What Is a Personal Loan? How You Can Apply in 3 Simple Steps
Whether you need to replace a leaky roof, your wedding day is quickly approaching, or you want to consolidate high-interest rate debt, there are times when we all need a little financial boost. That’s where a personal loan comes in. Unlike a mortgage or an auto loan, a personal loan is more flexible and can be the smart choice in some situations. Here’s what you need to know about how personal loans work before you start looking into available loan options.
In This Article
- What is a Personal Loan?
- How to Apply for a Personal Loan
- Types of Personal Loans: Secured vs Unsecured Loans
- What Can You Use a Personal Loan For?
- The Bottom Line
- Personal Loan FAQs
A personal loan is a lump sum of money you can borrow for almost any purpose, such as consolidating credit card debt, paying off medical debt, or making home improvements. A personal loan is paid back at a fixed interest rate with fixed monthly installments over a fixed period of time.
Current average APRs for personal loans range from 10% to 28%. Repayment terms generally vary from one to seven years in length. Individual personal loan rates, loan terms, and eligibility are based on several factors, including your credit score, payment history, ability to repay the loan, and the lender.
Take these simple steps and you could have the necessary amount of money you need to move forward in as little as a few business days.
1. Review your credit report
You'll need excellent credit to get the best personal loan offer there is. So before you begin the application process for a personal loan, check your credit reports. You can get a free credit report from each of the three major bureaus (Equifax, TransUnion, and Experian) once per year. Lenders will look at your report, so if you find any errors, contact that credit bureau to fix your file.
2. Check your rate
Comparison shop for interest rates online before you commit to a personal loan (and a hard pull of your credit report). Often you’ll be able to plug your information into an online application that will turn around a personalized loan offer (or offers) showing what your interest rate and monthly payment amount could be.
Pro Tip: Know whether your personal loan application will trigger a hard or soft pull of your credit report. If it's a hard pull, your credit score may drop by a few points temporarily (which can affect your ability to get a loan from other financial institutions you apply to after). On the other hand, a soft pull will not affect your credit score. (For example, checking your rate through LendingClub is a soft pull.)
3. Choose a lender
Before you enter into an agreement with any lender, first read the fine print, and understand all the terms of the loan being offered. For example, the annual percentage rate (APR) may be higher than the interest rate, meaning you’re paying more in a year than the advertised interest rate would suggest. If your personal loan has an origination fee, that fee might get subtracted from your loan proceeds. So make sure the total loan amount you request covers what you need, plus any origination fee. Additionally, if you were thinking about paying off your loan early, be sure to check if the lender charges a prepayment penalty.
Also take into account the loan experience. If a lender offers automated loan payments, for example, you can take advantage of that always paying on time, which can boost your credit score. Customer service makes a big difference as well. Look for a lender who is available by phone or online chat at times that are convenient to you.
Personal loans are typically secured or unsecured. Here are the key differences:
Secured loans require that you put up collateral—a valuable asset such as a car, boat, or home. If you do not pay according to the terms of the loan agreement, you must surrender the collateral to the lender. Examples of secured loans include mortgages, auto loans, and home equity lines of credit (HELOC).
Unsecured personal loans, also known as signature loans, do not require collateral. Lenders offer unsecured loans based on your creditworthiness, or the likelihood you’ll repay the loan. Lenders look at your credit score, credit history, and income. Credit cards, student loans, personal loans, and personal lines of credit are all examples of loans that are unsecured.
Generally, a personal loan can be used for almost any purpose, including:
Debt consolidation loans
A personal loan can help you consolidate your debt from multiple revolving credit cards with high (and often variable) interest rates into one manageable payment. Typically, personal loans offer lower interest rates than credit cards, saving you money on interest over time. Some lenders also offer a balance transfer personal loan, which lets the lender send the funds directly to your creditors, consolidating your debt quicker.
Home renovation and repairs
Unlike a home equity loan or home equity line of credit, a home improvement personal loan lets you avoid the risk of using your home as collateral for a loan to make needed repairs or improvements. You can use a personal loan for something minor (like replacing your water heater), something major (like finally upgrading those Formica countertops in your kitchen), and pretty much everything in between.
High interest rates can rack up quickly on credit cards. Using them to make very large purchases that won’t (or can’t) be paid off within a month or two is usually not the best idea. With a fixed (and, typically) lower rate, personal loans can be used to make major purchases or pay for major life milestones, such as welcoming a new member of the family, or hosting a wedding.
Paying back friends and family
Family loans can cause family tension. Avoid the emotional cost of borrowing or lending from within your circle by obtaining a personal loan instead. Or, you can use a personal loan to pay back an existing family loan and give yourself (and your clan) peace of mind.
Elective procedures, dental work, and unexpected injuries may not be entirely covered by health care insurance. Not only that, unpaid medical bills are often sent to collections, leaving a negative mark on your credit report. According to a survey by the Consumer Financial Protection Bureau, at least 43 million Americans have medical bills on their credit reports. Personal loans can be used ahead of time to cover medical expenses and avoid the headache—or used afterward to pay down medical debt.
Emergencies and urgent expenses
Even if you’ve been persistently building your emergency fund, an emergency can outstrip your nest egg. If your car breaks down, your pet gets sick, or your hot water heater needs to be replaced immediately, you can use the funds from a personal loan to handle the crisis and get back on track without having to dip into your savings account.
Before applying for a personal loan, consider your whole financial picture. If a personal loan sounds like it might be a good fit, you can check your rate through LendingClub using our personal loan calculator, with no impact to your credit score. Personal loans are available through LendingClub in amounts from $1,000 to $40,000. You could get a loan approval within a couple of hours and have your money fast.
Can a personal loan help my credit score?
Lenders regularly report borrower activity, including personal loans, to the major credit bureaus. Personal loans can help you build a payment history, contribute to a healthy credit mix, and, when used to consolidate credit card debt, may improve your credit utilization ratio.1 A personal loan can help or hurt your credit depending on how you manage the loan.
Is it a good idea to get a personal loan?
Used wisely, a personal loan can be a great tool for maintaining or improving your financial health. You can fill short-term cash needs for an emergency or invest in a big purchase. If you’re juggling revolving credit card balances with higher interest rates, consolidating those balances into a personal loan can help you save money and get your personal finances in order as long as you commit to keeping those balances low in the future.
How can I get approved for a personal loan?
Lenders like to see steady income with a solid payment history of on-time payments and a low debt-to-income ratio. A credit score of about 740 or above is considered “very good.” If your score is in that range, you have a good chance of getting approved for a personal loan. Applying with a cosigner can help you qualify for a better rate, a higher loan amount, or both, as long as the cosigner has good credit themselves.
1 Reducing debt and maintaining low credit balances may contribute to an improvement in your credit score, but results are not guaranteed. Individual results vary based on multiple factors, including but not limited to payment history and credit utilization.
2 Between April 2022 and June 2022, Personal Loans issued by LendingClub Bank were approved within 2 hours, on average. Loan approval, and the time it takes to issue a credit decision, are not guaranteed and individual results vary based on creditworthiness and other factors.