What is a personal loan?

If you’re looking to make a big purchase, a number of small purchases or consolidate existing debt, you might wonder if a personal loan is the right choice for you. Not all loans are made equal, so familiarize yourself with your options before jumping into an application.

What is a personal loan?

A personal loan is money you borrow from a financial institution and repay monthly with interest. Both the principal and interest must be repaid by the end of the loan term, which is usually between one and seven years. You may be able to borrow between $1,000 and $100,000, though it varies by lender. APRs typically range from 4% to 36% depending on your creditworthiness and financial situation.

You can usually find personal loans offered by online lenders, brokers, banks, credit unions and peer-to-peer lenders. Personal loans can be used for almost any legitimate purpose, including consolidating your debts, making a large purchase or going on vacation.

What types of personal loans are available?

When you’re ready to get started, there are a few different types of personal loans to consider:

  • Fixed- vs. variable-rate loans. Ask your lender how it intends on calculating interest. Fixed rates guarantee a certain interest over the life of the loan, while variable rates can fluctuate based on the lending market.
  • Secured vs. unsecured loans. When comparing loans, ask if you need to put up an asset as collateral. A secured loan requires collateral, but will generally have better terms. On the other hand, an unsecured loan doesn’t require collateral and will usually have less competitive terms, but you don’t risk losing an asset if you default.

How can I get a personal loan?

Many lenders allow you to apply for a personal loan online, though some banks and credit unions might ask you to visit a local branch to sign you loan documents in person. Before you apply, check that you’re eligible — many lenders have credit and income requirements you need to meet.

A personal loan allows you to borrow money from a bank, credit union or online lender to cover a major expense, consolidate your debts and more. You usually have the choice between fixed or variable rates, and can opt to back it with collateral for a more competitive deal.