A personal loan is a lump sum of money borrowed from a financial institution that can be used for almost any purpose.
What Is a Personal Loan?
A personal loan is a loan you qualify for based on your credit history and income. Personal loans are sometimes called signature loans or unsecured loans because there is typically no collateral required to secure a personal loan.
Collateral is an asset that can be seized and sold to repay the loan. Home loans are secured by the home being financed. In most cases, lenders approve personal loans by evaluating your creditworthiness.
Personal loans are relatively easy to apply for and qualify for when compared to home and auto loans. That makes them useful for everything from small home improvements to expensive purchases. You can use the money for almost anything, but it’s wise to borrow only as much as you need—and only for things that improve your finances or make a significant impact on your life.
- Alternate names: Signature loans, unsecured loans
How Personal Loans Work
When you get a personal loan, you typically receive your money in a lump sum, and you repay with fixed monthly payments over time. However, the details can vary from lender to lender and there are a few factors to take into account.
Interest Rates
Your interest rate depends on your credit and can be lower than credit card rates. With excellent credit, you may be able to borrow in the single digits.
Personal loans typically have fixed interest rates. Your interest rate doesn’t change, so you make the same monthly payment for the life of your loan.
They can also have variable rates, but this option is less popular. With a rate that can change, you may end up paying more or less interest depending on whether interest rates are rising or falling.