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Personal Loan Definition, Types, and how to get one

What is a personal loan?

Understanding a Personal Loan

The types of personal loans available

How Personal Loans Work

An example of a personal loan

How to find Personal Loans

By Rebecca Lake

Updated August 09, 2021.

Reviewed by Thomas Brock

Fact verified by Katrina Munichiello

What is a Personal Loan?

The term “personal” refers to a loan is an amount of money that you are able to take out to fund various reasons. For instance, you may take advantage of the personal loan to consolidate debt, pay for home improvements, or even organize a dream wedding. Personal loans are offered by credit unions, banks as well as online lenders. The money you get from them must be repaid over time, usually with interest. Some lenders may be able to charge fees on personal loans.

The most important takeaways

The personal loans are loans which can be used to pay for a number of personal expenses.

You can find personal loans through credit unions, banks, as well as online lenders.

Personal loans are secured, meaning you need collateral to get money or unsecured, with no collateral needed.

Personal loans aren’t the same in terms of rates of interest as well as fees, amount and the terms of repayment.

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Understanding a Personal Loan

A personal loan lets you get money to cover personal expenses and then repay those funds in time. The personal loans are a form of installment debt that permits you to obtain an amount of money in one lump. For instance, you could take advantage of a personal loan to pay for:

Moving costs

Debt consolidation

Medical bills

Wedding expenses

Home renovations or repairs

Funeral expenses

The cost of vacation

Unexpected costs

These loans are different from other installment loans–such as student loans, auto loans, and mortgage loans–that are used to pay for specific expenditures (i.e. the cost of education, purchase of a vehicle or home purchase).

Some personal loan lenders restrict the ways you are able to use a personal loan. For example, you may not be able to get an individual loan to pay for fees for college tuition, fees or any other costs.

A personal loan is also different than a private line of credit. The latter is not an amount that is lumped together; rather, it functions similar to credit cards. You have credit line you can spend money against and, as you do so the credit available to you is reduced. You can then make available credit through a repayment to your credit line.1

If you have personal loan generally, there’s a fixed end date by which the loan is paid back. A personal line of credit in contrast can be open and open to you for a long time until your account remains at a good state with your lender.2

Types of Personal Loans

Personal loans can be secured or unsecured. Secured personal loan will needs some kind of collateral in order to meet the requirements of taking out. In other words, you can take out the personal loan with cash assets, like a savings account or certificate of deposit (CD) or tangible assets, like your car or boat. If you fail to pay the loan the lender can retain your collateral in order to pay the debt.

An unsecured personal loan does not require collateral to obtain money. Credit unions, banks and online lenders may provide both secured and unsecure personal loans to borrowers who are eligible. Banks generally consider that the latter is more risky than the former because there’s no collateral to take. This can result in more interest for a personal loan.3

How a Personal Loan Works

To obtain a personal loan then you must make an application to an institution. Again, this can be a credit union, bank or an online private loan lender.

Generally, you would first complete an application. The lender will review the application and decides to approve or deny the application. If approved, you’ll be provided with the loan terms, which you can accept or reject. If you’re in agreement, the next step is closing your loan paperwork.

After that after that, the lender will fund the loan, which means paying you the money. Depending on the lender, these could be made via a direct transfer in your banking account, or an actual check. After the loan has been approved and you are able to use the funds however you feel appropriate. Then, you must begin repaying the loan in accordance with the terms established in your loan agreement.

Defaulting on an individual loan can cause serious harm to the credit rating of your. You could also lose your collateral with secured loan or face being pursued by the lender in order to collect the loan.

A Personal Loan Example

If you’re contemplating the possibility of a personal loan, it’s helpful to know what it will cost. The annual percentage rate (APR) on a personal loan is the cost per year of paying back the loan in accordance with the interest rate and fees. The APR as well as the loan duration determine the amount you have to pay in interest over the life of your loan.

As an example, suppose you get a $10,000 personal loan with an APR of 7.5%. The loan is a loan with a term that is 24 months. Using those terms the monthly installment will be $450, and the total amount of interest you pay over the life of the loan is $799.90.

Imagine that you take out the same amount but with different loan conditions. Instead of a 2-year period, you have three years to pay back the loan, and your interest rate is 6.6% instead of 7.5 percent. Using those guidelines, your monthly payment would drop to $304, however, your total interest would increase to $951.90.

This method of comparing numbers is crucial for you to ensure that you get the lowest monthly payments or pay the lowest amount of interest when you take out an individual loan. Utilizing a basic web-based personal loan calculator can help determine what kind of the amount of payment and the interest rate is the most suitable choice for your budget.

While some lenders don’t charge fees for personal loans, others may levy fees for credit checks as well as an loan origination fee, or if you decide to pay off the loan earlier, a prepayment fee. In the event of a late payment, it could result in a late payment fee.

How to find Personal Loans

The first stop to look for personal loans could be through the current institution you’re with, such as your bank or credit union. Your personal banker can advise you on what types of personal loans are available and the borrowing options for which you’re most likely eligible.

Personal loans can be found on the internet. Many lenders provide personal loans online. You can apply electronically and get a response in minutes and, in some cases, get funding in just 24-48 hours after loan approval.

When comparing personal loans either online or offline, pay close attention to the details. Particularly, think about these aspects:

Rate of interest

Fees

Repayment terms

Limits for borrowing (minimum and maximum)

Collateral requirements

You can check your credit report for free at AnnualCreditReport.com. While doing this, check for any errors that may harm your score, and don’t hesitate to dispute the errors.

It’s also helpful to check the minimum requirements to qualify for a personal loan. Different lenders have different requirements when it comes to the credit score, income, and debt-to income ratio that are acceptable to be granted a personal loan. This can help you narrow down the loans that may best fit your financial and credit profile.