What Is A Personal Loan? Definition & Meaning

Personal loans provide a simple way to borrow money for a variety of needs. The personal loans definition is straightforward: it’s a lump sum of money which you are able to borrow from a bank or online lender. The lender agrees to lend you a certain amount, then you agree on how it will be repaid with interest in regular installments, usually monthly.

Personal loans are a form of unsecured loan. This means you don’t need collateral—for example, a house or car—to get the loan. Instead, lenders assess your creditworthiness by looking at your income levels against your debt burdens and credit history.

People take out personal loans for various purposes. Many take out personal loans to roll over higher-interest credit card or other debt into one lower monthly payment. Others use personal loans to improve homes, pay for medical costs, fund weddings or vacations, and pay for unexpected expenses.

No matter what your purpose may be, only borrow an amount that you need and can comfortably afford to pay back according to the agreed schedule. In this article, we will explain what a personal loan is and answer all your questions about it.

What Is a Personal Loan?

A personal loan is a simple way to borrow money for things like home improvements, medical bills, debt consolidation, or unexpected expenses. In about 200 words or less, here’s a quick overview of what personal loans are and how they work:

A personal loan is money that a lender like a bank or online company gives you all at once. You agree on an amount to borrow and how much you’ll pay back each month, including interest. Personal loans are “unsecured,” which means you don’t have to put up any collateral, or valuable things you own, to get the loan.

Lenders look at your credit report and income to decide if you’re a reliable borrower. If approved, the money is all yours to use for whatever you need. Then you make fixed monthly payments to the lender over a set period of time, usually 1-5 years.

Personal loans are a good option if you want to consolidate high-interest credit card debt into one lower monthly payment. Just be sure not to borrow more than you need and can comfortably repay each month.

Personal loans provide flexibility to borrow a lump sum for your purposes. Just be sure to shop around for the lowest interest rates and always pay on time – this helps build your credit score over time.

How Personal Loans Work

Personal loans are a simple way to borrow money when you need it. Here’s a quick overview of how the personal loan process works:

• Application: You’ll fill out an online or paper application providing basic information like your name, address, income, and employment details. Lenders will check your credit to see if you’re approved.
• Approval Criteria: Lenders look at your credit report and scores, income, existing debts, and other application info to decide if you’re a reliable borrower with the means to repay the loan. Stronger credit usually means better interest rates.
• Disbursement of Funds: Once approved, the full loan amount is deposited directly into your bank account, usually within a few business days. The money is yours to use as needed.
• Repayment Terms: You’ll agree to fixed monthly payments over a set period of time, usually 1-5 years. Interest charges are added to each payment. Make sure to factor in the total interest cost when deciding if a loan fits your budget.
• Building Credit: Making on-time payments lowers your debt-to-income ratio over time and shows responsibility to lenders. This can help you qualify for lower rates on future loans and credit cards.

An unsecured personal loan is money loaned without collateral like a home or car securing the debt. Lenders take more risk, so credit is especially important.

Personal loans provide flexibility when you need cash, just be sure to only borrow what you can comfortably repay each month to stay on track with your financial goals. Managing debt responsibly through on-time payments builds a strong credit profile for the future.

Types of Personal Loans

There are several different types of personal loans available that can help whether you have great credit or are rebuilding. Let’s break down the main options:

Secured vs. Unsecured Loans

Secured loans require collateral, or valuable property you pledge as security against the loan like your home or car. If you default, the lender can take your collateral. An unsecured personal loan definition is straightforward: it’s money loaned without collateral like a home or car securing the debt. Unsecured loans usually have higher interest rates since the lender takes on more risk without security.

Fixed-Rate vs. Variable-Rate Loans

With a fixed-rate loan, your monthly payment stays the same throughout. Variable rates can go up or down, affecting what you pay each month. Locking in a fixed rate protects your budget from rate hikes.

Installment Loans

Most personal loans are installment loans, where you receive a lump sum and repay it plus interest with fixed monthly payments over a set period of time, usually 1-5 years. This spreads costs over time in an affordable way.

