Personal Loans: Everything You Need to Know Before You Borrow

Personal loans have become one of the most flexible borrowing options available. Whether you need to consolidate high-interest debt, cover a major expense, or finance a home improvement project, a personal loan can provide quick access to cash with predictable repayment terms.

loan approved

Unlike credit cards, personal loans come with fixed monthly payments and set interest rates, making it easier to budget. Many lenders offer funding within a few days, and you don’t always need perfect credit to qualify.

With so many lenders and loan types available, finding the right personal loan can feel overwhelming. This guide will break down how they work, where to find the best options, and how to increase your chances of approval.

What is a personal loan?

A personal loan is a lump sum of money borrowed from a bank, credit union, or online lender that is repaid in fixed monthly installments. These loans are typically unsecured, meaning you don’t need to put up collateral like a car or house to qualify.

Lenders determine eligibility based on factors like credit score, income, and existing debt. Borrowers with strong credit often qualify for lower interest rates, while those with lower scores may pay more in interest or face stricter borrowing limits.

Personal loans can be used for almost anything, including debt consolidation, medical expenses, major purchases, or even unexpected financial emergencies. Loan amounts generally range from $1,000 to $50,000, with repayment terms typically spanning from 12 to 60 months.

Because these loans have fixed terms and predictable payments, they can be a smart alternative to credit cards, especially when trying to manage high-interest debt. However, it’s important to compare offers to find a loan with the lowest rates and most favorable terms.

How Personal Loans Work

A personal loan provides a lump sum of money that you repay over a set period through fixed monthly payments. The structure of these loans makes them predictable, helping borrowers budget effectively. Before applying, it’s important to understand how repayment terms, interest rates, and fees impact the overall cost of the loan.

Repayment Terms

Personal loans typically come with repayment terms ranging from 12 to 60 months, though some lenders offer longer options. The length of your loan affects both your monthly payment and the total interest you’ll pay over time.

  • Shorter Terms (12-24 months): Higher monthly payments but less interest paid overall.
  • Longer Terms (36-60+ months): Lower monthly payments but higher total interest costs.

Choosing the right term depends on your financial situation. A shorter term saves money in the long run, while a longer term may be better if you need lower monthly payments to fit your budget.

Interest Rates

The interest rate on a personal loan determines how much you’ll pay to borrow the money. Rates can vary widely based on your credit score, income, and lender.

  • Fixed Interest Rates: The rate stays the same for the entire loan term, keeping payments predictable.
  • Variable Interest Rates: The rate can fluctuate over time, which may lower or increase your payment amount.

Borrowers with strong credit scores often secure the lowest rates, while those with lower scores may face higher rates or stricter approval requirements.

Fees to Watch For

Some personal loans come with extra fees that can add to the total cost of borrowing. Common fees include:

  • Origination Fee: A percentage of the loan amount (typically 1-6%) deducted before you receive the funds.
  • Late Payment Fee: A charge for missing a due date, which can also hurt your credit score.
  • Prepayment Penalty: Some lenders charge a fee if you pay off the loan early, though many do not.

Before committing to a loan, review the full terms to understand all potential costs. Comparing multiple lenders can help you find the best deal with the lowest fees.

Where to Get a Personal Loan

Personal loans are available from several types of lenders, each with different advantages. The right option depends on your credit score, financial needs, and how quickly you need the funds.

Banks

Traditional banks offer personal loans with competitive rates, especially for borrowers with strong credit. Many major banks provide discounts for existing customers, but approval can take longer and typically requires a high credit score.

Pros:

  • Lower rates for well-qualified borrowers
  • Potential discounts for existing customers
  • In-person support at physical branches

Cons:

  • Stricter credit and income requirements
  • Slower approval and funding compared to online lenders

Credit Unions

Credit unions tend to offer lower interest rates and more flexible approval requirements than banks. Since they are member-owned, they may be more willing to work with borrowers who have fair or poor credit.

Pros:

  • Lower interest rates and fees
  • More lenient credit requirements
  • Personalized customer service

Cons:

  • Must be a member to apply
  • Loan approval and funding may take longer

Online Lenders

Online lenders provide personal loans with fast approval and funding. Many allow borrowers to check rates without impacting their credit score and consider factors beyond just credit history, such as income and employment.

