What Is A Personal Loan? A Complete Guide

Sometimes a little extra cash can make a world of difference, whether it’s for an emergency expense, a large purchase or debt management. A personal loan can often supply those necessary funds and more, but first you should know what you’d be getting into.

Let’s explore all the key information on personal loans so you’re prepared to decide whether a personal loan is the right choice for you.

Personal Loan Definition

A personal loan is money you can borrow and use for big purchases, high-interest debt consolidation and various other purposes. It’s an installment loan, so you borrow a lump sum of money and pay it back within a set amount of time.

Your interest rate will depend largely on your creditworthiness. The higher your credit score, the lower your interest rate will likely be, meaning you’ll pay less over the life of the loan.

Types Of Personal Loans

Different types of personal loans are available to meet the needs of borrowers in various financial situations. Personal loans can be either secured or unsecured, both of which we’ll walk through below.

Secured Vs. Unsecured Personal Loans

A borrower backs a secured loan with some type of collateral, such as a vehicle or a savings account. If you don’t make your loan payments, the lender has the right to take that asset to pay off the personal loan. Secured loans tend to carry a lower interest rate than unsecured loans since, in the event of a default, a lender can tap the asset offered up.

By contrast, an unsecured personal loan isn’t backed by collateral. This means a lender will either grant or not grant loan approval based primarily on factors such as a borrower’s credit, income and debt-to-income ratio (DTI). If you have bad credit, an unsecured loan will be harder to get since lenders are likely to lack confidence in whether you’ll pay the loan back.

Fixed Vs. Variable Interest Rate Personal Loans

You also have options for the type of interest rate you prefer with a personal loan. If you choose a fixed-rate loan, you lock in an interest rate and your payments are equal over the term of the loan.

If you choose a variable rate, your interest rate will fluctuate with market conditions. You may pay a lower interest rate initially, but you assume the risk of your monthly payment amount increasing if interest rates rise. Conversely, you could benefit from monthly payments of a lower amount if interest rates fall.

What Can You Use A Personal Loan For?

Here are some common uses of personal loans:

• Making home renovations/repairs: If you want to make small repairs or home improvements, a personal loan can be a great way to cover the costs.
• Paying down medical bills: Some medical bills are so expensive that you may want or have no choice but to consider a personal loan. You can use a medical expense personal loan to pay your medical bills so they don’t damage your credit. You’d then repay the loan in
• Consolidating debts: If you have multiple debts with high interest, you may be able to combine them into one personal debt consolidation loan. This can make payments more manageable and possibly lower your interest rate. Debt consolidation can include student loans, credit card debt and tax debt.
• Financing a vehicle: If you can’t afford an auto loan down payment or don’t want to use your car as collateral, you could use a personal loan instead. Just be sure to weigh your options carefully before using a personal loan for this type of
• Funding your small business: Whether you’re expanding your operation or need to plan for extra marketing expenses, a personal loan can help finance a budding business.
• Planning a wedding or vacation: Even if you’re planning a modest wedding or looking to travel on a budget, the costs can add A personal loan can often help cover these expenses more affordably than a credit card.

How Do Personal Loans Work?

Let’s do a quick overview of the personal loan process.

Shopping Around

The personal loan process typically begins with seeking the best offer available. When you decide you need a personal loan, you can start shopping online to see your options. Knowing exactly what you’re looking for and how much money is necessary can help you narrow down your choices.

Traditional banks, credit unions and online lenders typically offer personal loans. When evaluating loan options, it’s best to compare the annual percentage rate (APR) on each. The APR takes all fees and charges into account so you can compare loan offers and choose the cheapest one. Lenders usually must disclose the APR on all consumer loans.

Applying And Getting Approved

Before applying for a loan, check your credit report for an idea of your loan approval odds. Your credit history can be an important decision-making factor for the lender, and it will impact the loan rate and repayment term you’re offered. You’ll need to send your financial information to a lender when submitting a personal loan application. Most lenders will look at:

• Your credit score
• Your income
• Your debt-to-income ratio (DTI)
• Your employment history
• Your savings

Once you choose a lender, you’ll supply more detailed information about your finances. Your lender will use this information to determine your eligibility, interest rate and loan term. If all goes well, you’ll receive your approval and repayment plan within days. If you have little or no credit history, a lender may require you to have a co-signer on the loan.

Loan Terms

Upon approval, you’ll get a promissory note with specifics about the loan and its conditions. Be sure to read this document carefully, as it spells out all the details of the agreement between you and your lender. For example, it will highlight payment due dates, your interest rate, any late payment fees and more information.

A promissory note also explains how long you have to repay the loan, and it will specify when and to whom you’ll make payments. Once you sign the note, the contract governs the relationship between you and your lender.

