What Is a Personal Loan?
Personal loans provide you with a lump sum of cash that you can use for almost any purpose. These loans are typically unsecured, meaning you don’t need collateral to get one.
Instead, lenders will review your financial profile, including your income, debts, and credit history, to determine what options are available for you.
Loan terms are designed to be flexible. Depending on the lender and your financial circumstances, you can find loans for various needs, from smaller expenses to larger projects. Lenders work to offer competitive interest rates and flexible repayment terms to fit your budget.
Unlike other types of loans, like mortgages or business loans, personal loans offer the flexibility of using funds on almost anything. That includes:
- Home improvement or repairs
- Medical expenses
- Sudden emergencies
- Debt consolidation
- Small business costs
- Major life events
You can often get the funds from personal loans quickly. Lenders typically deposit funds within a few business days of approval. Once the money arrives in your bank account, you’ll begin your repayment plan. You’ll have a set monthly payment, making it easy to budget for.
Types of Personal Loans
There are several types of personal loans to choose from:
- Unsecured: An unsecured loan doesn’t have any collateral to back it, which usually means it has a higher interest rate compared to a secured loan. It can also be more difficult to get an unsecured loan as lenders require stronger financial circumstances to qualify.
- Secured: This type of loan has collateral, like a car or other valuable item, to back it. If you fail to repay the loan, your lender will use the collateral to recoup their lost funds.
- Cosigned: If you don’t yet meet the lender’s financial qualifications on your own, a cosigner could help. The cosigner, which could be a family member or friend, agrees to repay the loan if you cannot.
- Variable and Fixed-Rate Loans: All loans have either fixed or variable interest rates. With a fixed rate, you pay the same interest rate over the life of the loan. With variable rates, your interest rate fluctuates with the market.
When to Get a Personal Loan
Since personal loans are typically unsecured, they can sometimes be more expensive than other types of loans. That said, there are times when getting a personal loan can make the most sense.
It’s best to get this type of loan when it is the least expensive form of financing. For example, let’s say you want to open a small business and get a few quotes for a business loan. If those loans have higher interest rates than a personal loan, then it makes more sense to choose the personal loan.
You’ll also need to make sure you can afford the monthly payments. That means the payment fits into your budget without having to cut down on your essential spending, like groceries or utilities.
Additionally, it can make sense to get a personal loan when it will improve your financial circumstances. For example, using a personal loan to improve your house can add value to your home and allow you to make more when you sell it.
Personal loans can also help you consolidate high-interest debt, which could simplify your finances. Instead of managing multiple payments with variable rates, such as from credit cards, a personal loan allows you to pay off those balances. You are then left with one set monthly payment, which can be easier to manage and fit into your budget.
How to Get the Best Personal Loans
Generally speaking, the best personal loans are those that have the lowest APRs, minimal fees, and monthly payments you can comfortably afford. Since most personal loans are unsecured, your loan terms depend largely on your personal finances.
To get the best personal loan, you’ll need a strong credit score. You can boost your credit by reviewing your history. Request your credit report from the three major credit reporting companies: TransUnion, Equifax, and Experian. Then, you can review your reports for any errors that could be lowering your credit score.
At the same time, try to pay down any outstanding debts if you can, like credit cards. This will improve your DTI (debt-to-income) ratio, which makes you a less risky investment for personal loan lenders.
On the other hand, increasing your income can also help improve your DTI ratio. If you’re able to, you might consider picking up more hours at work, looking for a part-time job, starting a side hustle, or asking for a raise at work.
How to Apply for a Personal Loan
Applying for a personal loan is a straightforward process, though it’s important to spend time doing your research. There are just a few steps to complete.
1. Shop Around Loan terms can vary greatly from lender to lender, so it’s important to compare your options before applying.
Once you have a few lenders in mind, prequalify with each. This step allows you to get personalized rate estimates and terms so you can get a good idea of your loan options. Many lenders allow you to prequalify with just a soft credit pull, meaning you won’t affect your credit score.
Compare your prequalified offers to determine which is the best fit for you. Generally speaking, the offer with the lowest APR and monthly payments is usually best as it will save you the most money and fit into your budget best.
2. Submit an Application Once you’ve selected a lender, submit a full application. Applying for a loan requires you to provide documentation about your identity and income, like W2s and pay stubs. As long as you have the documents ready, this step can often be completed quickly.
3. Receive Your Funds and Start Repayment Lenders will review your application and, if approved, will deliver your funds. The timeline for approval and funding can vary depending on the lender.
You’ll typically start repaying the loan within a month of receiving the funds. Many lenders allow you to set up autopay so you never miss a bill. Be sure to make full, on-time payments each month to protect your credit score and meet the terms of your loan.
