When you’re ready to plan that big wedding, buy a new set of wheels or simplify debt you already have, a personal loan could help you cover the upfront cost. Understanding exactly how personal loans work is key to getting the best rate and repayment terms you’re eligible for.
This guide shows you how to compare top online lenders to narrow down your choices. We take you from consideration to application to approval — including how to get an edge on low rates.
Even Financial Personal Loans
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A personal loan is money you borrow from a bank, online lender or credit union that you pay back with interest over a set period of time — usually between one to seven years. Your lender determines your loan amount, interest rate and fees based on factors like your credit score, income and debts you already have.
What can I use a personal loan for?
You can use a personal loan to cover almost any large expense or even consolidate your debt. Check out our guides below to see how you can use them to reach your next goal, take care of financial obligations or fund your next big purchase.
Just some of the top personal loan providers we compare
What types of personal loans are there?
Unsecured term loans. Your standard personal loan personal loan, where you receive a lump sum of money that you repay over a fixed period. You aren’t required to put collateral on the line to qualify and lenders tend to see these loans as risky — they’re left with nothing if you can’t pay it back.
Fixed-rate term loans. A term loan that comes with a set interest rate that never changes throughout the life of the loan.
Variable-rate term loans. A term loan that comes with an interest rate that is subject to change while you’re repaying your loan. Typically, interest rates on variable rate loans can start off lower than their fixed-rate cousins, but it is’t guaranteed to stay that low. Many variable rate loans come with caps
Personal lines of credit.Get access to a revolving amount of funds — similar to a credit card but with a higher limit and typically lower expenses. Great for funding continuous projects that might come with unexpected expenses. These can also be secured or unsecured.
Student loans. There are multiple borrowing options to pay for school, including public and private student loans. Lenders also offer student loan refinancing to help you get a better rate on what you’ve previously borrowed.
Can't I just use my credit card?
You could, but it might cost a lot more if you need to cover a large one-time expense. That’s because credit cards often have higher rates than personal loans.
Direct online lenders. These lenders offer straightforward application processes so you can conveniently borrow money online. If approved, your loan amount is deposited into your bank account. Compare direct lenders above.
Brokers. Brokers can pair you with a lender that suits your needs. After you fill out a preliminary application with the broker, you’ll be matched with a lender who offers the loan type you’re looking for in the amount you need. The lender must still make a decision on your application before you receive your funds.
Banks and credit unions. If familiarity is important to you, you can consider getting a loan through the credit union or bank you already have a relationship with. The application process may be expedited if you have an existing account with the institution. Keep in mind that banks and credit unions tend to have stricter eligibility criteria than other lenders.
Peer-to-peer lenders. Relatively new to the financial market, peer-to-peer lenders operate as marketplaces that bring investors and borrowers together. They facilitate the loan process between individuals rather than offering the loans themselves.
Getting a personal loan from a bank
Getting a personal loan from a bank may seem like an obvious choice. If your bank offers them, it might not be a bad idea to look into your borrowing options — they sometimes offer discounts to people that already have an account. However, bank loans typically have stricter eligibility requirements, have a longer turnover time and are sometimes even more expensive than other options.
Two main factors contribute your loan’s cost: Interest rates and fees.
Interest rate. This is what the lender charges you to borrow money and is usually a percentage of the loan amount.
Fees. There are a few fees that can add to the cost of your loan. It’s common to see origination fees up to 5% of the loan amount. Watch out for prepayment penalties if you plan to pay your loan off early. Lenders may also charge for late or missed payments and unsuccessful or failed payments.
Your annual percentage rate (APR) is an expression of your interest rate and fees as a percentage. Your APR can give you an idea of how much your loan is going to cost. APR doesn’t include late fees, nonsufficient funds fees (NSF) or prepayment penalties.
