What is a Personal Loan?

Joe Schwartz

Joe Schwartz

Personal Loans Editor |

Discover what personal loans are and what sets them apart.

Borrowers take out personal loans for a variety of reasons such as debt consolidation, or to pay for things such as home improvements, medical expenses, or large purchases. A borrower who takes out a personal loan will receive the funds up-front in a lump sum. Then he or she will repay the money with interest in regular monthly installments.

What makes a personal loan different from other types of loans?

Personal loans differ from other loan types in that they are an installment loan, as opposed to being a revolving loan. A personal loan comes with a fixed repayment term, which means that it must be paid back within a certain period of time. This time frame is referred to as the loan’s term length. Personal loans also have a fixed annual percentage rate (APR), so the interest a borrower owes on a loan does not fluctuate or change from year to year.

Personal Loans and Collateral

Because personal loans are unsecured loans, they do not require any sort of collateral when borrowers acquire them. This can be beneficial to borrowers because they might not have items of value to use as collateral such as a vehicle or a home that has built up sufficient equity. Even if they have items to use as collateral, borrowers might not want to use those items to secure their loans. The downside to an unsecured loan is that they tend to have higher APRs, which means that borrowers may pay a higher total cost for their use of the loan.

What are the typical terms of a personal loan?

A lender will base the terms of a personal loan primarily on the borrower’s credit score. The better a borrower’s credit score, the more likely he or she is to get a lower interest rate. Likewise, a borrower with a less than favorable credit score may get a higher interest rate. This is because lenders see a borrower with a low credit score as being a higher lending risk. Personal loan interest rates can range from as low as 5% for low risk borrowers, to as high as 35.99% for high risk borrowers.

Term lengths for personal loans can range between 61 days up to 15 years. When considering term lengths, a borrower should be sure to think about his or her loan’s interest rate, in addition to the maximum monthly payment amount the borrower can comfortably make. If a borrower has a higher interest rate, then he or she might wish to make efforts to pay a personal loan off over a shorter period of time, as this can help to minimize the total amount of interest paid toward the loan.

Conclusion

A personal loan can be a great method of getting needed financial resources without having to put forth collateral in exchange. They can also be acquired with relatively low interest rates, making them a great financial vehicle for consolidating and paying off higher interest debts such as those associated with credit cards. As an added benefit, the fixed nature of personal loans means that a borrower is highly unlikely to ever be surprised by changes to the loan terms. This makes a personal loan a good option for a borrower who is looking to acquire a certain amount up-front in exchange for a predictable repayment period with stable interest rates and payment amounts.

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