What Is a Personal Loan?

To get a personal loan, consumers should first check their credit score and check for pre-qualification, then compare offers based on APRs, fees, loan sizes and approval requirements.

How to Get a Personal Loan in 6 Steps

1. Check your credit score.
2. Check for pre-qualification.
3. Compare offers and select the one with the best terms (APR, fees, etc.).
4. Fill out an application, online if possible.
5. Wait for a decision, which usually takes a few business days.
6. Receive a bank transfer for the loan amount, usually within 7 business days of applying.

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You can use a personal loan for just about anything, from credit card debt consolidation and home improvements to large purchases, car repairs and medical procedures. As long as you don't take out a loan whose terms specify what the funds must be used for, you're free to do what you want with the money. For example, LightStream has different APR ranges specifically for different loan purposes, but most lenders do not.

The only things you're really not allowed to spend the money on are school tuition (you need a student loan instead), gambling and illegal purposes.

Things you can use a personal loan for:

Debt consolidation

You can use a personal loan to pay off existing debts, putting everything together with one easy monthly payment. This is a good option if you can get a lower APR on the personal loan than the APRs on your existing debts.

Medical/dental bills

Medical bills are an unavoidable expense, and a personal loan can help you finance them over time instead of being overwhelmed immediately after treatment. You can also refinance expensive bills that are already taking a toll on your wallet.

Home improvement

Home improvement expenses are often a good thing to use a personal loan for because they can increase the value of your property.

Starting a business

Starting a business can cost thousands of dollars, even if it's a small sole proprietorship. And it's perfectly legal to use a personal loan for business. But doing so can be a gamble, considering 50% of small businesses fail in the first five years.

Emergency expenses

Some lenders, like LightStream, offer the possibility (but not the guarantee) of same-day funding. Most personal loans will be able to provide financing in 7 business days or fewer, though some may take up to a few weeks.

Car repairs

A broken car can make your life incredibly difficult. Taking out a personal loan to pay off the repairs can ensure you get back to normalcy sooner. The average American household spends over $800 per year on car repairs, according to Liberty Mutual. Personal loans are usually for $1,000 or more.

Weddings

It's good to have a memorable wedding. But it's not the best idea to use a personal loan for one, even though it's allowed. You probably don't want to start married life with heaps of debt.

Funerals

A funeral could cost over $10,000. If you can't pay for the funeral out of the deceased's estate or your own savings, you might consider a personal loan.

Vacations

Vacations are fun, but they are a luxury. It's best to pay for them using money you already have saved, but you can use a personal loan if you want to.

Veterinary bills

If you're unable to pay for your pet's medical bills all at once, a personal loan can help you spread out that expense.

Big purchases

You can buy pretty much anything with a personal loan, as long as it's not illegal. But the best purchases to make are ones that are essential or a good investment, especially those too large to put on a credit card.

Those are just some of the expenses for which you can use a personal loan. However, just because you can use a personal loan for almost anything doesn't mean you necessarily should. Personal loans charge interest and fees, so it's best to only take out a loan for expenses that are necessary or will profit you in the long run.

A medical bill is an example of something that might be necessary, and remodeling a kitchen is an example of something that could make you money by increasing the value of a home. On the other hand, while you might be tempted to take out a loan for your dream wedding or vacation, it's better to save first and only spend money you already have.

Finally, it's worth noting that you won't be able to use a personal loan for anything if you can't get approved for one. Personal loans tend to require a credit score of at least 660, though some accept lower scores. You can see your personal loan approval odds with various lenders by using WalletHub's free pre-qualification tool.

An installment loan is a fixed amount of money that you receive in one lump sum and then repay in equal portions at regular intervals, which are known as installments. There are many different types of installment loans, from mortgages to personal loans. Some installment loans can only be used for one specific purpose, while others can be used for anything.

On the other hand, credit cards and lines of credit are not installment loans. They are types of revolving credit, since neither the amount borrowed nor the resulting monthly payments are predetermined.

Types of Installment Loans

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A personal loan generally it's not hard to get, but some personal loans are much more difficult to get than others. Unsecured personal loans often require a credit score of 660+, and some are only available to people with scores of 700+.

Some unsecured personal loans are available to people with lower credit scores, but you have to watch out for predatory interest rates. For example, one good unsecured personal loan provider for bad credit is Avant, whose interest rates will only be as high as 35.99%. In contrast, a company like Opploans could charge as much as 199%.

A secured personal loan is a lot easier to get than an unsecured personal loan, as the collateral that you provide greatly reduces the lender's risk. Even people with bad credit should have little trouble getting approved. The tradeoff is that the lender can take ownership of the collateral if you are unable to pay back your loan. So there's a lot more risk for you as the borrower. You'll have to decide if you have any collateral you're willing to put on the line, such as an auto title, stocks, money in a certificate of deposit, or valuable art.

