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If you need to borrow money, you might want to consider using a personal loan. But how do personal loans work? Before you take out a personal loan, learn how it works and how to find the best one.
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How personal loans work
A personal loan is a set amount of money you borrow from a financial institution — like a bank, credit union, or online lender — that you agree to pay back over a period of time with interest. These are usually unsecured loans, which means you don’t have to put up anything as collateral to get your loan. Instead, your credit score, income, and other factors determine if you qualify and what your interest rate will be.
Before you borrow money, though, you should consider the following:
- Will you qualify? Each lender has their own set requirements to qualify for a personal loan. But what they typically look for are borrowers who have a steady income and a good credit history (or a borrower with a cosigner who meets these conditions).
- What rates can you expect? Terms and rates vary by lender and what you’re planning on using your personal loan for. Qualifying for a lower interest rate offered by a lender depends on your online application, credit approval and score, loan terms, and other factors. But with Credible, you can compare multiple loan offers to find the lender that’s right for you.
- Are there fees? Many personal loans have an origination fee and some lenders might even charge late payment fees. Make sure to do your research, so you know exactly how much the loan will cost you.
- How long will it take to get funds? Once you’re approved for a personal loan, your lender will request banking information to wire the money into your bank account. Some lenders do this in as little as one day, but some can take a few days to a week to clear.
Learn More: What Is a Personal Loan?
How to apply for a personal loan
When you’re ready to get a personal loan, make sure you’re financially prepared to pay it back. Here’s how you can prepare before applying for a personal loan:
- Check your credit. Before you take money out, review your credit report and credit score to see if you can qualify for a personal loan and secure a low interest rate.
- Compare lenders. Many lenders have their own qualifying requirements, which means you’ll need to review each one before applying to the one of your choice. It’s also a good idea to compare them so you can find the best lender (and loan) for your situation.
- Look for ways to save. See which lenders have the lowest fees. Also, check if your lender offers any discounts. For example, some lenders may offer a deal if you set up automatic payments, where your monthly payment is deducted from your bank account each month.
- Only borrow what you need. Try to avoid over-borrowing money, or taking out a higher loan amount than you actually need. If you do, that just means you’ll be paying back more in interest over time. Use our personal loan calculator to estimate what your payments might look like.
Once you get approved, the money can get transferred into your checking or savings account anywhere from a day to a week, depending on your lender. Once you have the money in your account, you can typically use it however you’d like.
You’ll pay your loan off in installments every month and once the loan is paid in full, the account is closed. This type of loan is also known as an installment loan.
Check Out: The Best Personal Loan Lenders
What can you use a personal loan for?
Though you can typically use a personal loan for anything you wish, here are a few reasons you might need one:
- Debt consolidation: A debt consolidation loan is when you use a personal loan to pay off multiple bills at once (like high-interest credit card debt) and then pay your personal loan back in installments every month.
- Home improvement projects: Whether you have huge renovations or minor repairs, a personal loan can give you exactly what you need to afford these changes. Make sure you compare a personal loan to a home equity loan before applying.
- Major life events: Getting married, expanding your family, or putting a loved one to rest can get pricey. Use money from a personal loan to be able to pay for the big changes you’re expecting — or not expecting.
As long as you do your research beforehand, a personal loan is a saving grace when you’re in a tough bind. Especially since their interest rates are usually lower than a credit card.
It’s important to get your credit score in the best shape possible, compare the different repayment terms, and adjust your budget so you can make on-time payments every month. If you need help qualifying, try finding a cosigner.