A personal loan is a type of credit offered by many financial institutions, including banks, credit unions, and online lenders. They are loans, often unsecured, that borrowers repay through fixed monthly payments. 

They are a popular solution to many financial needs. As of the end of 2022, 27 million Americans maintained an outstanding balance on a personal loan.¹ The reason they’re so popular is that they can be used for a variety of purposes. Borrowers use them to  meet unexpected expenses such as medical bills or car repairs, or to fund planned expenditures like home repairs or children’s school costs. 

How Do They Work?

The terms of a personal loan can vary, usually ranging from one to five years, and interest rates are largely determined by the borrower’s creditworthiness. The process to secure a personal loan is usually easy and straightforward: 

  1. A borrower applies for a loan for a specific amount. You can easily apply online or in person depending on the lender and type of loan. 
  2. If approved, the funds are disbursed directly to the borrower, usually through direct deposit. 
  3. The borrower then repays the loan amount, plus interest, over a specified term in equal monthly payments (installments) until the debt is fully paid off.

Common Types of Personal Loans

Different types of personal loans cater to a variety of financial situations. The most commonly available types include:

Type of Personal Loans


Secured Loans

These loans are backed by an asset (collateral) such as a house or car. The lender has the right to seize the collateral if the borrower fails to repay the loan.

Unsecured Loans

These loans do not require collateral. The lender approves the loan based on the borrower’s creditworthiness. They can be personal loans, business loans, or many other types of financing.

Installment Loans

These are loans that the borrower repays over a set period of time in equal installments, which includes both the principal amount and interest.

Bad Credit Loans

These loans are designed for individuals with poor credit history. They usually come with higher interest rates to offset the lender’s risk.

Payday Loans

Payday loans are short-term, high-interest loans designed to be paid back by the borrower’s next paycheck. They are typically used for emergency situations when the borrower needs immediate cash.

Debt Consolidation Loans

These loans are used to combine multiple debts into one loan with a single payment, often with a lower interest rate. It’s a helpful tool for managing credit card debt.

No Credit Check Loans

These are loans where the lender doesn’t check your credit score. This can be beneficial for those with poor or no credit history but can often come with higher interest rates and fees.

Qualifying for a Personal Loan

Lenders assess your credit score, income and employment stability, and your debt-to-income (DTI) ratio when you fill out an online application for a personal loan. Your credit history influences the interest rate you’re offered — a higher score can lead to lower rates. Luckily, there are plenty of bad-credit loans, as well as good-credit loans. 

Stable income and employment also reassure lenders of your ability to repay the loan. Your DTI ratio, which shows how much of your income is used to pay existing debts, helps lenders understand your capacity to manage a new loan.

In summary, here are the key factors that lenders consider when you apply for a loan:

  • Credit score: Affects the interest rate offered.
  • Income and employment status: Demonstrates your ability to repay the loan.
  • Debt-to-income (DTI) ratio: Indicates your capacity to manage a new loan.

Understanding The Interest Rates

When compared to other types of loans such as credit cards, personal installment loans can often offer lower interest rates. For example, according to the Federal Reserve, the average credit card interest rate was about 14.65% as of February 2023, while the average rate for a 24-month personal loan was about 9.65%.2

To get the best interest rates, borrowers should aim to improve their credit history, compare loan offers from different lenders, and consider secured loans if appropriate.

Repayment Terms

Loan durations 

The repayment term typically ranges from 12 months to 5 years, and sometimes even longer. Typically, much longer than payday loans. These terms are established during the loan agreement and dictate the frequency and amount of your payments.

Repayment schedule

The specific schedule for repayment will depend on the terms agreed upon with your lender. This schedule outlines when payments must be made, usually monthly, until the loan is paid in full.

Prepayment Penalties

Some lenders may charge fees if the loan is paid off ahead of schedule. It’s advisable to check with your lender about potential prepayment penalties before making any extra payments or paying off your loan early. And always read the loan agreement to check for hidden costs. 

Impact of Repayment Terms

Choosing a longer repayment term could lead to smaller monthly payments but may increase the total cost of the loan due to accumulated interest. The longer the loan term, the more interest you’ll typically pay over time.

Choosing a shorter repayment term can lead to a higher monthly payment but may reduce the total cost of the loan. This is because the principal is paid down more quickly, leading to less accrued interest.

The Role of Credit Scores in Personal Loans

Importance of Credit Rating in Loan Approval: Credit scores play a pivotal role in easy personal loan approval. Lenders use them to assess the borrower’s creditworthiness and the potential risk associated with lending money. 

