What is a personal loan?
A personal loan is a loan you can use to help pay off expenses or close a budget gap. Personal loans are a form of unsecured debt, meaning that they are not backed by collateral, unlike mortgages and auto loans. They have fixed repayment schedules and higher interest rates than secured loans. Rates vary, depending on your credit score and loan eligibility. Personal loans can be viable alternatives to home equity loans.
When you request a personal loan from a lender, you’ll receive the amount you requested up front. Then, you’ll be expected to repay that loan in monthly installments.
The lender will use your credit score to determine your eligibility for a personal loan. If the lender grants you the loan, it will use your credit score to determine the interest rate you will pay. Depending on the lender and your credit score, the interest rates for personal loans can be higher than the interest rates for other loans. In general, the higher your credit score, the more affordable your loan will be.
If you fail to make a payment or cannot pay back the loan, the lender can sue you, since there is no collateral associated with personal loans. If you repay your loan too early, you may be forced to pay penalties.
Examples of a personal loan
Aside from unsecured personal loans, there are other types of personal loans:
- Fixed-rate personal loans: These are loans for which the interest rate remains the same throughout the entire repayment cycle. These loans are usually repaid with monthly installments.
- Short-term personal loans: These are loans designed to pay off expenses quickly and then be repaid just as fast. They carry high interest rates and are also referred to as “payday loans” and “cash advance loans.”
- Variable-rate personal loans: These are loans that do not have fixed interest rates. Instead, the rates vary, but fluctuations are usually regulated with caps on how much the interest can change.