A personal loan is a lump-sum amount you borrow from a lender and repay over a set period of time, or term. It can help you pay for large expenses, cover unexpected costs or consolidate debt, among other things. The best personal loans typically have low interest rates and affordable monthly payments that you pay off on a consistent basis to build your credit.
A person’s eligibility for a personal loan is determined by their creditworthiness, which is based on their payment history, credit mix and credit utilization. A good credit score — usually around 690 or higher — and a solid employment history are also important. Lenders typically check your credit before approving you for a personal loan, so applying for one could result in a hard inquiry on your credit report, which can temporarily lower it. During the approval process, lenders will verify your identity and income to make sure you can afford to repay the loan.
While a personal loan is commonly used to meet any number of financial needs, it’s particularly popular for debt consolidation. A large amount of high-interest debt can suck your budget dry each month, which is why it’s so often recommended to combine multiple debt accounts into a single personal loan with a lower rate and more manageable monthly payments.
You can find personal loans at banks, credit unions, consumer finance companies, peer-to-peer lenders and online lending platforms. It’s important to research your options and compare rates and terms before selecting a lender. The current variety of loan products on the market ensures there’s likely a loan out there that’s suited to your unique circumstances and financial goals.
Once you submit a complete application and fulfill any other requirements outlined by the lender, they will review your information and decide whether to approve your request. If you’re approved, the lender will then send you funds, which may arrive through a direct deposit into your bank account or a paper check. Then you’ll begin repayment according to the terms established in your loan agreement.
Tip: If you’re having trouble meeting loan requirements or securing a reasonable interest rate, try bringing on a cosigner. This can increase your chances of approval, especially if you have a lower credit score or are new to borrowing.
A personal loan is typically repaid in equal monthly installments over a set period of time, or loan term, which can range from one to seven years. Each monthly payment includes a portion of the principal and interest, so it’s crucial to carefully evaluate your needs and choose the right loan type for you. You may want to consider an unsecured personal loan, which isn’t backed by any assets you own, or secured personal loan, in which case you’ll need to put down some form of collateral in order to qualify. It’s also worth noting that if you miss any payments, your credit score will take a hit. To prevent this, you’ll want to keep your credit utilization at or below 30% of your total available credit.