One thing that will make it extremely hard to get a personal loan is if you don't have any kind of income. You need income to show that you're capable of making monthly payments. You don't necessarily have to be employed, however. Your income can come from other sources like a retirement account, alimony, disability payments and more.

There are both pros and cons of personal loans, but the pros can easily outweigh the cons in the right situation. Some of the biggest benefits of personal loans are that they can help build credit, they allow consumers to pay off big expenses over time, and they can be used for anything. Major drawbacks of personal loans include interest charges and fees, along with potential credit score damage if things don't go as planned.

It's important to weigh the advantages and disadvantages of personal loans before deciding whether or not to apply for one. We'll help you do just that below.

Top 5 Pros and Cons of Personal Loans:  

Pros of Personal Loans:

• Credit building: You will have to make monthly payments, and your lender will report your payment history to the credit bureaus. If you pay on time every month, you can expect your credit score to increase.
• High versatility: You can use a personal loan for almost anything you want. Some of the most common reasons for getting personal loans include home improvement, rent, electricity bills, medical expenses, funding a small business, and travel.
• Ability to pay over time: A personal loan will allow you to spend a lump sum of money and then pay it back over the course 12-60 months, typically. So your financial burden in any one month will be relatively small compared to the total. In addition, you know what your payment will be each month, which allows you to plan ahead.
• Ability to consolidate debt: If you have multiple debts with high interest rates, you may be able to take out a personal loan with a lower interest rate and use the loan to pay off the existing debts. That leaves you with only one monthly payment and less interest accumulation.
• Quick decisions: It typically takes 7 business days or fewer to get a personal loan. You may even be able to get approved and receive your funds the same day in some cases. Applying online gets you the fastest decisions.
• No collateral: Most personal loans are unsecured, meaning they don't require any collateral. If you can't pay the loan back, the lender can't immediately take your possessions. They'll have to send your debt to collections or take you to court.

Cons of Personal Loans:

• Ability to rack up unnecessary debt. Since personal loans don't really limit what you can do with the money, it's possible to go into debt for something you don't really need. In addition, you could end up borrowing more than you can afford, though lenders try to prevent that by looking at your existing debts and expenses.
• Short-term credit damage: Applying for a personal loan results in a hard inquiry on your credit report. This will cause a small, temporary drop in your credit score. In addition, the extra money you owe will raise your debt load, which will also impact your score and make it riskier for lenders to give you additional loans. But as long as you use the loan and other credit responsibly, you should bounce back quickly.
• Interest charges: The ability to pay off a balance over a period of months comes with the downside that you have to pay interest. Depending on your credit and the lender, your APR could be anywhere from around 6% to 36%.
• Origination fee: Personal loans may charge an origination fee, to cover the cost of processing your application. You might have to pay it upfront. Or it might get added to the total amount of your loan, or deducted from the amount you initially receive. It takes a credit score of 660 or higher to get a loan without this fee.
• Other fees: Personal loan providers often charge late fees if you don't pay the monthly bills on time. Some also charge a prepayment penalty for paying off your loan early. This lets them make back some of the money they didn't earn in interest. But prepayment penalties are rare, and none of the top 15 lenders charge them.
• Collateral on secured loans: People with credit scores of 585 or above can usually qualify for unsecured personal loans, which do not require any collateral. But people with scores below that may have to get a secured personal loan, which requires the borrower to offer something valuable as collateral to open the loan. The lender can keep the collateral if you default.

All in all, personal loans are useful for a large variety of purposes, and they allow you to pay off big expenses over time. But they also have the potential to be very costly. Before taking one out, make sure to compare personal loan rates on WalletHub.

You should get a personal loan if you really need to borrow the money and the loan has better terms than other borrowing methods available to you. For example, in certain situations, a credit card or home equity loan might be a better choice. In addition, you should only get a personal loan if you are confident that you can pay the loan off on schedule. Borrowers have defaulted on 3% - 4% of personal loans since 2016, down from 4.8% a decade prior, according to TransUnion. Defaulting on a loan results in significant credit-score damage.

If you're on the fence about whether you should get a personal loan, you can follow this simple checklist. You'll need to check off all the items for a loan to be worthwhile.

