What is a personal loan?

A personal loan is money an individual can borrow from a bank, credit union, or online lender to cover various expenses or debts. The loan is repaid over a set term, with added interest.

Personal loans are unsecured, meaning they don’t require valuable collateral, like a house or car, to qualify. Approval generally depends on the borrower’s credit and income to assess repayment ability.

Before obtaining a personal loan, it’s advisable for borrowers to review their finances and compare offers from different lenders to find the terms and rates that best suit their needs.

Is a personal loan the right choice?

Personal loans can be helpful for many things—like paying off high-interest debt, covering medical bills, making home improvements, or handling unexpected expenses. But before deciding, it’s good to look at potential risks and benefits.

Potential benefits of personal loans

• Monthly payments stay consistent, making budgeting easier


• Flexible amounts of funding, from small loans to large personal loans


• Can be used for various needs, unlike auto or student loans that have specific uses


• May offer a lower rate than existing debts, like credit card or medical bills, especially when compared to personal loan bank options

Potential risks of personal loans

• Individuals with a lower credit score have higher interest rates


• Missing payments can negatively impact credit score and result in fees


• Could lead to more debt without a solid repayment plan

What is APR?

APR (Annual Percentage Rate) represents the total yearly cost of a loan, including both interest and extra fees. It’s an easy way to see what a loan will cost over a year and helps borrowers accurately compare different loan options. For example, a loan with a lower APR will cost less overall than one with a higher APR, even if their monthly interest payments seem similar. Before applying, it’s helpful to compare rates between a personal loan bank and an online lender to see which offers the best terms for your needs.

How APR is calculated

APR is calculated by adding the loan’s interest rate + any fees involved, then averaging that cost over a year. This gives a complete picture of what you’ll pay annually. Since APR includes fees along with the interest rate, it often appears higher than just the interest rate alone. This way, APR makes it easier to see which option is truly the cheapest.

How credit score affects loan eligibility

A credit score is one of the factors that shows how likely a person is to repay borrowed money, helping lenders assess the risk of lending to them. It plays a major role in determining loan eligibility, interest rates, and loan terms.

Good vs. bad credit

Credit scores fall within specific ranges, from 800+ (excellent) to 580 and below (poor). While each lender may have slightly different definitions of good or bad credit, maintaining a higher credit score typically opens up more financial opportunities and reduces borrowing costs.

• Poor: 300 – 579


• Fair: 580 – 669


• Good: 670 – 739


• Excellent: 740 – 850

Credit scores can be checked through mobile banking apps, credit card statements, credit bureaus, monitoring services, and free online sites. People with lower credit scores can improve their score by paying bills on time, lowering credit card balances, and fixing any errors on their credit reports.

Common types of personal loans

Unsecured personal loans

Unsecured loans are the most common type offered by online lenders. They don’t require collateral, meaning no asset (like a car or home) is needed as security. Approval is typically based on the borrower’s creditworthiness, income, and ability to repay. Interest rates for unsecured loans tend to be higher than for secured loans due to the added risk for lenders.

Secured personal loans

Some online lenders offer secured loans, where the borrower provides collateral, such as a savings account or valuable asset, to secure the loan. Because the collateral reduces risk, secured loans often come with lower interest rates and may be an option for individuals with lower credit scores.

Fixed-rate loans

Fixed-rate personal loans have a consistent interest rate over the life of the loan, providing predictable monthly payments. This stability makes it easier for borrowers to budget, as they know exactly what to expect each month.

Variable-rate loans

Variable-rate loans have an interest rate that may fluctuate over time based on market conditions. While they can offer lower initial rates, monthly payments may increase if the interest rate rises, introducing a level of uncertainty in budgeting.

Debt consolidation loans

Online lenders often provide specific debt consolidation loans for borrowers looking to combine multiple high-interest debts into one manageable monthly payment. These loans can simplify debt management and potentially offer a lower interest rate.

Credit builder loans

Some online lenders offer credit builder loans designed to help borrowers establish or improve their credit. Borrowers make payments toward the loan, and these payments are reported to credit bureaus, which can help build a positive credit history.

Personal line of credit

A personal line of credit gives borrowers flexible access to funds up to a set limit, making it useful for ongoing or unexpected expenses. Unlike a lump-sum loan, a personal line of credit allows you to borrow as needed and only pay interest on what you use. Some personal lines of credit are unsecured, while others may require collateral, which can affect your rate and terms.

Personal loan options for homeowners

A personal loan for homeowners is a way to borrow money by using the value of their home or their credit history. From small loans to larger amounts, these options can help cover big expenses like home repairs, pay off high-interest debt, or manage unexpected costs. Homeowners can borrow without selling their home to access the funds they need.

Potential benefits homeowner loans

• Loans backed by home equity often have lower rates than regular personal loans


• Allows for borrowing larger sums, ideal for big projects like home renovations


• Sometimes offers longer repayment periods, which can mean lower monthly payments


• Interest may be tax-deductible if used for home improvements (consult a lender or tax advisor)


• May make it easier to qualify with lower credit, as the home provides added security for the lender

Risks of homeowner loans

• Missing payments could lead to home foreclosure


• Can lead to more debt if funds aren’t managed carefully


• Often have variable interest rates, meaning payments can increase if interest rates rise


• Can reduce the home’s value if it’s sold before the loan is paid off

How are interest rates calculated?

Interest rates for personal loans are determined by factors like loan type, lender or bank's policies, the borrower’s credit score, income, and current economic conditions.

• Fixed interest rates stay the same throughout the loan term, making monthly payments predictable and easier to budget


• Variable interest rates can fluctuate based on market conditions, so monthly payments may change over time

Each type has its pros and cons, with fixed rates offering stability and variable rates offering potential savings when rates are low. Small loans may carry higher rates because the lender wants to make it worth their time and risk. Large loans may come with better rates—if the borrower has strong credit and income—because the lender is competing for high-value business.