Personal Loans

A personal loan is a type of loan, typically unsecured, that you can get within days or hours from some banks, credit unions, and online lenders. They can be used for almost anything, depending on the lender’s guidelines, such as paying for a vacation, wedding, home improvements, or consolidating debt.

Interest rates are most often fixed, which means your payments won’t change for the life of the loan. Repayment terms typically range between 1 and 7 years, but can extend well over 10 years for certain loan purposes, like home improvements. Loan amounts are available from under $1,000 to over $200,000, depending on your credit score, the loan’s purpose, and the lender.

To get a personal loan, you’ll generally need a reliable source of income, a credit score that meets the lender’s minimum requirement — many lenders prefer a FICO score above 670 — and a debt-to-income ratio (DTI) under 36%. But different lenders have different eligibility criteria. For example, some lenders consider applicants with fair and bad credit, while others only consider applicants with good credit or better.

The Federal Reserve is widely expected to cut the federal funds rate at its September meeting, after months of cooling inflation and an unexpectedly weak July jobs report. The fed funds rate is the benchmark rate that determines how much it costs for banks to lend money to one another overnight.

This could mean a proportional rate cut for prospective borrowers, but a rate cut isn’t the only factor in play. Demand for loans has increased this year across all loan types, while lending standards have tightened. In other words, though the benchmark rate may drop, banks are being pickier about who they make loans to. Plus, consumer debt is reaching new highs and delinquency rates are on the rise, according to the New York Fed’s Quarterly Report on Household Debt and Credit. As of Q2 2024, 9.1% of credit card balances were delinquent.

All this adds up to a tougher time qualifying for loans for many consumers, who may not see any benefit from a lower federal funds rate. Borrowers with excellent credit, low debt, and a strong income are in the best position to benefit from lower rates.

Pros:

• Can be used for most purposes, including emergency expenses, home improvements, and debt consolidation

• Large loan maximums are available to certain borrowers

• Can have quick funding (the same day you apply, in some cases)
• Most are unsecured (no collateral required)

• Years-long repayment terms

• May be able to prequalify and compare potential rates

• Can be used to build credit

• Can be refinanced (e.g., if you improve your credit score and become eligible for a lower rate)

Cons:

• Potentially high annual percentage rates (APRs) for those with fair and bad credit

• Approval may be difficult without good credit and a low DTI

• Debt may be unnecessary

• Some lenders charge origination fees, which can reduce the amount you receive

Personal loans impact your credit score in a few different ways. When you apply for a personal loan, the lender will conduct a hard inquiry, which may lower your score by a few points for up to a year. However, adding a personal loan to your credit mix could increase your score if you make payments on time. If you get a personal loan to consolidate credit card debt, your score could increase significantly because your credit utilization will drop once you pay off your cards. Just be sure to keep the cards open, with balances low, and make timely payments on the loan.

While a personal loan can be a great way to get much-needed funds, it may not always be the best option. Personal loan alternatives include:

• Home equity loans

• Home equity lines of credit (HELOCs)

• Credit cards

• Personal lines of credit

• Cash advance apps (small loan amounts)

• Payday alternative loans (PALs) from a credit union

• Cash-out refinances (home or car)

• Cash-value life insurance loans

• 401(k) loans

• Borrowing money from friends and family

The best choice will depend on what you can qualify for and what you intend to use the loan funds for.

It may be possible for you to refinance a personal loan. If your credit score has improved, for example, you might qualify for a personal loan at a lower rate than the one you currently have. Or, if you need to lower your monthly payment, you could potentially do so even at the same rate by extending your repayment term.

Check your credit regularly — your bank or credit card company may let you do this for free. If you see your score increase, prequalify with multiple lenders to find out if you should refinance to get a lower rate. You may also be able to refinance at a lower rate if interest rates drop.

You could get a personal loan as soon as the same day you apply, depending on the lender you apply with, what time of day you apply, and how quickly your application is approved. That said, many online lenders will fund your loan within one to two business days of approval. In some cases — especially with lenders that use AI underwriting — approval decisions can be nearly instant.

However, with others, such as some banks and credit unions, approval could take days or longer. To speed up the application process, it’s best to ensure you’ve entered all your information correctly in the application and to have documentation ready for the lender, such as a driver's license, pay stubs, and tax returns.

According to the Federal Reserve, the average APR on a two-year loan from a bank is 11.92%. But what you’ll be able to qualify for depends heavily on your credit score and income. The higher both are, the lower your rate is likely to be. For example, average personal loan rates for borrowers with FICO credit scores above 780 were 12.75% APR for 3-year personal loans and 18.01% APR for 5-year loans. Borrowers with scores below 600 saw rates just under 33% APR for 3- and 5-year personal loans.

Each lender has different loan maximums, and how much of a loan you’ll qualify for with each lender is dependent on your credit, income, and current debt. For example, some lenders offer loans up to $100,000 or more, but only to well-qualified borrowers, usually those with excellent credit (a FICO score above 800) and a strong income.

Applying for a personal loan typically requires a hard credit inquiry, which can temporarily ding your score, while missed or late payments can hurt your score significantly. But making consistent on-time payments can improve your credit over time, as payment history makes up 35% of your FICO score. Plus, if you’re using the loan to consolidate credit card debt, your score could improve dramatically once your cards have been paid off.