Pros:

  • Fast approval and funding (some within 24 hours)
  • Competitive rates for various credit profiles
  • Convenient online application process

Cons:

  • Interest rates can be higher for lower credit scores
  • Some lenders charge origination fees

Peer-to-Peer (P2P) Lenders

P2P lending platforms connect borrowers directly with individual investors rather than traditional financial institutions. These platforms act as intermediaries, facilitating loans while investors fund them. P2P loans often offer flexible terms and competitive rates, but approval and funding depend on investor interest.

Pros:

  • Competitive rates, especially for borrowers with good credit
  • More flexible approval criteria compared to banks
  • Can be a good option for those who don’t qualify for traditional loans

Cons:

  • Approval isn’t guaranteed since funding depends on investors
  • Some platforms charge additional service fees
  • Interest rates may be higher for borrowers with lower credit scores

Loan Marketplaces

Loan marketplaces don’t lend money directly but allow borrowers to compare multiple loan offers through a single application. This saves time and helps borrowers find the best rate without applying separately to multiple lenders.

Pros:

  • One application provides access to multiple lenders
  • Saves time by comparing loan offers in one place
  • Can help borrowers of all credit levels find options

Cons:

  • Some marketplaces may share borrower information with third parties
  • Loan terms and fees vary widely depending on the lender

Each type of lender offers different benefits, so it’s worth comparing options to find the best personal loan based on your financial situation.

Types of Personal Loans

Not all personal loans are the same. Lenders offer different types based on how they’re secured, how interest rates are structured, and how borrowers qualify. Understanding these differences can help you choose the best loan for your needs.

Secured Personal Loans

A secured personal loan requires collateral—an asset like a car, savings account, or certificate of deposit (CD). If the borrower fails to repay, the lender can seize the collateral to cover the loss.

Pros:

  • Lower interest rates due to reduced lender risk
  • Easier approval for borrowers with lower credit scores
  • Higher loan amounts may be available

Cons:

  • Risk of losing the collateral if payments aren’t made
  • Some lenders restrict how funds can be used

Unsecured Personal Loans

Most personal loans are unsecured, meaning no collateral is required. Instead, lenders approve applicants based on creditworthiness, income, and debt-to-income ratio.

Pros:

  • No risk of losing personal assets
  • Funds can be used for almost any purpose
  • Fast approval and funding from many lenders

Cons:

  • Higher interest rates, especially for lower credit scores
  • More difficult to qualify without strong credit or stable income

Fixed-Rate Personal Loans

Fixed-rate personal loans have an interest rate that stays the same for the entire loan term. This keeps monthly payments predictable, making budgeting easier.

Pros:

  • Monthly payment never changes
  • Protects against rising interest rates
  • Ideal for long-term financial planning

Cons:

  • May start with a slightly higher rate than variable loans
  • Won’t benefit if market rates drop

Variable-Rate Personal Loans

Variable-rate loans have interest rates that fluctuate based on market conditions. While they may start lower than fixed-rate loans, they can increase over time, making payments unpredictable.

Pros:

  • Potential for lower rates, at least initially
  • May cost less if interest rates remain low

Cons:

  • Monthly payments can increase unexpectedly
  • Harder to budget long-term

Debt Consolidation Loans

A debt consolidation loan is designed to combine multiple debts into one monthly payment, often at a lower interest rate. These loans are popular for paying off high-interest credit card debt.

Pros:

  • Can lower overall interest costs
  • Simplifies repayment with one monthly bill
  • May improve credit by reducing credit card utilization

Cons:

  • Not effective if spending habits don’t change
  • May include origination fees that reduce savings

Personal Lines of Credit

A personal line of credit works like a credit card, allowing borrowers to draw funds as needed up to a set limit. Interest is only charged on the amount borrowed, and payments are flexible.

