How to Get a Personal Loan and How They Work

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In this article


  • Personal loans are a form of installment credit that can be used at the borrower’s discretion to cover a wide range of expenses.
  • There are many types of personal loans available to borrowers, including unsecured, secured, fixed-rate, variable-rate and debt consolidation loans.
  • The type of personal loan you choose depends on your financial situation and the requirements of the lender, which can vary widely.

If you’re suddenly faced with a large, necessary expense and find yourself scrambling for cash, you may want to consider taking out a personal loan. Personal loans can help borrowers fund everything from an unexpected medical expense to much-needed debt consolidation or even major life events like a wedding.

Here’s what you need to know about how personal loans work and how to find the right one for your situation.

What is a personal loan?

Personal loans are a form of installment credit that can be used by the borrower to cover a wide range of expenses. These loans are granted in a lump sum, which is paid back in fixed amounts, usually monthly, over time.

Personal loans can be used for any number of expenses, such as funding large purchases or covering unexpected emergency expenses. Personal loans can also be a good option for consolidating high-interest credit card debt, as they often have a lower annual percentage rate (APR) than many credit cards.

How do personal loans work?

Like other types of loans, personal loans consist of the principal, interest and any administrative and service fees. The principal, or the initial amount you borrow before fees and interest, can be several hundreds or thousands of dollars, with a typical repayment period between two and five years. Over that time, you'll make regular payments that include a portion of the principal plus interest.

Personal loan interest rates can range anywhere from 10% to 29%, and they tend to be fixed over the life of the loan. You might also be charged certain fees to secure the loan, like a documentation or origination fee. Avoid surprises by making sure you’re familiar with the terms of your loan.

Types of personal loans

There are many different types of personal loans available to borrowers. A few of the most popular options include:

  • Unsecured loans. The majority of personal loans are unsecured, which means they don’t require collateral. Collateral is an asset that the borrower agrees to surrender to the lender if they are unable to pay the amount owed. For example, a mortgage is a type of secured loan where your house acts as collateral.

    Unsecured loans can benefit the borrower because, in the event of late payments or a default, the lender cannot automatically repossess any property. However, lenders often compensate for this increased risk by charging a higher-than-average APR, which includes the loan’s interest rate, fees and other borrowing costs.

    Applicants may also need to demonstrate that they have been responsible borrowers in the past, meaning that lenders may look for an established credit history, strong credit scores and other signs of financial health. Borrowers with little existing credit or poor credit scores may find it difficult to obtain an unsecured personal loan.
  • Secured loans. Secured loans, on the other hand, allow borrowers to put up personal property as collateral to help insure their loan. The assets you can use as collateral will vary depending on your lender but may include things like your car title or a valuable savings account.

    The personal property you select as collateral will be at risk if you’re late on payments or default on your loan. In exchange for that risk, secured personal loans may be more accessible to borrowers and may offer a lower-than-average APR.
  • Fixed-rate loans. It’s common for personal loans to have a fixed interest rate over the life of the loan. With a fixed-rate loan, the borrower will always know how much their monthly payments will be over the life of the loan. This is a great option for those looking to make predictable payments on a tight budget.
  • Adjustable-rate loans. Although less common, adjustable-rate loans may also be available to some borrowers. With an adjustable-rate loan, interest typically starts off low but may change over time in response to market conditions. If the borrower can pay off the loan quickly, they may be able to save money on interest. However, adjustable-rate loans do carry some level of risk as interest rates could rise and leave the borrower with higher payments than they can handle.

How do I find the personal loan that’s right for me?

The type of personal loan you choose depends on your financial situation and the requirements of the lender, which can vary widely.

If you want to get an idea of what types of personal loans you might qualify for, some creditors offer a screening option called prequalification. In exchange for some basic financial information, you’ll find out whether you’re a likely candidate for a specific loan. However, even if you are prequalified, you’re not guaranteed final approval until you undergo a full credit check.

How do I apply for a personal loan?

Once you’ve decided a personal loan is right for you, consider the following steps:

  • Check your credit scores. Before applying for any new credit account, it’s a good idea to check your credit scores and credit report. Lenders may use your credit scores as one factor when deciding whether to approve you for credit and to set the APR and other terms of your loan.

    You can receive multiple Equifax credit reports with a free myEquifax account. Sign up and look for "Equifax Credit Report" on your myEquifax dashboard. You can also visit to access a free credit report from each of the three nationwide consumer reporting agencies - Equifax, TransUnion and Experian - every 12 months.
  • Find a lender. Start your search with banks that you already do business with. You may be more likely to be seen as a trustworthy borrower if you have an existing relationship with the lender. There are also many legitimate online lenders, but check with agencies like the Consumer Financial Protection Bureau to vet any options you’re considering. Be especially wary of lenders offering personal loans with no credit checks.
  • Compare your options. Shop around if you can. Make sure you know the APR, monthly payment schedule and fees offered by each contender.
  • Apply for your loan. After you make a final choice, submit an application. In general, you’ll be asked for proof of address, identification and income. This information will also be used when lenders perform a credit check.
  • Plan for repayment. As you wait to learn about the status of your application, prepare your strategy for repaying the loan and update your budget to include your new monthly payments. It’s important to keep up with whatever installments you owe so that you can enjoy the benefits of your new personal loan without jeopardizing your financial health.
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