What is a personal loan?

Personal loans can be used for almost any purpose, but it’s important to understand key characteristics and eligibility requirements.

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By Erin Gobler

Written by

Erin Gobler

Writer, Fox Money

Erin Gobler has covered personal finance for more than 10 years and is an expert on mortgages, student loans, and credit cards. Her byline has been featured at USA Today, Business Insider, and GOBankingRates.

Updated June 3, 2024, 1:37 PM EDT

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A personal loan can provide a lump sum from under $1,000 to over $100,000, depending on the lender and what you can qualify for. The average annual percentage rate (APR) for a two-year personal loan is 12.49%, according to the Federal Reserve. But APRs range from around 7% to 36%, depending on your credit score and finances.

We break down what a personal loan is as well as the requirements and how to apply.

How does a personal loan work?

A personal loan is a type of installment loan. You receive the loan amount upfront and then pay it back in monthly payments over a set period of time, usually between two to seven years.

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Good to know

Personal loan rates are expressed as an APR. This accounts for the interest rate and any upfront costs, like origination fees.

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

Interest rate
Fixed interest rates between 7% to 36%
Repayment term
from 2 to 7 years (up to 12 years or longer for certain loan purposes, like home improvement)
Monthly payment
Fixed payments
Origination fee
Less than 1% to 12% of the loan amount
  • Interest rate: Personal loans typically have a fixed interest rate, meaning your payment would not change over the course of the loan's term. While personal loan rates vary, they can range anywhere from 7% up to 36%, depending on your credit and the lender.
  • Repayment term: Personal loans offer flexible repayment terms, usually ranging from 2 to 7 years. But longer loan terms may be available depending on the lender and the loan's purpose. For instance, some lenders, like LightStream, 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: Some lenders charge an origination fee, which is deducted from the total loan amount upfront. It may range 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.
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The average APR for a credit card was 21.59%, according to the Fed, making personal loans a much more affordable option, especially for large expenses.

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, though permissible purposes vary by lender. Common uses for personal loans include:

Debt consolidation
To reduce monthly payments and get a lower interest rate on existing debt, such as credit card debt
Home improvement and repairs
To finance repairs and improvements to your home — some lenders offer home improvement loans up to $100,000 or more with extended repayment terms
Large purchases
From appliances to vacations, personal loans can be used for a number of large expenses
Major life events
Weddings, adoption fees, or funerals are some of the life events that a personal loan can fund
Financial emergencies
Same-day and next-day loans can be used to fund an emergency vet visit or car repair, plus a myriad of other emergencies
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Tip

Some lenders, like BHG Financial, offer large loan amounts (up to $200,000) with terms as long as 10 years.

What you can't use a personal loan for

Many lenders prohibit you from using a personal loan for things like gambling, business expenses, higher education, and all illegal activities.

Personal loan requirements

To qualify for a personal loan, you'll need to meet lender requirements regarding your credit score, income, and debt. Plus, you may 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
Lenders often use FICO credit scores when approving applications for personal loans. Requirements vary based on lenders, but you’re most likely to get the best rates if you have a score in the good to excellent range (670 or higher).
Credit history
If you have any missed payments or delinquencies you may be less likely to get approved.
Income
Most lenders require proof of income in the form of pay stubs, W-2s, or bank statements. You may also be required to earn a certain amount per year depending on the lender.
Debt-to-income ratio (DTI)
Many lenders prefer you to have a lower DTI around 36%.
Loan purpose
You may be required to state your reason for wanting a personal loan. Not all lenders approve every use for a loan.

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). 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.

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Check your credit reports with AnnualCreditReport.com to make sure they’re error-free. Dispute any errors or inaccuracies with the appropriate bureau immediately.

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. For example, Upstart requires you to have a verifiable regular source of income of $12,000 or more annually.

Debt-to-income ratio

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%.

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Tip

Calculate your DTI by dividing your minimum monthly debt payments (including rent or mortgage) by your gross monthly income. Personal loan lenders generally prefer a DTI less than 36%.

Loan purpose

Though personal loans can be used for a wide range of purposes, not all lenders approve all loan purposes.

Personal loan pros and cons

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Pros

  • Can be used for almost anything
  • High loan amounts
  • Long repayment terms
  • Fixed interest rates
  • No collateral required
  • Competitive interest rates
  • Fast funding times
  • Discounts available
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Cons

  • Potential for high interest rates
  • May require fees
  • Will increase your DTI
  • Potential credit impact

Pros

  • Can be used for almost anything: Personal loans offer flexibility in terms of their use. You can use the funds for various purposes like debt consolidation, medical expenses, or emergencies.
  • 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 month-to-month, and you won't be vulnerable to interest rate changes.
  • No collateral required: Many 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.
  • 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 since a hard credit check will be pulled for your application. However, making on-time payments and adding to your credit mix can improve it, though.

How to apply for a personal loan

  1. Check your credit: 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. You can receive free credit reports weekly from AnnualCreditReport.com.
  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. It's best practice to only borrow what you need to help maintain your budget.
  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 up to five business days of approval.

Current personal loan interest rates

Personal loan interest rates have been on an upward trajectory for the past few years - the average APR for a two-year loan went from 9.38% in 2021 to 12.49% in 2024, according to the Fed. And there's apparently no end in sight, at least not soon.

The three rate cuts on the table at the beginning of the year are much less likely in the face of persistent inflation and a strong labor market. Plus, loans are getting harder to qualify for with lenders tightening standards across all loan types, including personal loans.

If you need a personal loan, you may be better off improving your credit, reducing your DTI, or increasing your income to get the lowest possible rate, as opposed to waiting for rates to drop.

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Fox Business does not make or arrange loans.

Personal loan interest rates by credit score

Credit score
3-year fixed rate
5-year fixed rate
780+
13.64%
17.19%
720 to 779
16.50%
21.30%
680 to 719
21.69%
24.81%
640 to 679
28.13%
29.22%
600 to 639
32.06%
31.68%
0 to 599
32.53
33.18

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 loans for bad credit

Fox Business does not make or arrange loans.

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. The demand for personal loans can also impact rates, as does the larger interest rate environment.

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. As of May 2024, rates can start as low as 7%, but only borrowers with the best credit (a FICO score of 800 or above) and finances will be eligible for that rate.

Meet the contributor:
Erin Gobler
Erin Gobler

Erin Gobler has covered personal finance for more than 10 years and is an expert on mortgages, student loans, and credit cards. Her byline has been featured at USA Today, Business Insider, and GOBankingRates.

Fox Money

Fox Money is a property of Credible Operations, Inc., which is majority-owned indirectly by Fox Corporation. This material may not be published, broadcast, rewritten, or redistributed. All rights reserved. Use of this website (including any and all parts and components) constitutes your acceptance of Fox's Terms of Use and Updated Privacy Policy | Your Privacy Choices.

Fox Money is a property of Credible Operations, Inc., which is majority-owned indirectly by Fox Corporation. This material may not be published, broadcast, rewritten, or redistributed. All rights reserved. Use of this website (including any and all parts and components) constitutes your acceptance of Fox's Terms of Use and Updated Privacy Policy | Your Privacy Choices.