When you should get a personal loan:

1. The expense is necessary. You can get a personal loan for almost any purpose. But it's wiser to use a loan for important things like consolidating debt or making home improvements that will increase the value of your property.
2. Credit cards aren't a better option. People with good or excellent credit will likely find better long-term interest rates on personal loans than on credit cards. But there are plenty of credit cards with introductory 0% rates for 12-18 months on purchases. So 0% APR credit cards may be the better choice for smaller expenses.
3. Home equity loans/lines of credit aren't a better option. You can probably expect to get lower interest rates on a home equity loan or home equity line of credit than with a personal loan, and you may be able to borrow more than you could with a personal loan. But home equity loans and HELOCs use your house as collateral, whereas most personal loans require no collateral. Think over your options in detail before choosing.
4. You're confident you can pay it off. Personal loans can last anywhere from 12 to 84 months, though 60 months is a more typical cap. You'll make payments in equal monthly installments. Before agreeing to a personal loan, look at the monthly payment and put it in the context of all your other monthly expenses. You should be able to comfortably afford the loan payment, and not have to worry about being late.
5. You can qualify. To get an unsecured personal loan (a loan that doesn't require collateral) you'll need a credit score of at least 585. And you probably won't be able to get a loan without an origination fee unless your score is at least 660.

There are many situations when you should get a personal loan instead of borrowing another way. But there are also plenty of cases where you should not get a personal loan or even borrow at all. For example, taking out a personal loan to go on vacation or to throw a wedding isn't ideal. It'll take months or years to pay off the debt from something that only lasted a day or week. In addition, you'll want to avoid personal loans when you can get a better deal through other borrowing methods.

There are several other cases when you should not use a personal loan either. For example, it's not a good idea to borrow money to make investments you're not confident will pay off in the future. And your chances of getting an unsecured personal loan aren't great when your credit score is below 585. Personal loans are also not ideal in emergencies when you need immediate cash, because the lenders usually take at least a few business days to approve you and deliver the money. You might consider using a credit card or borrowing from family in an emergency instead.

Bottom line: Make sure to compare all options thoroughly before you commit to one.

Personal loans affect your credit score in the short-term and in the long-term. In the short-term, a personal loan may damage your score because it causes a hard credit inquiry and increases your debt load. But in the long-term, a personal loan can either help or hurt your credit, depending largely on whether or not you pay the bills on time. Ultimately, it's up to you how much impact the personal loan will have.

How a Personal Loan Affects Your Credit Score:

• Does temporary damage with an initial hard inquiry. When you first apply for a personal loan, your credit score will immediately take a small hit. That's because applying for a personal loan triggers a hard inquiry into your credit history. But this shouldn't drop your score by more than 5 points or so, and you should be able to bounce back quickly.
• Adds to your overall debt. If you're approved for a personal loan, you will immediately have a higher debt load, which may cause your credit score to drop in the short-term. That's because the more debt you have, the riskier it is for banks and credit unions to lend to you.
• Reports to the major credit bureaus monthly. The banks, credit unions and online lenders that issue personal loans report payment information to the major credit bureaus on a monthly basis. If you make on-time payments, you can expect your score to increase. But if you are late or don't pay altogether, your score will drop.
• Improves your credit mix. Proving yourself capable of managing multiple types of loans and lines of credit responsibly is good for your credit score. It shows you can be trusted to repay what you borrow in a variety of situations. So if you only have one or two other types of accounts on your credit report, such as credit cards or student loans, your score may benefit in the long run from getting the personal loan.
• Could help reduce credit utilization. Personal loans give you a lump sum up front, which you pay back in monthly installments. This is different from a credit card, where you can borrow up to a certain amount any time you want. Credit cards are known as “revolving credit,” and a big part of your credit score is how much of your revolving credit you use up each month, or your “credit utilization ratio.” Personal loans don't count toward this ratio, so if you use them to pay off revolving debt, you can lower your ratio and improve your score.

In conclusion, as long as you're sure to pay on time each month, a personal loan should eventually increase your score by a lot more than the initial inquiry caused it to fall. You can also avoid wasting hard inquiries by getting pre-qualified for a loan first. Pre-qualification only uses a harmless soft inquiry. And while it doesn't guarantee approval, it will let you know if your odds are good.

A secured personal loan is a personal loan that requires the borrower to provide collateral to the lender. The collateral “secures” the loan because the lender can keep the collateral if the borrower is unable to pay back the loan. So there's a lot less risk of the lender losing money than with an unsecured personal loan, which doesn't require collateral.

The major benefit of a secured personal loan is how easy it is to get. A secured personal loan can often get you lower interest rates than you'd receive with an unsecured personal loan, as well. The downside is that you're putting something valuable on the line. If you secure a loan with your car, for instance, defaulting on the loan would mean losing your means of transportation as well. It's important to be aware of exactly how secured personal loans work before applying.

