What is a personal loan? | Personal loan details and benefits

An unsecured personal loan is a fixed-rate loan that is not backed by collateral and is repaid in monthly installments over a specific term, usually two to seven years. When you need money to cover a large expense or to consolidate your debt, consider a personal loan. You can use the funds for almost any purpose.

To qualify you, lenders look at factors including your credit score, credit report, and debt-to-income ratio. You can get a personal loan from some major banks, credit unions, and online lenders.

What rate should I expect on a personal loan?

Here’s what interest rates on personal loans look like, on average:

How's your credit?	Score range	Estimated APR
Excellent.	720-850.	11.2%.
Good.	690-719.	15.5%.
Fair.	630-689.	20.5%.
Bad.	300-629.	25.3% (Lowest scores unlikely to qualify).

Before you take a personal loan

Check your credit score. Learn about your personal loan options based on your credit score. This will give you an idea of what rate and payment to expect as you shop for loans. You might decide to postpone getting a loan and instead take steps to build your credit in order to get a lower rate or a larger loan.

Compare your options. Interest rates on personal loans for excellent credit start around 6% APR, but if you can qualify for a 0% interest credit card — and pay off the balance within the promotional period — then you may be better off with the credit card.

Find a co-signer. If you have bad credit, having a co-signer with good credit allows you to piggyback on his or her creditworthiness and potentially get a better rate.

Consider a secured loan. Using a car, savings account or other asset as collateral may get you a lower rate. The risk is losing your asset if you default on the loan.

Assess your overall financial well-being. Personal loans work best as part of a balanced financial plan. Borrow money to consolidate debt if it means you’ll get out of debt more quickly. But don’t borrow if it only adds financial strain. If your current debt is overwhelming, investigate your debt-relief options.

How does COVID-19 impact personal loans?

In response to the COVID-19 crisis, some lenders introduced hardship loans for consumers dealing with financial losses. Other lenders tightened requirements for their loans, making it more difficult for borrowers with bad credit to qualify for a personal loan.

Especially during difficult times, it’s important to reach out to your lender and know your options. Some lenders allow you to defer loan payments for a specified time. If you miss payments without first notifying your lender, your credit will take a hit and your loan could be in default.

Reasons to get a personal loan

One benefit of getting a personal loan is you can use the money for nearly any purpose. Ideally, getting one positively impacts your overall financial health, by helping you pay off debt faster, for example, or adding to the value of your home. Here are some top reasons consumers get personal loans:

Debt consolidation: Roll your debts into one monthly payment, potentially reducing the interest you pay toward the debt and helping you pay it off faster.

Home improvement: Need to add on a home office or install a swimming pool? Use a personal loan to cover the costs.

Large expenses: You can use a personal loan to buy a boat, RV or other items with large price tags.

Weddings: Using a personal loan to pay for your wedding can help you stick to a budget.

How to choose the best personal loan

If you decide a personal loan is right for you, always compare rates from multiple lenders. The loan with the lowest APR is the least expensive — and therefore, usually the best choice.

Also consider the loan’s term and monthly payments. A longer term may mean lower monthly payments, but you’ll pay more in interest over the life of the loan. Assess how the payments fit into your monthly budget.

Some loans have consumer-friendly features that may be important to you. If you’re consolidating debt, a lender that sends your loan proceeds directly to your creditors saves you that step in the process. Some lenders offer flexible payment options that allow you to change a payment due date or defer a payment.