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What is a Personal Loan—and Why Get One?

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What is a personal loan is and why would you get one? If you want to consolidate high-interest rate debt, or find yourself in urgent need of a lump sum of cash, a personal loan can be a smart choice.

What is a personal loan?

A personal loan is money borrowed from a credit union, brick-and-mortar bank, or through an online lending marketplace, and can be used for just about anything you want. Loans are paid back in fixed, regular monthly installments over a set 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, terms, and eligibility are based on several factors, including your credit score, payment history, ability to repay the loan, and the lender.

You can apply for a personal loan on your own, or jointly, with a co-borrower. If you have poor or not enough credit, applying with a co-borrower can help you qualify for a better rate, a higher loan amount, or both. Many personal loans are considered unsecured debt, which does not require collateral. Once a personal loan has been paid back, the account is closed and you must reapply if you need additional funds.

What is the difference between secured vs. unsecured loans?

The difference between a secured and an unsecured loan is whether or not the lender requires collateral as part of the loan agreement.

  • Secured loans require collateral—a valuable asset such as a car, boat, or home—that is provided by the borrower and used by the lender as payment in case the loan is not repaid according to the agreed upon loan terms. Examples of secured loans include mortgages (house, condo, townhome), auto loans, and home equity lines of credit (HELOC).
  • Unsecured loans do not require collateral as an incentive for repayment. Also known as signature loan, unsecured loans are supported only by your creditworthiness (or your co-borrower’s, if you apply with someone else). Eligibility for unsecured loans often are contingent solely on payment history and credit score. However, most reputable lenders will also look at credit history, income, and other financial indicators to determine the likelihood of loan repayment.

How can you use a personal loan?

Depending on what the money is for and your borrowing history, there are multiple benefits to obtaining a personal loan. If you have outstanding credit card balances, medical bills, or other high-interest debt, a personal loan can help you pay down your debts faster at an interest rate and monthly payment that you can responsibly afford.

Unless your lender has specific guidelines, most personal loans can be used for almost anything, including:

Debt Consolidation

If you have multiple credit cards with high rates, a personal loan with a lower interest rate can be used to consolidate your debt into one manageable loan with a fixed, monthly payment amount. Unlike credit cards, with a personal loan you’ll know the exact date your loan can be paid off in full. And if you’re struggling with overwhelming credit card debt, a balance transfer personal loan can help you pay down those cards directly.

Home Renovation and Repairs

If your house needs help, a personal loan makes it easy to cover the cost of a just about any home renovation or repair. A fresh coat of paint, roof and siding repairs, kitchen and bathroom remodels, or room additions and garage expansions—a home improvement personal loan is a smart, responsible way to finance improvements to the comfort and safety of your home.

Major Purchases and Urgent Expenses

You can use a personal loan to finance milestone moments and big purchases—new baby, weddings, funerals—as well as large, unexpected expenses. This is especially helpful when you don’t have the cash on hand. Rather than rack up high-interest rate credit card debt you might not be able to pay off quickly, a personal loan can help you manage expenses, and your budget, responsibly. Spreading the costs over a set period of time at a lower fixed rate than offered by credit cards can mean savings on interest.

Paying Back Friends or Family

Family loans can cause family tension. If you’ve borrowed money from relatives or close friends in the past (or are thinking about doing so), you can eliminate the emotional cost of borrowing or lending from within your circle by obtaining a personal loan instead.

Medical Bills

If unpaid medical bills are piling up, using a personal loan to pay those off can keep your credit score in good standing and debt collectors at bay. Knowing you have a responsible way to pay down outstanding medical and hospital bills may not only help reduce your financial stress. Regaining peace of mind by getting bills back under control may also support your (or a family member’s) overall health.

Can a personal loan help my credit score?

Lenders regularly report borrower behavior and activity to the major credit bureaus. Personal loans are no exception. Once issued, personal loans are recorded on your credit report and can have either a positive or negative impact on your credit score, depending on how you use them.1 Personal loans can help you build a payment history, contribute to a better credit mix, and, when used to consolidate credit card debt, may improve your credit utilization ratio. Read more about what influences your credit score and how a personal loan can help or hurt your credit.

If you’re committed to always making payments on time, applying for, obtaining, and paying back a personal loan can demonstrate your ability to borrow and manage money. Consistent, responsible money management is an important factor in determining your credit score, and improving it over time.

The Bottom Line

Before applying for a personal loan—or borrowing money in any form—first consider your whole financial picture and decide what’s best for you. If a personal loan sounds like it might be a good fit, you can check your rate through LendingClub, with no impact to your credit score.2 If you do qualify, you’ll have a better idea of what your rates and terms will be. Personal loans are available through LendingClub for as low as $1,000 all the way up to $40,000—and you could be approved in 24 hours and get the funds you need in as few as four days.3,4



1On average, borrowers who paid their debt down and maintained low balances saw a credit score increase, however, other factors including increasing debt load could result in your credit score declining.

2Checking your rate through LendingClub generates a soft credit inquiry, which is visible only to you. A hard credit inquiry that may affect your credit score only appears when your loan is issued.

3Of all personal loans approved between 1/1/19 – 3/31/19, 72% were approved within 24 hours.

4Based on a majority of borrowers who were issued loans between 1/1/18 and 12/31/18. The time it takes for your loan to be funded may vary.

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