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What Is A Personal Loan?

Written by Banks Editorial Team

Updated August 10, 2021​

2 min. read​

Often, people ask what is a personal loan and end up getting all sorts of answers that do not answer their question. Understanding personal loans, their features, and how they work ultimately improves the way people make decisions about their finances.

What is a Personal Loan and How Do You Apply for One?

A personal loan is a type of borrowing from a lending institution characterized by monthly installment payments with a fixed rate of interest applicable over a set period, and often ranging from $1000 – $100,000. Most personal loans are unsecured (demand no collateral); however, in some instances, a lending institution may require some form of security.

The wealth of knowledge around what is a personal loan is critical to shaping a borrower’s decision to seek a loan. First, personal loans are awarded based on some considerations such as the borrower’s credit history, debt-to-income ratio, credit score, and monthly cash flow. A favorable credit profile and history, characterized by financial responsibility increase the odds for qualifying for a lower interest rate.

Despite the lack of harmony regarding credit score considerations exhibited by lenders charging different rates, borrowers need to factor in their credit score categories before borrowing. A score of 740 on a scale with a maximum score of 850 qualifies as a very good to excellent rating, which offers the most favorable loan conditions.

Similarly, a score of 670 to 739 is considered average, and individuals with this score often receive common loan terms. The next category falls between a score of 580 to 669; however, borrowers in this category get very steep interest rates. Lastly, scores less than 579 attract high rates of interest and can potentially lead to debt accumulation. Understanding what is a personal loan requires in-depth analyses of the terms of personal loans to avoid accepting unfavorable terms.

Finding the Best Personal Loans for Your Needs

To ensure you always get the best terms for loans, we have featured a link to a website with in-depth analyses of some of the leading providers of personal loans including their annual percentage rates, and the expected monthly payment.

While some people may wonder what is a personal loan used for, others use them for various purposes, especially during emergencies, and when in need of additional cash when what they have is insufficient. Below are some common ways a personal loan works:

  • Debt Consolidation – is often characterized by borrowers asking for a large sum to pay debts such as student’s loan, credit cards, and auto loans. Debt consolidation helps to aggregate your monthly financial obligations because you end up making one monthly payment, instead of multiple ones.
  • Home Improvement – personal loans are often used for home improvement purposes. Since the amount of money required for necessary remodeling may not be within arm’s reach, personal loans can come in handy.
  • Vacation Expenses – individuals take personal loans to pay for a vacation. While many critics may argue that it is prudent to save for a holiday, in times of a financial crunch, a personal loan can quench the thirst for a dream vacation.
  • Unexpected Expenses – unprecedented expenses such as emergency medical bills, replacing stolen items, work-related costs, etc. can drain your pockets and disorient your budget. In this regard, a personal loan can assist to fund such emergencies, which could have been impossible without the loan.

Overall, examining the full details of what is a personal loan leads to a greater understanding of their broader applications. Personal loans are still attractive to many individuals owing to the fact that they are unsecured, and that they are less restricted regarding their utilization.

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