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 Online 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 Online

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.

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

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