Pros:

  • Only pay interest on what you use
  • Can be reused without reapplying for a new loan
  • Useful for ongoing or unexpected expenses

Cons:

  • Interest rates may be higher than traditional loans
  • Not ideal for structured, long-term repayment

Choosing the right type of personal loan depends on your credit score, financial goals, and how you plan to use the funds. Comparing lenders and loan terms can help you find the best fit for your situation.

What You Need to Qualify for a Personal Loan

Lenders evaluate several factors when deciding whether to approve a personal loan application. While requirements vary, most lenders focus on credit score, income, and debt-to-income ratio to determine eligibility and loan terms.

Credit Score

Your credit score plays a major role in whether you qualify and what interest rate you’ll receive. Higher scores typically lead to lower rates, while lower scores may result in higher costs or stricter loan terms.

  • Excellent Credit (720+): Qualifies for the lowest interest rates and best loan terms.
  • Good Credit (690-719): Eligible for competitive rates, but may not receive the best offers.
  • Fair Credit (630-689): May qualify, but with higher rates and potential origination fees.
  • Poor Credit (Below 630): Options are limited, and interest rates tend to be much higher.

Some lenders specialize in loans for borrowers with lower credit scores, but they often require higher income or additional verification.

Income Requirements

Lenders want to ensure you have a steady income to repay the loan. While there’s no universal minimum income requirement, higher earnings increase your chances of approval. Lenders may consider:

  • Salary or wages from employment
  • Self-employment income
  • Investment or rental income
  • Government benefits or retirement income

Proof of income, such as pay stubs, tax returns, or bank statements, is often required during the application process.

Debt-to-Income (DTI) Ratio

Your debt-to-income (DTI) ratio compares your monthly debt payments to your gross monthly income. Lenders use this metric to determine if you can afford another loan.

How DTI is calculated:
(Total monthly debt payments ÷ Gross monthly income) × 100

  • Below 35%: Ideal for loan approval, showing manageable debt levels.
  • 36-49%: Some lenders will approve, but you may receive higher rates.
  • 50% or higher: Considered risky, making approval difficult unless income is high.

Reducing existing debt before applying can improve your chances of qualifying for a personal loan with better terms.

Other Factors Lenders Consider

  • Employment History: A stable job history reassures lenders of consistent income.
  • Loan Purpose: While most personal loans can be used for anything, some lenders have restrictions.
  • Collateral (for secured loans): If applying for a secured loan, assets like a car or savings account may be required.

Meeting a lender’s minimum requirements improves your approval chances, but shopping around for the best terms is just as important. Even if you qualify, comparing multiple offers ensures you get the lowest rate and most favorable loan terms.

How to Compare Personal Loans

Not all personal loans offer the same value. A loan with a low interest rate might have hidden fees, and one with higher rates might offer better flexibility. Comparing multiple factors ensures you get the best deal for your needs.

Lender Transparency and Reputation

A great loan means nothing if the lender engages in misleading practices. Before applying, research lenders by:

  • Reading customer reviews on Trustpilot, the Better Business Bureau (BBB), and Google.
  • Checking for complaints about hidden fees, sudden rate hikes, or poor service.
  • Ensuring transparency in loan terms, repayment flexibility, and prepayment policies.

A reputable lender will clearly outline total borrowing costs without vague terms or hidden conditions.

Prequalification and Loan Comparisons

Many lenders offer prequalification with a soft credit check, allowing you to compare rates without affecting your credit score. When evaluating offers, consider:

  • APR and total borrowing cost (including fees)
  • Loan term and monthly payment amount
  • Flexibility in repayment (such as deferment or early payoff options)
  • Funding speed and ease of application

Choosing a loan isn’t just about getting the lowest rate—it’s about finding the best overall terms that fit your financial goals.

Alternatives to Personal Loans

A personal loan isn’t always the best solution. Depending on your needs, other options may offer lower interest rates, greater flexibility, or better repayment terms. Here are some alternatives to consider:

Home Equity Line of Credit (HELOC)

A HELOC allows homeowners to borrow against the equity in their property. It works like a credit card, offering a revolving credit limit that you can draw from as needed.