What is a secured personal loan? Fast facts:

• A secured personal loan is a personal loan that requires collateral.
• The lender can take possession of the collateral if you default.
• The collateral usually needs to be at least as valuable as the amount you borrow. Some lenders might offer partially secured loans, where the collateral is worth less.
• If you're unable to pay back the loan, the lender will use the collateral to recoup amounts owed. Any excess amount will be returned to you. 
• It's not difficult to get a secured personal loan with bad credit because the lender has low risk.

If you have good or excellent credit, you're probably better off getting an unsecured personal loan. If you have bad-to-fair credit, you may still qualify for some unsecured loans, though your interest rates will be high. You'll have to weigh those rates against the cost of putting down collateral for a lower APR.

Whether you should get a personal loan or a credit card depends on how you want to use the money you borrow. Credit cards are best used for daily expenses, providing convenience, security, rewards and other benefits. Some credit cards are also good for short-term financing. If you can get a 0% APR credit card and pay off the debt before the regular interest rate kicks in, you could save a lot of money on a big purchase or balance transfer. Be careful, though, because credit cards have higher regular APRs than the average personal loan.

If you want to pay off a very large expense over a number of years, a personal loan is probably the answer because you're likely to get a lower interest rate on a loan than a credit card, and you can be certain the loan amount will cover the bill before you accept it. Credit card limits, on the other hand, are unknown until you're approved for the card. Also, credit cards cannot be used as a regular payment method for some types of bills, such as mortgages, student loans, and credit card bills. Money from personal loans can be used for pretty much anything. That said, many personal loan providers charge origination fees of 1%-8%, and those should factor into your decision, too.

Personal Loans vs. Credit Cards:

It's clear that personal loans and credit cards both share a lot of similarities and have a lot of differences. As a result, it's not too hard to see which is best to use for different types of people in some common situations.

When to Use Personal Loans vs. Credit Cards:

• If you need to borrow a lot for a long time, use a personal loan. Personal loans generally give better interest rates and let you borrow more than a credit card. Personal loans also have set payoff periods, lasting years. Plus, you can request the amount of the loan, whereas credit cards don't allow you to ask for a certain limit. You're still not guaranteed to get the amount requested, though.
• If you want a credit line for emergencies, use a credit card. With credit cards, you aren't borrowing money until you use your card. If you simply want an emergency credit line that will be there when you need it – without any obligation to borrow a certain amount – credit cards are the best option.
• If you want to pay off a high-interest credit card debt, use either a personal loan or a balance transfer credit card (depending on which gives the best interest rate). Balance transfer credit cards can potentially give the best deal – 0% APR for an intro period and, in some cases, no balance transfer fee – but only if you have at least good credit. Otherwise, a personal loan will likely be the better (and cheaper) bet for paying off credit card debt.

Ultimately, however, every reason you might have for borrowing money will have a different set of circumstances. Plus, personal loans and credit cards both have variables that depend on an applicant's creditworthiness, such as interest rates, credit limits, and fees. The differences in these variables can make either option more expensive or far cheaper than the other for certain types of transactions and people. So make sure to thoroughly consider the pros and cons of each option available to you, given your own credit standing. That's how you choose whether a personal loan or a credit card is right for you.

The benefits of obtaining a personal loan include being able to use the money for nearly anything, building credit if you pay the bills on time, and not having to put down any collateral. Personal loans also can have low interest rates, online approval and quick funding.

Benefits of Obtaining a Personal Loan

• Use them for many things. You can use a personal loan for almost anything. Some popular ways to use a personal loan include paying for home improvements, consolidating debt, or simply making a large purchase. 
• Build your credit. When you make your payments on time, the lender will report positive information to credit bureaus, which will raise your credit score.
• Pay over time. With a personal loan, you do not repay the loan all at once. You typically have 12 - 84 months to repay what you borrowed, plus interest. To see how much a personal loan will cost you over the life of the loan, check out the free personal loan calculator on WalletHub.
• Predictable payments. Personal loan payments are typically made in equal monthly installments, on the same day each month.
• Borrow large sums of money. Personal loans usually range from $1,000 to $100,000. Some lenders may offer loans with smaller dollar amounts, too.
• Manage your debt. If you have existing debt spread across multiple lenders, a personal loan can help you combine the debt into one easy-to-manage loan that has a lower APR. If that's what you want a personal loan for, check out WalletHub's picks for the best debt consolidation loans.
• Quick decision & funding. After you apply for a personal loan, you may get the decision the same day or within a few business days. Some fast-funding personal loans provide you with funding as soon as the same day you apply, too. Applying online will usually get you the fastest decision.
• Usually don't need to put up collateral. Unsecured personal loans do not require you to put anything up as collateral. On the other hand, secured personal loans do require collateral, such as a car or money in a savings account. 

If you're ready to start comparing options, check out WalletHub's picks for the best personal loans. Then you can estimate your rates with the free pre-qualification tool on WalletHub.