Monthly repayments calculator
Calculate how much you could expect to pay each month
Personal loan APRs typically range from 5% all the way up to 36%, which is the legal limit for personal loan APRs in most states. Rates can sometimes go lower, but it’s uncommon. In fact, most people don’t get the lowest advertised rate on a personal loan, even if they have excellent credit. Here’s what rate you might expect based on your credit score.
You might get an APR around..
800 or higher
579 and under
Not likely to get approved
So who gets the highest rate? People with long and impeccable credit histories, high salaries and almost no debt. Sometimes even those people can’t qualify for the lowest rates unless they apply to borrow over a certain limit.
Personal loans can either have a positive or negative affect on your credit. If you make all of your payments on time and according to schedule, taking out a personal loan can help you build your credit. In fact, some lenders offer small-dollar, short-term loans with low interest rates that are specifically designed to help borrowers build credit.
Personal loans can damage your credit if you fall behind on your repayments. Whether or not you’re able to make your repayments on time is the most heavily weighted factor credit bureaus consider when calculating your score.
5 tips for getting the best rate on a loan
Watch the 2-minute video above or read the tips below.
Compare your options. If you have a long history with a bank or credit union, you might want to consider borrowing from that financial institution to take advantage of member perks. However, online lenders offer a wide variety of loan types that may fit your needs better than what your bank offers.
Find out your credit score and review your credit report. You’ll generally need a score in the “good” range — 680 and above — to secure a decent rate. Your credit score and credit report are two different things. The latter is a detailed record of your credit history. Learn how to get a copy of your credit report and be sure to check for errors. Correcting incorrect listings, such as unpaid accounts that were actually paid, can help improve your credit score and help you get a better APR on a loan.
Check rates, but don’t apply yet. Loan applications may appear as inquiries on your credit report. Be sure to review the eligibility criteria to see if you may qualify. When comparing your options, you can also ask if the lender can give you a pre-approval before submitting your actual loan application. Asking questions before you fill out an application can help narrow down your options.
Pay down your debt. Having a lower debt-to-income ratio (DTI) is sometimes just as important as having good credit: It can improve the rates and repayment terms you’re ultimately offered. Aim to keep your DTI under 20%.
Only apply for the loan amount you need. The amount you apply for has a direct influence on the rate you’re offered, so only ask for as much as you need.
Can I borrow the amount I need? Will you be able to take out the exact amount you need and afford to pay it back in a reasonable amount of time? If not, you might want to look elsewhere.
Does it have a competitive interest rate? Look at the rate itself, but also consider whether it’s fixed or variable — variable interest rates are subject to change.
What are the fees? Most lender will charge application, origination, prepayment, late or NSF fees.
How long will I have to pay it back? Aim for a loan term that gives you monthly repayments you can afford without being too long. Otherwise, you could wind up paying a lot in interest in the long run.
What lenders look for in a personal loan applicant
Lenders take on risk when they lend large amounts of money to borrowers. That’s why they require applicants to meet certain eligibility criteria. Here are some common qualifications lenders look for:
Good to excellent credit. Most lenders rely on credit scores when choosing borrowers to approve and even calculating specific loan terms. If you have poor or no credit, check out our guide on bad credit loans to see your options.
Low debt-to-income ratio. You can calculate your DTI by dividing your monthly debt payments by your monthly income. Lenders can rely on this number as much as your credit score and normally don’t accept anyone with a DTI above 43%. A good DTI is anything below 36%, though as we mention before, under 20% is ideal.
Employment. Most lenders require you to be steadily employed. Some lenders have minimum income requirements as well that can include wages, alimony, pensions or any other form of funds coming in on a regular basis.
US citizen or permanent resident. If you’re a US citizen or permanent resident, you’re able to apply for personal loans. Temporary residents are only eligible to apply with certain lenders but may need to build up a credit history. They may also need a US citizen to cosign the loan. You may be able to get one as a non-US resident if you have full-time employment and a US Social Security number.
