Personal loans are a popular choice for people who need money to cover a range of expenses. It’s easy to qualify for a personal loan when you have good or excellent credit, but some lenders cater to borrowers with poor credit as well.
While personal loans can be very flexible, here’s how a general personal loan works along with what to consider when deciding which personal loan is right for you.
Personal loans work similarly to any other loan. You borrow money from a lender and agree to pay it back with interest over a set time frame. Personal loans, however, are typically unsecured loans that don’t require any collateral, such as a car or home.
Instead, the lender will use your credit score and other factors to see if you qualify for the loan. Banks, credit unions, and online lenders all offer personal loans. Loan amounts and repayment periods can vary depending on the lender’s terms. Repayment terms typically range from one to seven years, but some lenders offer repayment terms up to 12 years for very large loan amounts. Many lenders allow you to borrow up to $50,000, and some offer $100,000 personal loans or more.
Personal loan interest rates are typically fixed, meaning the rate won’t fluctuate over the life of your loan, and your monthly payment will be the same until the loan is paid off.
The average personal loan interest rate was around 11.48% for a two-year personal loan, according to the Federal Reserve’s most recent data. But your rate could be much higher, such as 30%, if you have bad credit. On the other hand, it could be much lower, such as 6%, if you have excellent credit.
The best personal loans often provide quick funding once you’re approved. Some lenders provide funds as soon as the same day. Lenders will usually deposit the funds directly into your bank account or, with a debt consolidation loan, you can often request that your creditors be paid directly.
Personal loans can have several uses, and lenders don’t place many limits on what you can use the loan for. However, you usually cannot use a personal loan for secondary education expenses, such as tuition. Here are some common uses for personal loans (it’s always important to check with your lender, as this isn’t an exhaustive list):
Lenders look at a few different criteria to determine whether to approve a personal loan. Fortunately, you can still get a personal loan with bad credit, as your credit score is not the only factor that lenders consider.
If you’re interested in applying for a personal loan, here’s how to get started:
There are several things to consider when choosing a personal loan, including:
| Important: If you’re charged an origination fee, that amount is typically deducted from the loan proceeds. This means that the loan funds you receive would be less than what you actually applied for and were approved for. Be sure to factor this in when deciding how much money to borrow. |
A personal loan is not the best option for everyone. Consider these alternatives to be sure it’s the best option for you: