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Personal Loan The Definition, Types and how to get one

What is a personal loan?

Understanding a Personal Loan

Types of Personal Loans

How a Personal Loan Works

Example of a Personal Loan

How to find Personal Loans

By Rebecca Lake

Last updated August 09, 2021.

Review by Thomas Brock

Facts checked by Katrina Munichiello

What is a Personal Loan?

The term “personal” refers to a loan is an amount of money you can take out to fund many different reasons. You could, for instance, take advantage of the personal loan to pay off your debt, fund home improvements, or to organize a dream wedding. Personal loans can be provided by banks, credit unions, or online lenders. The money you borrow is due to be paid back over time, typically with interest. Some lenders may also charge fees for personal loans.

Key Takeaways

The personal loans are loans which can be used to pay for many personal expenses.

There are personal loans through credit unions, banks as well as online lenders.

Personal loans can be secured, which means you require collateral to obtain money or unsecured, with no collateral requirement.

Personal loans can vary greatly in terms of interest rates as well as fees, amount and the terms of repayment.

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Understanding a Personal Loan

A personal loan can allow you to borrow money to pay for personal expenses and then repay those funds over time. A personal loans are a kind of installment debt that allows you to receive the funding in one lump sum. You could, for instance, make use of a personal loan to pay for:

Moving expenses

Consolidation of debt

Medical bills

Wedding expenses

Home improvements or repairs

Funeral expenses

Costs of vacation

Unexpected costs

These loans are distinct from other installment loans, such as student loans and car loans, and mortgage loans–that are used to pay for particular expenses (i.e. the cost of education, purchase of a vehicle, and the purchase of a home).

Certain personal loan lenders limit the ways that you can use the personal loan. In particular, you may not be eligible for an individual loan to pay for tuition fees, college tuition or other expenses.

The personal loan is also different in comparison to a line of credit. It isn’t an amount that is lumped together; rather, it functions like credit cards. There is an account on which can be used to make purchases and, as you do so your credit line will be reduced. You then can get credit back by paying a loan to your credit line.1

If you have a personal loan, there’s typically a set date when the loan is due to be paid back. A personal line of credit, on the other hand, may remain open and accessible to you for until your account remains at a good state with your lender.2

Different types of personal loans

Personal loans could be secured or unsecure. A secured personal loan will requires some type of collateral as a condition of the borrowing. In other words, you can get the personal loan with cash assets, like a savings account or certificate of deposit (CD) or tangible assets, like your vehicle or boat. If you fail to pay the loan, the lender could retain your collateral in order to pay the debt.

A personal loan doesn’t require collateral to borrow money. Credit unions, banks, and online lenders may offer secured and unsecured personal loans to qualified borrowers. They generally consider the latter to be riskier than the former because there’s no collateral to collect. This can result in a higher interest rate for a personal loan.3

How a Personal Loan Works

To get a personal loan then you must apply to an institution. This could be an institution like a credit union, bank or an online private loan lender.

In most cases, you’ll first complete an application. The lender will review the application and decides to accept or deny it. If it is approved, you’ll be provided with loan terms, which you can decide to accept or not. If you accept them, the next step is closing the loan paperwork.

Once that’s completed, the lender will fund the loan and pay you the proceeds. According to the lender, these could be made via a direct transfer to your account at a bank, or a check. Once the loan is funded then you can make use of the funds however you feel suitable. Then, you must begin repaying the loan in accordance with the terms established in your loan agreement.

A default on an individual loan can cause serious damage to your credit score. You could also lose your collateral with secured loan or face being accused of suing your loan provider in order to collect the loan.

Example of a Personal Loan

If you are considering a personal loan it is important to know how much it may cost. The annual percentage rate (APR) for the personal loan is the cost per year of paying back the loan in accordance with the interest rate and the fees. The APR and loan duration determine the amount you will pay in interest total over the life of the loan.

As an example, suppose you get a $10,000 personal loan with an APR of 7.5%. The loan has a repayment term that is 24 months. Using those terms, your monthly payment is $450. The total interest over the life of the loan would be $799.90.

Imagine that you take out the same amount but with different loan conditions. Instead of a two-year term you’ll have three years to repay the loan, and your interest rate is 6% instead of 7.5 percent. With these terms, your monthly payment would be reduced to $304 however, your total interest would rise to $951.90.

The way you compare the figures is essential if you want to get the lowest monthly payment possible or pay the least amount of interest for the personal loan. A simple internet-based personal loan calculator can help you determine what kind of installment amount and interest rate is the best fit to your budget.

Although some lenders do not charge fees for personal loans however, some may charge an additional fee for credit checks or the loan origination fee, or–if you choose to pay off the loan in advance, a prepayment penalty. In the event of a late payment, it could result in an additional late payment charge.

Where to Find Personal Loans

The first place to search for personal loans could be through your current bank or credit union. Your personal banker can advise you on the types of personal loans may be available and the options to borrow for which you’re most likely to qualify.

Personal loans can be found online. Numerous lenders offer individuals with loans online. You can submit an application online and receive a decision within just a few minutes and, in certain instances, receive funds within up to 48 hours following loan approval.

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

Rate of interest

Fees

Repayment conditions

Limits on 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 could affect your credit score, and don’t hesitate to dispute these.

It is also beneficial to determine the minimum requirements needed to qualify for a personal loan. Lenders can have different requirements in relation to credit score, income, and debt-to-income ratio that can be granted personal loan. This can help you determine the loans which are the most appropriate for your credit and financial profile.