan. This type of loan can go toward most expenses, for example, consolidating debt or upgrading your home.

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Learn the difference between secured and unsecured loans.

How Does a Personal Loan Work?

Once approved by your lender for a personal loan, the lump-sum amount will be deposited into your banking account. Most often, borrowers repay personal loans by making fixed monthly payments over the life of the loan, known as the term.


Lenders offer different terms, but the length of a personal loan typically ranges from 1-10 years.

Interest Rates

You can select a fixed interest rate option for your personal loan, which again, means the rate won't change throughout your loan term. Here are some points to consider:

  • The average personal loan interest rate for borrowers with good credit is 10.3%
  • Since unsecured personal loans don't require collateral, rates tend to be higher than for other types of loans
  • A lower monthly payment with a longer term may seem like a better deal, but you'll pay more in interest throughout the life of your loan

Crunching some numbers with a loan calculator can help you figure out your monthly payment options.


Find out what your monthly loan payments would be.

What Can a Personal Loan Be Used For?

One of the greatest benefits of a personal loan is that the money can be used for nearly anything. Here are some of the most common uses:

Debt Consolidation

If you have high-interest debt, such as credit cards, you might take out a debt consolidation personal loan. By combining your debts into a single debt with a new loan, you may be able to lower your monthly payments and the amount of interest you pay throughout your loan term.

See debt consolidation loan details.

Home Improvements

When it comes to home improvements, personal loans are typically used for quick repairs or large home purchases, such as a furnace or water heater. Personal loans are ideal in any home improvement scenario when you need money fast because many lenders distribute funds within a couple days.

See home improvement loan details.

Life Events: Weddings and Vacations

Life events such as weddings and travel plans are meaningful milestones, however, they often come with a hefty price tag. Taking out a personal loan to cover these kinds of costs can help break down big expenses into manageable payments.

See life event loan details.


If you owe more in taxes than you can pay at once, the IRS charges you interest and fees until you pay it back in full. A tax loan can help you better manage your payments and cost you less over the long run.

See tax loan details.

Medical Bills

It's no secret the cost of medical and dental bills is difficult for many people to cover. A personal loan is a simple way to finance the cost of those bills over time.

See medical loan details.

Where to Get a Personal Loan

You can apply for a personal loan through a credit union, bank, or online lender.

Credit unions:

  • Not-for-profit and member-owned, credit unions may offer personal loans with lower rates and fees than other lenders.
  • Credit unions may be more flexible about approving personal loans for borrowers with fair or poor credit.
  • To qualify for a loan, you must become a credit union member.


  • Not all banks offer personal loans, so if you're considering a bank, make sure to check.
  • A bank may offer a larger loan amount.
  • You often need good credit to qualify for a personal loan through a bank.

Online lenders:

  • Online lenders may be more lenient than some banks when it comes to loan qualifications.
  • Online lenders may offer more accommodating payment schedules, waived fees, and a quicker application process.
  • You need to be comfortable applying and managing your loan completely online.

To find a loan with rates and terms that work best for you, make sure to shop around so you can compare offerings from different lenders.

What You Need to Qualify for a Personal Loan

When you apply for a personal loan, lenders consider general qualification factors such as your credit score, credit history, verifiable income, and debt-to-income ratio.

Credit Score

Although qualifications may vary by lender, a credit score of 580 is typically the minimum score you need to qualify for a personal loan. Having a higher score may also help you get a lower interest rate. Checking your credit through one of the top three credit bureaus, Equifax, Transunion, and Experian, is free and won't affect your credit score.

Verifiable Income

Providing income verification documents can help assure a lender you'll be able to repay your loan. Common documents to present include:

  • Pay stubs (preferably your most current one and a few previous ones as well)
  • Bank statements
  • Most recent W-2 form

Debt-to-Income (DTI) Ratio

A debt-to-income ratio is calculated by dividing your total monthly debts by your gross monthly income. Lenders use your DTI to gain a better sense of whether you'll be able to make monthly payments to repay your loan.

For example: monthly debts ($1,500) / gross monthly income ($5,000) = .3 or 30%

A DTI ratio of 30% is considered good.


If you don't qualify for a loan because you either have poor credit or little-to-no credit history, you may want to find a cosigner. A cosigner agrees to take legal responsibility for repaying a loan if the primary borrower isn't able to make payments.

Overall, keep in mind that loan qualification factors vary per lender.

5 Steps to Getting a Personal Loan

To compile all the information outlined so far and show you how you can put it into practice, here are five quick steps you can take when applying for a personal loan.

1. Check Your Credit Score

When you apply for a loan, lenders will check your credit score to assess whether you'll be able to pay back the money you borrow.

Here's a breakdown of score ranges:

  • 800+: Excellent
  • 740-799: Very good
  • 670-739: Good
  • 580-669: Fair
  • Under 580: Subprime

Some lenders will accept a minimum score of 580 but qualifying scores will vary by lender.

2. Choose Secured or Unsecured

A benefit of personal loans is how flexible they are, meaning you can use them to cover almost any personal expenses, from home repairs to debt consolidation.

You just need to decide whether you're most comfortable with a secured loan, which must be backed by collateral, or an unsecured loan. Lenders consider unsecured loans to be riskier, so interest rates are typically higher than rates for secured loans.

3. Research Lenders and Compare Rates

Taking the time to research lenders and find the best rates and terms for your situation will be to your advantage. Explore your options by researching different types of lenders, including:

  • Credit unions
  • Banks
  • Online lenders

Then, run different rates and terms through a loan calculator to estimate your payments so you can decide what might work best for you.

4. Gather Your Documents

When you've done your research to find a loan and you're ready to apply, having verification documents on hand will make the application process smoother for you. Common documents include:

  • Proof of employment (pay stubs, bank statements)
  • Driver's license
  • Proof of residence
  • Social Security number
  • W-2 forms

5. Submit Your Application

Make sure to review the loan terms and conditions, and if you're on board with everything, apply! As a reminder, if you don't have much credit or have a subprime credit score, you may want to find a cosigner.

Also note that applying for a loan requires a hard credit inquiry, which may affect your credit score, but making on-time payments can help you build back your credit.

If you're officially approved, you'll need to accept the terms, and generally, you'll receive your funds within a week.

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Find out what you need to know before taking out a personal loan.

Common Personal Loan Fees to Know

Taking out a loan often requires you to pay certain fees. Personal loan fees may vary by lender, but here are some common ones to be aware of:

Fee type Industry Average Cost
Application fee $25-30
Loan origination/loan processing fee 1-6% of the loan amount
Prepayment penalty 2-5% of the loan amount
Nonsufficient funds (NSF) fee $20-50
Late payment fee $25-50 of 3-5% of monthly payment

Some fees are required, but you may want to talk to your lender to find out which fees may potentially be waived.

Personal Loan Alternatives

Just as important as comparing lenders, evaluating your borrowing options is central to finding the approach that works best for you. Some alternatives to taking out a personal loan include:

  • Personal line of credit
  • Home equity line of credit
  • Credit card
  • Payday loan

Meet Your Personal Needs

There are plenty of options to consider when you need to borrow money. A personal loan may be the right fit for you if have one-time expenses, you have a general idea of your costs, and you prefer the consistency of having a fixed interest rate and monthly payment over the life of your loan.

Take a Closer Look

See the features and benefits of our personal loans.