18 or older. Since the age of majority varies by state, the minimum age for lenders varies as well and is usually between 18 and 21.
Personal loan application checklist
The application process differs between lenders, but they’ll generally ask for the following:
Proof of your identity, like a government-issued ID, US passport or military ID
Your Social Security number and date of birth
Pay stubs, tax returns and other income details
Banking details for disbursing your funds and elective automatic repayments
Utility bill in your name or other proof of residence
How to apply for a personal loan step by step
Step 1: Figure out how much you need to borrow
The first thing you need to do once you decide to apply for a loan is determine exactly how much money you want to borrow. Borrowing too little or too much could leave you either unable to cover your costs or with extra money that increases how much you pay in interest.
Step 2: Choose a loan type
There are quite a few loan types available, which you can review above. But beyond that, ask yourself what you’re looking for within your loan type. Do you want a secured or unsecured loan? Do you want a fixed or variable interest rate?
Step 3: Shop around
The first lender you come across may not have the best deal. Shop around and make sure to compare things like APR, fees, turnaround time and term of the loan. You can check out our table of loan providers to compare these features. Be sure to read the requirements as well to make sure you qualify before submitting an application.
Step 4: Apply
Applying for a personal loan is typically a quick and straightforward process that goes something like this:
Personal details. Gather the necessary information such as proof of identity (passport, driver’s license, or ID), proof of address (utility bills or lease), and proof of income (W-2s, pay stubs or bank statements).
Loan application. This is where you request a certain loan amount, specify what you want the loan for and choose your terms. Many banks and lenders have applications online, so you avoid the hassle of having to go to a branch and fill out paperwork.
Loan agreement. If you’re approved, sign the loan documentation and agree to all the terms. With most lenders you’ll have a certain amount of time to rescind the agreement, should you change your mind.
Many lenders require that you have a checking account to receive your money via direct deposit, but that’s not always the only option. Some lenders may be able to send you a check in the mail.
Step 6: Spend your money
If you take out a loan for something specific, such as a new car purchase or debt consolidation, the lender may send the funds directly to the company you owe. If you take out a general personal loan, the funds will go to you to use for the purpose specified in your application.
Step 7: Make payments on time.
It’s important to make your payments on time so you don’t end up paying extra in fees. Be sure to verify how you will be required to make payments. Can you pay by phone with a credit card or account number? Is there an automatic payment option?
So you’ve been approved and the money is in your bank account. You’re done, right? Not quite. Now you have to pay it back.
Set up autopay
Many lenders — especially online lenders — require you to set up autopay with your bank account. Others might give a discount on interest if you set it up.
Autopay is a great way for you to make sure you don’t miss any payments, but don’t think you can just forget about your loan. If your account doesn’t have enough money to cover your payment, you could be slapped with an NSF fee.
Stay in touch
In fact, it’s a good idea to stay in touch with your lender, especially if you run into any trouble making repayments. Many lenders are willing to renegotiate your loan if you have an unexpected financial problem. You won’t know until you ask. The fastest way to get in touch is usually by phone. Some lenders also have a live chat option, but those are generally better for finding basic information.
Pay it off early
Most personal loans have interest that accumulates during your loan term, but some require you to pay most of your interest in the first few months. With the first type of loan, check if your lender do prepayment fees. If not, you can save on interest by paying off your loan early.
Paying off your loan early has other benefits: It can get you out of debt faster and improve your debt-to-income ratio
If you’re considering prepaying your entire loan, look for your payoff amount — not your balance. Your payoff amount includes interest and fees and you can typically find it on your online account. Don’t have an online account? Call your lender.
5 easy ways to prepay your loan
Make half of your monthly repayment amount every two weeks. That is, not twice a month. It’ll feel like you’re paying roughly the same amount but you can save on interest and shave a few months off of your loan term.
Round up your repayments. Rounding up your payments to the nearest $50 is ideal, but even the nearest $20 could help you repay your loan months — or even years early.