Lines of Credit

A line of credit acts like a credit card – you can borrow up to your limit as needed and pay interest only on what you use. The full balance is due at the end of the term, usually 1 year.

Personal Loans for Fair or Bad Credit

Personal loans for bad credit are available from some lenders, though they may come with higher interest rates. Look for loans advertised for fair, poor, or bad credit. Make all payments on time – this shows lenders you’re working to improve.

When Should You Consider a Personal Loan?

There are a few scenarios where taking out a personal loan can be a good option. Here are some examples:

Consolidating Debt

If you have several credit cards or other bills with high interest rates, a personal loan can help you save money. By paying off your old balances with a new loan at a lower rate, your monthly payments will be more affordable. Just be sure not to charge up those cards again!

Covering Emergency Expenses

Emergencies like car or home repairs can be stressful and expensive. A personal loan may provide the cash you need to handle the problem without using high-interest credit. Just don’t borrow more than the actual emergency cost.

Financing a Large Purchase

If you need to replace an appliance or have home renovations in mind, a personal loan gives you flexible funding rather than putting it all on plastic. Again, only borrow what you truly need to stay within your means.

On the other hand, a personal loan may not be a good choice if you have credit problems or find yourself struggling with debt regularly. The interest charges could make your financial situation worse. It’s best to only borrow what you know you can comfortably afford to pay back each month.

Remember, personal loans come in different types so make sure to shop around. Look for personal installment loans which are repaid in fixed monthly payments over 1-5 years.

This predictable budgeting helps you stay on track. And don’t forget – making on-time payments with any loan helps build your credit scores over time for lower rates in the future.

With care and responsibility, a personal loan could help you achieve your financial goals. But take it slow and focus first on building good spending habits before considering extra debt.

How to Qualify for a Personal Loan

If you’re thinking about getting a personal loan, here are some tips that can help you get approved:

• Check your credit: Lenders will look closely at your credit reports and scores. The higher your scores, the better your chances and the lower your interest rate will be. Aim for a score of at least 670.
• Show proof of income: Lenders want to see that you have a stable source of income to reliably make your monthly payments. Have recent pay stubs or tax returns ready to show your lender.
• Keep debt low: Your debt-to-income ratio is a key factor. It compares your monthly debt payments to your gross monthly income. Most lenders want this to be 36% or less. Pay down credit cards before applying.
• Have a co-signer: If your credit isn’t great, asking someone with excellent credit to co-sign can help you qualify. But keep in mind they’re responsible if you miss payments.
• Consider secured loans: If your credit is fair or poor, secured personal loans use collateral like your car or savings to lower risk for the lender. Rates tend to be lower than unsecured loans for bad credit.
• Check rates for bad credit: Even with dings on your report, online lenders offer personal loans for fair or bad credit. Shop terms to find the lowest possible interest rate as you work to improve your scores over time.

If you’re looking for personal loans with bad credit, consider online lenders that specialize in these types of loans. Taking control of your finances through small improvements each month is the best way to boost your odds of approval. With patience and determination, a personal loan could help you reach important goals.

How Much Does a Personal Loan Cost?

Most people want to know exactly how much a personal loan will cost before deciding if it fits their budget. The good news is, it’s actually pretty simple to calculate!

The cost of a personal loan has two main parts – interest and fees. Interest is the amount the lender charges you to borrow their money. It’s expressed as an annual percentage rate, or APR. Fees are any additional charges by the lender, like an application or origination fee.

Let’s look at an example. Say you take out a $5,000 personal loan with an APR of 9% and no fees. Over 5 years with monthly payments, here’s what you’d pay each month and the total cost:

• Monthly Payment: Around $100 per month
• Total Interest Paid: Around $1,000
• Total Repaid: Around $6,000

So in this case, borrowing $5,000 at 9% interest for 5 years would cost you around $100 per month in payments. In the end, you repay the full $5,000 you borrowed plus around $1,000 in interest charges.

Always shop around and compare APRs from multiple lenders. Even a difference of 1-2% APR can save you hundreds in interest on the same loan amount. And be sure to factor in any fees when deciding if a loan fits your budget. While low interest personal loans are ideal, your rate will depend on factors like your credit score and income.

