How do personal loans work?

Whether you want to consolidate debt, fund home renovations, or cover a large expense, personal loans can come in handy in a number of situations

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Personal loans can help you meet a variety of financial goals. Find out how they work and where to get one. (Shutterstock)

A personal loan is a set amount of money you borrow from a lender that you agree to repay, with interest, over a certain period of time. It’s usually unsecured, meaning you don’t have to offer collateral, like your house or car. You can use a personal loan to consolidate debt, pay medical bills, fund home improvement projects, or cover virtually any other expense. 

Visit Credible to see your prequalified personal loan rates from various lenders, all in one place.

What is a personal loan?

A personal loan is a product offered by financial institutions like banks, credit unions, and online lenders. Once you take one out, you’ll pay it back in equal installments, with interest, over a period of time. Repayment terms can range from a few months to a few years or even longer. 

Most personal loans are unsecured, so you don’t have to worry about putting collateral on the line. Instead, factors like your credit and income will determine if you qualify and the interest rate you’ll land. Secured personal loans do require you to provide collateral, like jewelry or a car. 

Since they’re less risky for lenders, secured loans might have lower interest rates than unsecured loans. You may find it easier to qualify for an unsecured loan if you have poor or fair credit. Just keep in mind that the lender will have the right to seize your collateral if you can’t make your payments. 

How do personal loans work?

A personal loan is an installment loan, so you’ll get all the money you borrow in a lump sum. Your repayment term will depend on the lender and your particular situation. If you choose a fixed-rate loan, the interest rate will stay the same over its life. A variable-rate loan, on the other hand, will come with a fluctuating interest rate that might go up or down.

Most lenders will let you apply for a personal loan from the comfort of your home. You’ll need to share some basic personal and financial information. You may also be required to submit some documents, like a government-issued ID and your pay stubs.

The time to fund a personal loan is usually about a few business days. But some lenders offer same-day or next-day funding after they approve you. This is great news if you have emergency expenses and need the money right away.

Credible makes it easy to compare personal loan rates from various lenders, without affecting your credit score.

How much does a personal loan cost?

A number of factors affect how much you’ll pay for a personal loan, including your credit, income, interest rate, fees, and the amount you borrow. The lender you choose will also play a role in the cost of your personal loan. 

It’s a good idea to only borrow what you need so you can keep your repayment costs as low as possible. You can use Credible’s personal loan calculator to estimate your monthly payments, as well as how much you’ll pay over the life of the loan.

Pros and cons of personal loans

Before you take out a personal loan, be sure to weigh the benefits and drawbacks. 


  • Low rates — Compared to credit cards and other credit products, personal loans offer low interest rates. A lower rate can save you hundreds or even thousands of dollars over the life of the loan.
  • Flexible — You can use the funds from a personal loan to pay for just about any expense. This might be a car repair, kitchen remodel, or even a vacation.
  • Potentially quick funding — Some lenders will fund your loan shortly after you get approved. Depending on the lender, you may be able to receive your money the same or next business day after approval.
  • Can help you build credit — As long as you make your payments on time, every time, a personal loan might improve your credit. A higher credit score can open the doors to lower rates and more favorable terms in the future.


  • Must meet certain eligibility requirements — Most personal loan lenders require you to have a certain credit score and steady income. It can be difficult to get approved if you don’t have the best credit.
  • Interest and fees — Personal loans aren’t free. Once you commit to one, you’ll need to pay interest and any fees the lender charges, like origination fees and late payment fees.
  • Take on more debt — A personal loan will increase your debt load. If you’re already drowning in debt because you have credit card debt, student loans, and car loans, for example, it could be challenging to add an additional debt payment each month.
  • May damage your credit — Even one missed payment can lower your credit score. A lower credit score will limit the credit products you get approved for, and you’ll likely receive higher interest rates on loan products.

How to get a personal loan

If you’re interested in applying for a personal loan, follow these steps:

  1. Check your credit. Since most lenders look at your credit score when deciding whether to approve you for a loan, it’s a good idea to check your credit before you apply. Go to to request copies of your credit reports from all three major credit bureaus. Dispute any errors or inaccuracies that may be lowering your score.
  2. Shop around. Not all personal loans are created equal. That’s why you should do your research and explore all your options at banks, credit unions, and online lenders. Compare interest rates, fees, terms, qualification requirements, and funding times to find an option that works for you.
  3. Get prequalified. The prequalification process can help you understand whether you’re likely to get approved for a loan and the loan terms you may lock in. To get prequalified, you’ll typically need to state how much you want to borrow, how you’ll use the funds, your annual income, your employment status, and the last four digits of your Social Security number. When you get prequalified, the lender will usually pull a soft credit inquiry, which won’t hurt your credit score.
  4. Apply. Once you find a loan offer that you’d like to move forward with, you’ll need to fill out a formal application. Be prepared to state your name, address, phone number, date of birth, employment status, and income. You’ll also need to submit documents, like pay stubs or bank statements. During this step, the lender may perform a hard credit pull, which will lower your score temporarily.
  5. Get funded. Upon approval, the lender will deposit your funds, typically through direct deposit to your bank account. You may receive the loan funds that same day, the next business day, or within a few business days, depending on the lender.

If you’re ready to apply for a personal loan, Credible lets you quickly and easily compare personal loan rates to find one that best suits your needs.