Make one large payment during your loan term. Making one large payment toward your loan’s principle can help you save a lot on interest during the course of your loan.
Don’t skip payments. Not only will you likely have to pay a late penalty, your interest will continue to accumulate at a faster rate.
Refinance. If your credit score has improved over the course of your loan term — or you experienced other positive changes in your financial situation — you might be able to qualify for another loan with more favorable terms, which you can use to repay your original loan. Lower interest almost always means savings when the term length stays the same — or gets shorter.
Business loans work a lot like personal loans but often come in a wider range of loan amounts and have different requirements to qualify. They’re also typically designed to — like two similar to personal loans, but are tailored to specific business needs.
Your business loan options include traditional term loans, lines of credit, invoice financing and more. You can secure a business loan with your personal or business assets.
Accrued interest. Interest that’s accumulated on a loan since it was issued but has not been paid yet.
Adjustable rate. Also, variable rate. An interest rate that’s subject to change.
Amortization. A loan that has regular, scheduled repayments that go toward paying both the loan’s interest and principal.
Annual percentage rate (APR). An expression of a loan’s interest rates and fees as a percentage.
Appreciation. An increase in an asset’s value (such as a car or home).
Asset. Anything that someone owns that has money value, including cash, a home, owed debt, a trademark or patent.
Automated clearing house (ACH) payment. An electronic payment made through the ACH network from one bank account to another. ACH is used for direct deposit from your employer or when a lender transfers funds directly into your account.
Autopay. A service that allows you or a loan provider to automatically withdraw money from your account on a regular (usually monthly) basis.
Borrower. The person taking out a loan from a bank, credit union or other lender.
Broker. A third party that acts as an intermediary between lenders and borrowers for a fee.
5 Cs of credit. An easy way to remember what lenders look at when determining your creditworthiness. The five Cs are: Character, capacity, conditions, capital and collateral.
Capitalized interest. Interest that’s added to your loan’s principal instead of being treated separately.
Closing. Also, settlement. The final step in taking out a loan, when the loan agreement is signed and the funds are dispersed.
Cosigner. Someone who also signs your loans and holds responsibility to repay it if you default.
Compound interest. Interest that is periodically added to a loan based on your accumulated interest and principal.
Consumer reporting agency. Also, credit bureau. An agency that gathers information from your creditors to compile your credit report and credit score.
Creditworthiness. How a lender values your likeliness to be able to repay a loan. Your credit score is typically used as the best expression of your creditworthiness, though your income, debts, age, employment status also play a large role.
D to N
Debt-to-income ratio. Your gross monthly income divided by your gross monthly debt payments.
Default. A failure to repay debts, which can result in the seizure of collateral or lawsuits.
Deferred payment. An arrangement in which a borrower doesn’t have to start making payments on a loan until a certain agreed-upon time (common with student loans).
Depreciation. A decrease in an asset’s value (such as a car or a home).
Down payment. An initial payment you make upfront when purchasing an expensive item. A loan is used to cover the rest of its cost.
Equity. The difference between the value of an asset (like a car or home) and the balance of a loan used to pay for that asset.
Escrow account. A third-party account that holds money before two parties go through with a transaction. Common with debt settlement companies.
FICO score. Your credit score assigned by one of the three credit bureaus: Experian, Equifax and TransUnion. When a lender sets credit score requirements, they’re most likely talking about your FICO score.
Grace period. The amount of time a borrower has to make a payment before the lender charges a late fee.
Guaranteed loan. A loan where a third party agrees to assume at least part of the debt if the borrower defaults.
Interest. The amount a lender charges for letting someone borrow its assets, typically expressed as a percentage. Loan agreement. The contract that a borrower signs agreeing to the lender’s terms and conditions.
Minimum and maximum loan amount. The largest and smallest amount of money a lender is willing to let someone borrow.
