How personal loans work
A personal loan is money you borrow in one lump sum and pay back in fixed monthly installments over a set period, usually two to seven years. Most personal loans are unsecured, which means you don't put up your house or car as collateral. The lender decides whether to approve you, and at what rate, mostly based on your credit and income.
The parts of a loan
- Principal: the amount you borrow.
- Interest rate: what the lender charges you each year to borrow, as a percentage of what you still owe.
- APR: the interest rate plus most fees, expressed as a yearly rate. It's the best number for comparing offers. More on APR.
- Term: how many months you have to repay. A longer term lowers the monthly payment but usually raises the total interest you pay.
Fees to watch for
- Origination fee: a one-time fee, often taken out of the loan before you receive it. If you borrow $10,000 with a 5% fee, you may get $9,500 but still owe $10,000.
- Late fees: charged if a payment is late.
- Prepayment penalty: a fee for paying the loan off early. Many lenders don't charge one, but check.
What lenders look at
Lenders typically review your credit score and history, your income and employment, and your debt-to-income ratio (how much of your monthly income already goes to debt payments). A stronger profile usually means a lower rate.
Soft vs. hard credit checks
Checking your rate through a comparison marketplace usually uses a soft inquiry, which doesn't affect your score. When you choose an offer and formally apply, the lender typically does a hard inquiry, which can lower your score slightly for a short time.
Before you borrow
Run the numbers with our payment calculator, make sure the monthly payment fits comfortably in your budget, and compare at least a few offers by APR and total cost.
This guide is general education, not financial advice. Loan terms vary by lender and borrower.