What is a Personal Loan?

Learn more about personal loans

A personal loan is money borrowed from a bank, credit union, or online lender and repaid in fixed monthly installments, along with interest, typically over two to five years. The annual percentage rates on loans from conventional lenders can range between 6 and 36 percent.

The majority of personal loans are unsecured, meaning they are not secured by collateral. A secured loan backed by a car or home is typically less expensive, but you risk losing the collateral if you default on your payments.

Unless you qualify for a balance-transfer credit card with 0% interest, the interest rates on personal loans are typically lower than those on credit cards, and the amounts you can borrow are typically greater. If you have large balances on multiple credit cards with high interest rates, a personal loan can help you consolidate the debts into one payment at a lower interest rate.

Compare the interest rates of multiple lenders before deciding. The loan with the lowest APR is the least expensive, and is therefore the best option in most cases.

What rate should I expect?

Rates vary from lender to lender and depend heavily on your credit history and ability to repay, but here is what interest rates on personal loans look like, on average:

How’s your credit?Score rangeEstimated APRExcellent720 – 85013.9%Good690 – 71918.0%Average630 – 68921.8%Bad300 – 62927.2%; lowest scores unlikely to qualifySource: lender survey

What are the requirements?

Almost all lenders require borrowers to be at least 18 years old, legal U.S. residents with a verifiable bank account, and not bankrupt or in foreclosure.

Excellent credit and low debt-to-income ratios may qualify borrowers for the lowest possible interest rates. A person with poor or average credit may be able to qualify for an unsecured personal loan if they have a steady income and low debt levels, but they should expect to pay rates as high as 36%. Secured or co-signed personal loans are other options for borrowers with poor credit.

Although some lenders claim they have no minimum credit score requirements, this does not mean they do not check your credit report. Knowing your credit profile before applying can assist in establishing expectations. Numerous websites devoted to personal finance provide free access to your credit score and credit report. Look for a website that provides educational resources, such as a credit score simulator and credit-building advice.

If you are unable to qualify for a loan through a reputable lender, avoid payday lenders for now.