Life doesn’t always go according to plan. Maybe your car breaks down right after you’ve finally saved up for a vacation. Or perhaps a surprise medical bill throws your monthly budget into chaos. These are moments when a personal loan can be a real financial lifeline.
But if you’ve never taken out a personal loan, or you feel overwhelmed, don’t worry. We’re here to break it all down in plain language, so you feel confident when borrowing money.
A personal loan is a form of credit issued to a borrower by a lender, such as a bank, credit union, or online lender, according to Investopedia. This loan must be repaid over time—with interest. This is called an installment loan, which means you receive a lump sum of money upfront and repay it in regular payments over a certain period of time.
Unlike a car loan or a mortgage, many personal loans are unsecured, meaning you don’t need to offer collateral (like your car or house) to get approved. However, secured personal loans do exist, and they require you to back the loan with an asset. Whether the loan is secured or unsecured, lenders typically decide on approval and interest rates based on factors like your credit score, income, and debt-to-income ratio.
If you are unfamiliar with some of the terms you just read, check out our blog, Loan Lingo: Understanding Personal Loan Terminology, first.
Here’s one of the best parts: personal loans are flexible. You can use them for just about anything, including:
Just be aware that some lenders restrict certain uses (like college tuition or investing), so always check the loan agreement.
Here’s what typically happens when you apply for and repay a personal loan:
Your credit score gives lenders a quick glance at how risky it might be to lend to you. The higher your score, the better your chances of getting a lower interest rate. It’s easy to check your credit score for free on various sites like Annual Credit Report, Experian, or Equifax.
Not all personal loans are created equal. Interest rates, fees, and repayment terms can vary widely. Some lenders even offer prequalification tools, which let you check your estimated loan terms without impacting your credit score. Things you should look for include:
Once you’ve found the right lender, you’ll need to fill out an application. Lenders may ask for you to provide documents, which may include:
If approved, you’ll receive the loan offer with all the terms, and it’s important you read the agreement carefully before signing.
Once you sign the loan agreement, you can choose to have the lender deposit the money into your bank account—sometimes as quickly as the same day, but usually within a few business days.
From there, it’s up to you how the funds are used. Just remember that some lenders restrict personal loans to various categories, so don’t forget to check before using the money.
Once you get a personal loan, the repayment period usually begins right away. You’ll make regular payments (which typically include both principal and interest) until the loan is paid off. To stay on track, it’s a good idea to set up automatic payments. This helps you avoid late fees.
You also should budget your monthly loan payment so you know where that money comes from. Finally, if you think you are going to miss a payment, contact your lender. If it is the first time, they might be willing to change your due date or drop a late fee if you are already past due and have a good reason for it. The sooner you communicate with them, the more options may be available.
A personal loan can be a smart move if you:
If your budget is already stretched or you're unsure how you'll repay the loan, it might be better to explore other options like financial assistance programs or building an emergency savings fund first.
Taking out a personal loan is a big decision, but it doesn’t have to be intimidating. Consider consulting a financial advisor to discuss your specific circumstances and the options you may have. With the right information and a clear plan, a personal loan can help you regain control, reduce stress, and tackle life’s curveballs with confidence.