Pros:

  • Lower interest rates than personal loans
  • Only pay interest on what you use
  • Longer repayment terms

Cons:

  • Requires home equity as collateral
  • Risk of foreclosure if payments aren’t made
  • Variable interest rates may increase over time

A HELOC is best for homeowners who need ongoing access to funds and are comfortable using their home as collateral.

Credit Cards & Balance Transfer Cards

For smaller expenses or short-term borrowing, a credit card may be a more flexible option than a personal loan. Some credit cards offer 0% APR promotional periods, making them a useful tool for avoiding interest if paid off quickly. Balance transfer cards allow you to move existing debt to a new card with 0% APR for a set period, helping consolidate and pay off high-interest balances.

Pros:

  • Instant access to funds
  • 0% APR promotions can reduce interest costs
  • No fixed repayment schedule

Cons:

  • High interest rates if balances aren’t paid off in time
  • Balance transfer fees (usually 3-5% of the transferred amount)
  • Credit utilization can impact your credit score

Credit cards work well for short-term borrowing, while balance transfer cards are better for consolidating high-interest debt.

Personal Line of Credit

A personal line of credit works like a HELOC but doesn’t require home equity. Instead, it offers a revolving credit limit based on your income and credit profile. Borrowers can withdraw money as needed and only pay interest on the amount used.

Pros:

  • More flexible than a lump-sum personal loan
  • No collateral required
  • Only pay interest on what you borrow

Cons:

  • Higher interest rates than HELOCs
  • Some lenders charge annual fees
  • Can be harder to qualify for without strong credit

A personal line of credit is a suitable option for those who need ongoing access to funds but don’t want to take out a traditional loan.

Each alternative has its advantages, depending on your financial situation. Comparing options carefully ensures you choose the most cost-effective borrowing method for your needs.

Best Personal Loans Based on Your Credit Score

The right personal loan depends largely on your credit score. Some lenders cater to borrowers with strong credit, offering low interest rates and flexible terms, while others specialize in helping those with lower scores secure financing. Below are the best loan options based on different credit profiles.

Good to Excellent Credit (690+ Credit Score)

If you have good or excellent credit, you’ll likely qualify for the lowest interest rates and most favorable loan terms. Lenders competing for borrowers with strong credit often offer:

  • Low APRs (sometimes as low as 6-8%)
  • Higher loan amounts (up to $50,000 or more)
  • Longer repayment terms (up to 60 months)

To find the best offers, check out our guide to the best personal loans for good credit.

Fair Credit (630-689 Credit Score)

With fair credit, you may still qualify for a personal loan, though interest rates will be higher than those offered to borrowers with excellent credit. Some lenders consider additional factors like income, job stability, and debt-to-income ratio. Look for:

  • Lenders that accept alternative credit factors
  • Moderate APRs (typically 12-25%)
  • No prepayment penalties in case you want to refinance later

If your score falls in this range, compare lenders in our list of the best online personal loans to find options that work for you.

Bad Credit (Below 630 Credit Score)

If your credit score is below 630, personal loan options are more limited, but approval is still possible. Some lenders specialize in bad credit loans, though interest rates tend to be higher, and loan amounts may be smaller. Key things to look for:

  • No minimum credit score requirements
  • Lenders that report to credit bureaus (to help rebuild your credit)
  • Avoiding predatory loans with excessive fees

To compare reputable lenders that work with lower credit scores, visit our guide on best personal loans for bad credit.

Final Thoughts

A personal loan can be a useful financial tool, but choosing the right one requires careful comparison. Factors like interest rates, repayment terms, lender reputation, and fees all impact the total cost of borrowing.

If you qualify for a low-interest personal loan, it can be a great way to consolidate debt, finance a major purchase, or cover unexpected expenses. If your credit score is on the lower end, look for lenders that consider more than just credit history when making approval decisions.

Before committing, compare multiple offers, check for hidden fees, and make sure the monthly payment fits comfortably within your budget. Taking the time to find the right loan can save you money and help you reach your financial goals with confidence.

Choosing the right lender is just as important as finding the right loan terms. We’ve reviewed some of the top personal loan companies to help you compare rates, fees, and eligibility requirements.

Check out our in-depth lender reviews to find the best personal loan for your needs: