A personal loan is a lump sum you can borrow from a bank, a credit union or an online lender and repay over a fixed amount of time, unlike a credit card or line of credit. Borrowers pay back loans of up to $100,000 in fixed installments, usually over two to five years.
Personal loans are typically unsecured, which means they are supported by your creditworthiness rather than collateral. Collateral is an asset, such as a car or house, a lender may require for certain types of loans and use to recoup its losses if you default.
You can get a personal loan from different types of lenders, including traditional brick-and-mortar banks and online lenders. They serve borrowers with varying credit scores, income levels and other requirements.
There are smart ways to use personal loans, although these loans won’t work for everyone.
Credit card refinancing is one of the best personal loan options. You could consider a debt consolidation loan if you have high-interest credit card debt.
Paying off high-interest debt, such as a credit card with a 24% annual percentage rate, can be difficult and lengthy because the higher your rate, the higher your payments.
A credit card typically has a higher interest rate than a personal loan. If you qualify for a personal loan with a low interest rate, you can pay off your debt faster and spend less on interest.
Personal loans also can be used as home improvement loans, but you may find better options. Consider a home equity loan that taps the equity built up in your home. Home equity lines usually have lower rates than personal loans.
For some expenses, saving is better than taking out a personal loan. If you’re struggling to save for an expense such as a wedding or vacation, postponing until you can pay in cash is best.
Personal loans are available everywhere from brick-and-mortar banks and credit unions to online lenders. Review the pros and cons of each type of lender.
A bank or credit union could offer personal service, especially if a location is nearby. But online lenders sometimes offer more convenience, especially if you prefer to apply, close and manage your personal loan online.
Strive to obtain preapprovals from a variety of lenders so you can compare rates, terms and other factors for different types of personal loans.