Where to Find the Best Personal Loans

These days there are more options than ever when it comes to finding a personal loan. While traditional banks are still around, online lenders and credit unions have gotten much more common too. This gives you more chances to compare rates and terms.

Some good places to start your search include Discover personal loans, Capital One, and Prudential. These companies offer personal loans both online and sometimes at local branches too. It’s also worth checking your local credit unions, as the rates at those non-profit organizations tend to be very competitive.

No matter where you look, be sure to compare interest rates and fees closely. Even a difference of one percent on the annual percentage rate (APR) can save you real money in the long run. Also pay attention to terms – how long you have to repay and whether the payments stay the same each month (fixed) or can go up and down (variable).

When it comes to which bank or company is “best,” there’s no single answer – it depends on your specific situation. But in general, applying with an established lender that you already have a good relationship with through accounts in good standing is a smart choice. It shows them you are a low risk borrower.

The most important thing is doing your research so you can feel confident about choosing the personal loan that fits your needs and your budget. With the right loan, you can take control of your finances without getting in over your head with debt.

Risks and Considerations Before Taking a Personal Loan

Taking out a personal loan can be a good way to get cash when you need it. But it’s important to be aware of potential risks so you don’t end up with more debt than you bargained for. Here are a few things to look out for:

• High interest rates – Personal loan interest rates vary depending on your credit. But they’re often higher than loans with collateral, like mortgages. Make sure to shop around and compare APRs (annual percentage rates) from multiple lenders.
• Hidden fees – Some lenders charge extra fees on top of interest, like late fees if your payment is ever late. Carefully review the full terms and costs from each lender.
• Too much debt – Only borrow what you truly need. Don’t get a loan just because you’re approved for a higher amount. Stick to your budget so you can comfortably afford the monthly payments.

To help avoid these risks, start with “small personal loans” or “personal loans no credit check” if you’re rebuilding credit. Always make personal loans payments on time – this shows lenders you’re responsible.

Going forward, maintain low balances on your other loans and credit cards to keep your overall debt manageable. Getting approved for a loan is one thing, but staying debt-free should be the ultimate goal.

Risks and Considerations Before Taking a Personal Loan

I always recommend really thinking through whether a personal loan is right for you. While they can be helpful for some situations, personal loans do come with some risks to be aware of.

Potential Downsides to Weigh

• High Interest Rates: Rates on personal loans are often higher than alternatives like home equity loans. Make sure you shop around.
• Hidden Fees: Watch out for origination fees or prepayment penalties that could add to costs.
• Taking on Too Much Debt: Don’t borrow more than you can realistically pay back each month. This avoids falling behind.

Tips to Borrow Responsibly

• Calculate Total Costs: Factor in interest and fees so you know the true cost.
• Build Emergency Savings: This helps avoid needing loans for unexpected expenses.
• Boost Your Credit Score: Good credit means better loan rates. Pay all bills on time.
• Read All Loan Terms: Don’t gloss over the fine print so you fully understand.

The bottom line? Personal loans require caution. But if you put in the work to understand costs, risks, and terms upfront, they can be manageable. The key is borrowing responsibly within your budget.

Wrap Up: Take Control of Your Finances With Care

I hope this overview gave you a better understanding of what personal loans are, how they work, and things to consider before applying. The bottom line is personal loans can be helpful financial tools when used responsibly. But it’s so important to educate yourself on the risks and costs involved first.

The best advice I can give is to carefully evaluate your budget and only borrow what you can realistically afford to pay back. Making on-time monthly payments builds your credit, while late payments or too much debt damages it. Be sure to shop around for the best rates and read all terms closely before signing.

With care and financial discipline, a personal loan may help you consolidate debt, finance major purchases, or cover emergencies in a more affordable way. But building strong money habits through saving money is the real key to taking control of your finances over time. You’ve got this!

FAQ

Now that you have a good understanding of the personal loans definition, in this section we will answer some of your questions about personal loans.