A personal loan is defined as money loaned to individual borrowers by banks, credit unions, or private lenders. The money can be used for just about any purpose. Personal loans are paid out in a single lump sum, and often repaid over a number of years. The typical personal loan is repaid in monthly installments over an agreed-on period of time and personal loans are typically unsecured, meaning they aren’t backed by collateral (homes, cars or other types of property).
"A personal loan is a convenient borrowing alternative, often at a lower rate than a credit card and with funds disbursed much more quickly than getting a home equity line of credit."
-Greg McBride, CFA, Bankrate’s chief financial analyst.
Interest rates for personal loans are largely determined by your credit score. Your annual income and the amount you wish to borrow are important, too. Interest rates for unsecured personal loans generally range from 5%-36%. You can apply for a personal loan through a bank, credit union or finance company, including online marketplace lenders.
| Credit Rating | Score Range | Average personal loan interest rate |
|---|---|---|
| Excellent | 720-850 | 9.8% |
| Good | 690-719 | 15.0% |
| Average | 630-689 | 21.3% |
| Poor | 300-629 | 28.2% |
Some of the most common reasons for considering a personal loan are:
Even if these reasons don’t apply to you, you may still benefit from a personal loan. Bankrate’s personal loans marketplace can help you find the best loan and the best lender for your situation.
Know the advantages and disadvantages of a personal loan, which include:
APR stands for Annual Percentage Rate. APR refers to the extra amount borrowers pay in interest and fees on an annual basis. Lenders calculate APR on a yearly basis, but borrowers are most often responsible for paying APR on a monthly basis.
For more detail on how APR can affect your monthly payments, check out our loan calculator.
Secured loans are backed by a piece of the borrower’s property as collateral, typically a vehicle or house. Because the borrower stands to lose personal property if they default, secured loans tend to have lower interest rates.
Unsecured loans are not backed by collateral, but instead by the borrower’s creditworthiness. Because the lender takes on more of a risk with an unsecured loan, interest rates tend to be higher. Lenders also require that borrowers seeking an unsecured loan have a higher-than-average credit score.
A repayment term refers to the length of time borrowers have to repay their loan. A personal loan's repayment term can vary between one and ten years, depending on the lender.
Because personal loans are often unsecured, they may come with higher APRs. With unsecured loans, lenders tend to pay extra attention to a borrower's credit score.
The lower a borrower's credit score is, the more they'll have to pay in APR. Lower credit scores can lead to APRs in the double digits.
Loan rates differ by lender, but often opting for a secured loan can help lower APR, even for someone with bad credit. In some cases, secured loans can offer up to 8% less in APR than unsecured loans.
Depending on the loan and the lender, you may have a choice between fixed rate (which stays the same over the life of the loan) or variable (which can rise or fall depending on changes in the market).
The interest on a variable rate loan often starts low but may increase over time. The terms of the loan agreement will specify how often the lender is allowed to raise the interest rate, and some loans cap the maximum rate at a certain percentage. By contrast, the payments and interest charges on a fixed-rate loan will remain the same.
Base your decision on whether you prefer the stability of a fixed rate or the possibility of saving on interest with a variable rate.
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