What is a personal loan?

Compared to other types of financing, personal loans are particularly attractive because you can use them for almost anything, including home improvements, debt consolidation, vacations, weddings, emergencies, and more. Plus, they have lower rates than credit cards, on average, and funding is quick — you could get the money the same day you apply. 

A personal loan provides a lump sum from under $1,000 to $200,000, depending on the lender and what you can qualify for. The average annual percentage rate (APR) for personal loans was 12.35% in November 2023, according to the Federal Reserve. But APRs range from around 6% to 36%, depending on your credit score and finances. 

How does a personal loan work?

A personal loan is a type of installment loan. You receive the loan amount and then pay it back in monthly payments (installments) over a predetermined schedule. 

Personal loans are offered by traditional banks, credit unions, and online lenders, and are typically unsecured loans, meaning they don’t require collateral. They have the following characteristics:

• Interest rate: Personal loans typically have a fixed interest rate, which is the price of borrowing money. In other words, your payment would not change over the course of the loan's term. While personal loan rates vary, they start around 6% APR and generally don’t exceed 36%.
• Repayment term: Personal loans offer flexible repayment terms, usually ranging from 1 year to 7 years. But longer loan terms may be available depending on the lender and the loan’s purpose. For instance, some lenders offer 12-year terms for home improvement loans and boat loans.
• Monthly payment: Personal loans have fixed monthly payments that are based on your loan amount, repayment term, and interest rate.
• Origination fee: An origination fee is a fee that some lenders charge upfront. It ranges from less than 1% to 12% of the loan amount, and typically reduces the amount you receive. The lower your credit score, the higher your origination fee is likely to be.

What can you use a personal loan for?

Unlike other types of loans, such as student loans and auto loans, personal loans aren’t designed for a specific purpose. Instead, they can be used for nearly any legal reason. Common uses for personal loans include:

• Debt consolidation: Debt consolidation is the process of paying off one or more existing debt with a new loan. By doing so, you can potentially get a lower interest rate and reduce your monthly payments. 
• Home improvements and repairs: If you don't have enough home equity to fund improvements or repairs (or you don't want to use it), a personal loan can provide a way to finance expensive projects over a number of years. 
• Large purchases: Whether it's a new fridge or a family vacation, a personal loan can be used to make big purchases a reality now. 
• Major life events: Weddings, honeymoons, adoption expenses, and funerals are all major life events that can be financed with a personal loan.
• Financial emergencies: A personal loan can be funded the same day you apply, in some cases, making them a good option for financial emergencies like emergency vet expenses or an emergency car repair. 

Personal loan requirements

To qualify for a personal loan, you’ll have to meet lender requirements regarding your credit score, income, and debt. Plus, you’ll typically need proof of address, a Social Security number or Taxpayer Identification Number (TIN), and to be a U.S. citizen (though not always).

Exact requirements may vary between lenders, but each will consider the following to determine whether to approve your loan and at what rate:

• Credit score: Your credit score is one of the most important things lenders look at when approving your application for a personal loan. There’s no set credit score that you need to get a loan, but you have the best chance with a good or excellent score (a FICO score above 670 or 800). However, some lenders offer loans to borrowers with fair credit (between 580 and 669) or poor credit (below 580).
• Credit history: In addition to your credit score, lenders will consider your credit history. If you have missed payments or delinquent debts on your credit report, you may be less likely to qualify for a loan.
• Income: Most personal loan lenders require that you have a verifiable source of income to get a personal loan. This could be income from a job or from other sources like alimony, Social Security benefits, disability benefits, and more. Some lenders also have a minimum dollar amount you must earn per year to qualify.
• Debt-to-income ratio (DTI): Lenders are less inclined to give you a loan if you already have a lot of debt relative to your income. Your DTI is the percentage of your gross monthly income that goes toward debt. Personal loan lenders prefer a DTI below 36%.
• Loan purpose: Though personal loans can be used for a wide range of purposes, not all lenders approve all loan purposes.

Best personal loan lenders

The best personal loan lender depends on your needs and credit profile. Consider the lenders below, and prequalify to get a sense of the rates and terms you might qualify for. Prequalification won't hurt your credit, but it's not an offer of credit. You'll need to apply for the loan to get final terms. When you do, the lender wil conduct a hard credit pull which could impact your score.

