Personal loans are offered by banks, credit unions, or online lenders. When you get such a loan, you’ll pay back the money in regular payments, which can take as long as five years.
Personal loans are the fastest-growing debt category in the U.S. Personal loan debt balances reached $305 billion in the second quarter of 2019, which is a 12% increase year over year. Debt balances of $30,000+ have increased by 15% in the past five years, and balances of $20,000 to $25,000 have increased by 10%.
A personal loan may be secured (backed by collateral) or unsecured (not backed by collateral). Interest rates on personal loans are usually cheaper than credit card rates, and the loan limits are also typically higher. Therefore, if you have debt balances on multiple high-interest credit cards, consolidating the debt into one personal loan at a lower rate can help you save money.
A survey by Experian revealed that people are primarily taking personal loans for the following reasons:
- 28% for large purchases
- 26% for debt consolidation
- 17% for home improvements
- 9% for refinance existing debt
- 30% for other reasons
Lenders consider multiple factors when determining whether to offer personal loans, including credit score, earning history, and debt-to-income ratio. Generally, the lowest rates on personal loans go to consumers with excellent credit, but some lenders offer personal loans to customers with credit scores below 600.
If you don’t qualify for an unsecured personal loan, you may still have a chance of qualifying for secured or co-signer (someone with a strong credit score who agrees to make your payments if you fail to do so) personal loans.
The cost of a personal loan includes interest rates and other fees, such as:
- Interest rate: This is the proportion of loan that is charged as interest, typically expressed as an annual percentage of your loan.
- Origination fee: Lenders may charge an origination fee to cover the cost of processing your loan.
- Prepayment penalties: If you pay off your loan early, some lenders may charge a prepayment fee, since early repayment means lenders won’t get some of the interest they would have otherwise earned.
All the fees and interest rates make up the APR (annual percentage rate) of your personal loan, which reflects its true cost.