Negative amortization. When the loan payment doesn’t cover the accrued principal for that period, which is added to a loan balance.
Origination fee. A fee you pay to cover the cost of processing your loan, usually between 1% and 5% of the amount you borrow taken out of your funds before you receive them.
P to Z
Prepayment. Paying more than your monthly payment on a loan,
Prime rate. The interest rate that lenders give to their most creditworthy customers, generally based on the Federal Reserve or Wall Street Journal’s prime rate.
Principal. Your loan balance, not including interest.
Promissory note. The document you sign before you take out a loan legally binding you to the terms and conditions of repayment: Your loan documents.
Purchase option. The option to buy a leased car or home, typically for a balloon payment.
Refinance. Taking out another loan with more favorable terms to pay off a debt. Revolving debt. Open-ended access to a certain amount of funds that you pay off as your borrow, (like a credit card).
Secured loan. A loan that is backed by collateral.
Simple interest. Interest that’s calculated based on your loan’s balance, not balance and accumulated interest.
Strong credit. Having a long history of repaying debts on time with a high credit score — good credit or higher. Typically necessary to get approved for a loan with a competitive rate.
Subprime. Credit for borrowers with bad or poor credit, typically with higher interest rates.
Term. The amount of time a borrower has to repay a loan.
Title. A document that proves ownership of an asset (like a car or home).
Unsecured loan. A loan that is not backed by collateral.
Upside-down loan. When you owe more money on an asset that it’s actually worth.
Frequently asked questions about personal loans
You can typically borrow between $2,000 and $50,000. Some lenders offer loans up to $100,000.
The best personal loan for you depends on how much you need to borrow, how quickly you need the funds and what you can qualify for. You may want to compare things like interest rates, loan amount and how legit the lender is. Read our “best personal loans page” to learn how to find the best personal loan for you.
Some lenders can approve your application by the next business day if you apply by a certain cut-off time. If additional verification is required or if you need to take documents to a branch location, this may delay the process a few days. You can usually find out the turnaround time from the lender before you apply.
The interest rate is what the lender charges for lending you the money. The APR is more representative of the true cost of the loan as it includes all fees that come with the loan as well as the interest rate.
You can, but it might not end well. Investing itself is incredibly risky and taking out a personal loan increases that risk even more. Some experienced investors take out personal loans after they’ve gotten the hang of weighing the risks, but it takes a while to get to their level. And even they don’t always win.
There’s no technical definition for this but prime borrowers are typically thought to have credit scores above 720, have no delinquencies on their credit report and have a minimum six-year credit history.
Interest rates vary by lender, but can be as low as under 3% and as much as 36%. Generally, the higher your credit score, the lower your interest rate on a personal loan.
Personal loans themselves aren’t bad for your credit. As long as you make regular payments and pay within the terms of the loan, a personal loan can actually improve your credit score to prove you can handle your debt responsibly.
Most lenders offer loans from one to seven years.
When you borrow money, you might end up with more than you actually need. Or a last minute, emergency expense might arise. Are you allowed to do whatever you want with the money as long as you repay it on time? This all depends on the type of loan you apply for. Some loans, such as home and student loans, come with restrictions and are virtually impossible to spend on something other than what they’re meant for. Auto lenders are typically more lenient but considering there will be a lien on your vehicle until the loan is repaid, it makes it more difficult to repurpose the funds. Some people will even take out loans without any plans of using the money the way they were intended to. In a process known as a “spread”, borrowers will invest money with the hopes of earning more than they have to pay in interest.
While there’s technically no law against it, if you default, your lender could still choose to take legal action should they find out that you’ve used the money for something other than what you agreed to. This would be on the grounds that you falsified information on your application.
Before you visit Laurel Road..
The most qualified applicants have a minimum credit score of 680. Laurel Road tends to be best for people with annual income above $60,000 and total debt of less than 40% their income. If you don’t think Laurel Road is best for you, explore other loan options.
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