Personal loan pros and cons

Before applying for a personal loan, it’s important to consider the potential benefits and downsides.

Pros

• Can be used for almost anything: Unlike other types of loans, students don’t have a particular use. Instead, they can be used for nearly any legal purpose.
• High loan amounts: Personal loans offer the opportunity to borrow a large sum of money — some lenders lend up to $100,000 or more.
• Long repayment terms: While repayment terms vary by lender, personal loan terms can be as long as 7 to 12 years, depending on the lender and the loan’s purpose.
• Fixed interest rates: Personal loans generally have fixed interest rates, meaning your payments won’t change, and you won’t be vulnerable to interest rate changes.
• No collateral required: Most personal loans are unsecured, which means they don’t require collateral, like your car or home.
• Competitive interest rates: Personal loans can have low interest rates, especially when compared to high-interest debt like credit cards. According to the Federal Reserve, the average APR on a two-year personal loan was 12.35% in November 2023. The average credit card APR was 21.47%.
• Fast funding times: Personal loans, especially those from online lenders, can be funded within days of approval — some lenders even offer funding the same day you apply.
• Discounts available: Many lenders offer rate discounts for specific purposes, such as if the lender sends the loan funds directly to your creditors in the case of debt consolidation.

Cons

• Potential for high interest rates: While many personal loans have competitive interest rates, borrowers with poor credit may be stuck with high rates.
• May require fees: Personal loans often come with fees, including origination fees as high as 12% of the loan amount. Some lenders also charge late fees and insufficient funds fees.
• Will increase your DTI: Taking out a personal loan results in increased debt, which may not be advisable if you expect to apply for another loan, such as a mortgage, before you pay off the personal loan.
• Potential credit impact: Taking out an additional loan can negatively impact your credit score, particularly in the short term. Making on-time payments and adding to your credit mix can improve it, though.

How to apply for a personal loan

If you’re considering applying for a personal loan, here are the steps you’ll follow:

1. Check your credit: First things first, it’s important to check your credit before applying for a personal loan. Knowing your credit score and what’s on your credit report will tell you if you need to make any improvements before applying for a loan and what lenders you might be eligible for loans from.
2. Decide how much you need: Whether you’re consolidating debt or making a large purchase, decide ahead of time how much you need to borrow. This will be key for completing your loan application and determining what your monthly payments will be.
3. Prequalify with multiple lenders: Most personal loan lenders offer prequalification, meaning you can get a sense of personal loan rates you may be approved for, along with how much you’ll be approved for, without any impact to your credit score. While prequalification is not an offer of credit, it can be a great way to compare lenders.
4. Apply for your loan: Once you’ve prequalified for several loans, you can choose the one with the best rate and terms and complete the official application. At this point the lender will conduct a hard credit pull that could ding your score temporarily by a few points.
5. Receive your loan funds: If your loan is approved, the lender will disburse the funds. A few lenders offer loan funding as soon as the same business day, while many others offer funding within one or two business days of approval.

Can you get a personal loan with bad credit?

You have the best chances of approval if you have good or excellent credit, but that doesn't necessarily mean you can’t get a personal loan with bad credit. There are several lenders that consider borrowers with fair or poor credit. These lenders may look at other factors to determine your ability to repay the loan, including your income and debt-to-income ratio.

Personal loan FAQ

How are personal loan rates determined?

Personal loan rates are determined by a few key factors. While your credit score is among the most important factors, your current debt, income, loan amount, and repayment term also play a role.

What are common mistakes when using personal loans?

Common mistakes people make with personal loans are not shopping around for the best rate, failing to plan for loan fees, and borrowing more money than needed. Comparing lenders before getting a loan, knowing exactly what you’ll be charged and when, and only borrowing what you need can save you hundreds or even thousands of dollars over the term of the loan.

What is a good APR on a personal loan?

The best interest rates on personal loans fluctuate based on market changes. In February 2024, rates started as low as around 6%, but only borrowers with the best credit and finances will be eligible for that rate. A good APR comes down to what you’re using the loan for. For instance, if you can use a personal loan to consolidate debt at a rate lower than what you’re currently paying, it’s probably a good APR.