Tips to Improve Your Score for Better Financial Well-Being:

Improving your credit score is key to securing better loan terms, building wealth, or even preparing for retirement. Here’s a condensed guide:

  1. Regularly check your credit report to catch and correct any errors.
  2. Always pay your bills on time as late payments can hurt your score.
  3. Keep your credit card balances low to maintain a credit utilization ratio under 30%.
  4. Avoid taking on new debt to prevent overburdening your credit score.
  5. Diversify your credit types to enhance your score.
  6. Limit hard inquiries by only applying for new credit when necessary.

Remember, boosting your credit score takes time and consistent good financial habits. Stay patient and your efforts will pay off.

Fees & Charges for Personal Loans

Origination fee

This is a one-time fee charged by the lender to cover the costs associated with processing your loan. The fee is typically a percentage of the total loan amount, and it’s deducted from the loan proceeds.

Prepayment Penalty

While it may seem counterintuitive, some lenders charge a fee if you pay off your loan early. This is known as a prepayment fee or prepayment penalty. Lenders charge this fee to compensate for the interest they’ll lose if you pay off the loan before the end of the term.

Late payment fee

If you fail to make your loan repayments on time, lenders can charge a late payment fee. The amount and terms of this fee can vary widely between lenders, so it’s important to understand the specifics before signing the personal loan agreement. Late payments can also negatively impact your credit score.

The Importance of Loan Security

The type of personal loan you choose, whether secured or unsecured, has implications on the interest rates, borrowing limits, and overall risk.

How Secured and Unsecured Loans Differ: Secured loans are backed by collateral—assets like your home or car—that the lender can seize if you fail to repay the loan. Home loans are an example of a secured loan. Unsecured loans, on the other hand, do not require collateral. They are approved based on your creditworthiness, making them potentially riskier for the lender.

Risk and Benefits of Secured Loans:

Risk: The main risk with secured loans is that if you fail to repay the loan, you could lose the asset you used as collateral.

Benefits: Secured loans often have lower interest rates and higher borrowing limits due to the reduced risk for the lender.

The Advantages and Disadvantages

A personal installment loan can be a powerful tool for handling finances, but they come with both advantages and disadvantages.

  • Benefits: They offer flexibility in usage, potential for lower interest rates than credit cards, fixed repayments for budgeting, and may improve your credit mix.
  • Drawbacks: There are potential origination fees, penalties for late payments or early payoff, and they might tempt overspending.
  • Situational Use: Best suited for situations like debt consolidation for high-interest debt, paying for costly home repairs, or covering emergency medical bills.

Using Your Loan Wisely

Personal loans can be a lifesaver when used correctly.

  • Recommended Uses:
    • Debt consolidation: To simplify payments and potentially lower interest cost.
    • Emergency expenses: For unforeseen situations like medical bills.
    • Home improvements: For significant repairs or upgrades.
  • Situations to Avoid Using Personal Loans: It’s advisable to avoid personal loans for discretionary spending, investing in volatile markets, vacation, or covering everyday expenses. It’s best to view personal loans as a tool for better financial management, not as a regular source of funds.

Personal Loan Providers and Eligibility

There are several types of providers when it comes to sourcing a personal loan, each with its unique benefits and drawbacks:

Traditional Banks as Personal Loan Providers

Traditional banks have been the go-to choice for many when it comes to personal loans. They often offer a variety of loan options and the convenience of having all your financial services in one place. You might even be able to track your loan through your mobile banking app.

  • Benefits: Banks often have robust customer service, numerous physical branches for in-person assistance, and may provide discounts or preferential rates for existing customers.
  • Drawbacks: Banks may have more stringent credit and income requirements compared to other lenders. The approval process can also be slower than with online lenders.

Lenders for Personal Loans Online

In recent years, online lenders have grown in popularity due to their speedy approval and disbursement times, as well as their flexible eligibility requirements.

  • Benefits: Online loans often have a quick and easy application process, with decisions and funding potentially available within one business day. They may also cater to borrowers with lower credit scores.
  • Drawbacks: Some online lenders may charge higher interest rates, especially for borrowers with less than excellent credit. Lack of physical branches could also be a disadvantage for those who prefer in-person interactions.

Eligibility Criteria for Personal Loans

While eligibility requirements for online lending can vary, some common factors lenders consider include:

  • Credit Score: This is often the first factor lenders look at. Those with a higher credit score may have an easier time receiving approval for loans with better terms and lower interest rates. 
  • Income and Employment: Lenders will consider your income and employment stability. Regular, reliable income makes it more likely you’ll be able to repay the loan.
  • Debt-to-Income Ratio: This is your monthly debt payments divided by your monthly income. A lower ratio indicates a better balance between debt and income.
  • Credit History: When it comes to online lending, lenders look at your history of managing debt and making payments on time. A good financial history can improve your chances of approval.

Remember, it’s always important to shop around and compare different lenders to get a personal loan for your specific needs and circumstances.

How to Apply

Applying for a personal loan can be a straightforward process if you know the necessary steps:

  1. Research lenders: Understand the different offerings and eligibility criteria from various lenders including banks, online lenders, and credit unions.
  2. Prequalification: Some lenders allow for a soft credit check to see if you prequalify for a loan, which won’t affect your credit score.
  3. Apply Online or In Person: If you prequalify and decide to proceed, you’ll complete a full in-person or online application.

Documentation Required for an Application for Loan Approval

Typically, lenders will require the following documentation:

  • Proof of identity (driver’s license, passport, etc.)
  • Proof of income (pay stubs, info from bank accounts, etc.)
  • Proof of residence (utility bill, lease agreement, zip code, etc.)

Managing Your Loan

How to Handle Loan Repayments: Timely repayment for loans is critical. Set up automated payments to ensure you never miss a due date.

Consequences of Missed Payments: Late or missed payments can lead to penalties, higher interest rates, and a negative impact on your credit score.

Dealing with Financial Hardship During Loan Repayment: If you’re facing financial hardship, contact your lender. They may offer options such as forbearance or loan modification to help you manage your loan during difficult times.

FAQs and Common Questions

A personal loan, sometimes referred to as a “private loan,” can be used for a variety of purposes, including debt consolidation, covering large expenses, home improvements, medical bills, or even a vacation. However, it’s wise to use personal loans for necessities or to improve your financial situation.

You can typically find the lowest interest rates on personal loans through traditional banks and credit unions. That being said, you’ll need to be a member of a credit union, and you’ll need a decent credit score for good bank rates.

The interest rate on a personal loan is typically determined by a combination of the lender’s base rate and an individual risk assessment based on your credit score, income, debt-to-income ratio, and other financial factors.

Traditional banks and credit unions tend to have the best rates on personal loans. Although, having a low credit score may prevent you from having access to some of these options, which is why some borrowers turn to online personal loans.

Yes, most lenders allow you to prepay your personal loan. However, some might charge a prepayment penalty, so always check your loan agreement for any such conditions. 

Missing a payment on your personal loan can lead to a late payment fee and will likely negatively affect your credit score. If you continue to miss payments, the lender could eventually declare the loan to be in default and take legal action to recover the money.

The amount you can borrow varies depending on the lender, your credit score, income, and other factors. Generally, loans can range from $1,000 to $50,000, though some lenders offer loans up to $100,000 to borrowers with excellent credit.

The benefits to a personal loan would be solving financial emergencies, longer repayment terms than payday options, and more affordable rates than many other quick cash solutions.

The amount you can borrow varies depending on the lender, your credit score, income, and other factors. Generally, loans can range from $1,000 to $50,000, though some lenders offer loans up to $100,000 to borrowers with excellent credit.

You will usually be notified of your personal loan approval via email or a phone call from the lender. If approved, the personal loan funds are typically deposited directly into your bank account.

A personal loan is different from a line of credit in that it provides a lump sum of money upfront, which is repaid over a fixed loan term with monthly payments. In contrast, a line of credit allows you to borrow up to a certain limit as needed, and you only pay interest on the amount you borrow.

The severity of your personal financial situation will dictate the ease in which you may get approved for a loan. The decision to get a personal loan is made by the lender. They consider various factors, including your credit score, income, and debt-to-income ratio. For a secured loan, the value of your collateral is also considered, while for an unsecured loan, your creditworthiness is key.

The easiest loans to get approved for are usually personal installment loans, payday loans, and title loans. Many of these options cater to borrowers with less-than-perfect credit scores.

If you have a question about your personal loan, you should contact your lender directly. Whether you have a Discover personal loan or another lender’s loan, they can provide information about your loan term, monthly payment, any origination fee, and how to consolidate debt to save money.

In Conclusion 

A personal loan can be a versatile financial tool that can serve various purposes, including debt consolidation, covering emergency costs, or funding significant purchases. Understanding the ins and outs of these loans is essential, especially in terms of interest rates, fees, loan terms, and the distinction between secured and unsecured loans. 

A Note from CreditNinja

At CreditNinja we believe that it’s crucial to explore different personal loan providers – traditional banks, online lenders, and credit unions, each with unique advantages and drawbacks. Taking a personal loan is not a decision to be made lightly. Prioritize thorough research, and consider seeking professional financial advice if needed. While they can help manage and consolidate debt, they must be handled responsibly. 


  1. Personal Loan Statistics to Know for 2023 | Credit.com
  2. Consumer Credit | Federal Reserve


Additional Resources:

Help plan your personal banking payments with a calculator –  Personal Loan payment calculator

More Personal Loans Resources:

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CreditNinja is your trusted source for quality personal finance information. With a demonstrated history of helping borrowers in need, CreditNinja makes your financial growth and understanding our top priority. Whether you want to learn more about budgeting, saving, credit cards, or personal loans, at CreditNinja we are here to help.