Before signing on the dotted line, make sure you understand:

• The steepness of the interest rate: A personal loan interest rate tends to be lower than the rate with credit cards. But the rate can still be high, especially if you don’t have a great credit score. Take note of whether you have a variable or fixed interest rate.
• The presence or absence of an origination fee: Some lenders charge an origination fee to process the loan. Typically a percentage of the loan amount, the origination fee oftentimes may be rolled into your monthly payments or paid upfront.
• The length of the loan term: The longer the loan term, the more interest you’ll pay. You may be able to pay off your loan early to avoid paying more interest, though. That said, some lenders charge a prepayment penalty fee for paying off the loan sooner than expected.
• Your monthly payment amount: Make sure you can commit to paying this amount on time each month for the life of the If you fall seriously behind, you could face late fees and receive negative marks on your credit report.

Repayment

Once approved, you should receive your loan funds within 1 – 7 business days. Then, you’ll be expected to make payments until you pay the loan off. When you fully repay the loan, the promissory note gets returned to you and you’re free of obligations on the loan.

Rocket Loans℠ offers personal loans with same-day financing, so you could get your money the day you’re approved.¹

Personal Loan Alternatives

A personal loan isn’t your only option for major expenses. Take a look at these financing alternatives.

Home Equity Loans

A home equity loan functions a lot like a personal loan, in that you can spend it as you wish in most cases. A major difference between a home equity loan and an unsecured personal loan is that a home equity loan requires collateral in the form of your home itself. Your loan amount and interest rate will depend largely on your credit history and how much equity you have in your home.

If you can’t keep up with your payments and you default on a home equity loan, the lender can seize your home through the foreclosure process.

HELOCs

A home equity line of credit, or HELOC, is the revolving debt version of a home equity loan. You’re approved for a credit line of a set amount with an agreed-upon time frame during which you can withdraw funds. After the draw period ends, you enter the repayment period and can no longer take money out.

As with a home equity loan, your home secures the loan and can be taken from you if you fail to make all your payments.

Credit Cards With Promotional Offers

Some credit card companies offer a promotional period during which a new cardholder can repay their card balance at a 0% annual percentage rate (APR). The introductory period typically lasts 6 – 21 months. Depending on how much money you put on the card, this may not be enough time to pay off your full balance.

After the period ends, be prepared to pay a more traditional credit card interest rate – which these days averages out to around 21%.

FAQs About Personal Loans

Let’s dig into some common questions about personal loans and find quick answers.

How does a personal loan affect my credit score?

A personal loan can affect your credit in various ways. Most immediately, applying for a personal loan involves a hard inquiry, which causes a small dip in your credit score. Making late payments or defaulting can also damage your score.

If you want to see the rate and term you may get, you can do this by prequalifying with some lenders. Prequalification requires only a soft credit check, which won’t affect your credit.

A personal loan can boost your credit, however, by diversifying your credit mix and lowering your credit utilization. Making on-time monthly payments can raise your credit score over time as well.

What is the average interest rate on a personal loan?

Current personal loan rates hover in the 10% – 32% range on average. But the interest rate you’ll receive will depend mostly on your credit score and DTI if it’s an unsecured personal loan.

How much can I borrow with a personal loan?

Your financial situation affects how much you can get with a personal loan. Typically, borrowers are approved for $1,000 – $50,000. In rare instances, it’s possible to be approved for up to $100,000.

Rocket Loans offers personal loans of $2,000 – $45,000.

How do small personal loans work?

The minimum borrowing amount for a personal loan is often $1,000. The repayment process for a loan this small should work as it would with a higher loan amount, but you’ll likely have a shorter loan term.

Is a personal loan a good idea for me?

Considerable time and effort typically go into getting a personal loan. You have a lot to think about if you’re contemplating whether to apply for one. If you need funding and want to know whether you should get a personal loan, be mindful of your credit score.

Borrowers with a low credit score may have a hard time qualifying for a good interest rate – if they’re approved at all. If your credit score is too low for you to qualify with a decent rate and repayment term, take steps to repair your credit or consider other financing options.

Final Thoughts

A personal loan can be a great choice if you need money for plans such as debt consolidation or home repairs. However, you should always carefully consider your finances and ability to repay a loan before taking on new debt.

If a personal loan sounds right for you, apply online today with Rocket Loans.

*Same day funding is available for clients completing the loan process and signing the Promissory Note by 1:00 p.m. ET on a business day. Also note, the ACH credit will be submitted to your bank the same business day. This may result in same day funding, but results may vary, and your bank may have rules that limit our ability to credit your account. We are not responsible for delays that may occur due to an incorrect routing number, an incorrect account number or errors of your financial institution.