What Is a Personal Loan?
A personal installment loan is a closed-end loan where the lender provides a lump sum that you repay in fixed installments over a set term. This structure gives you predictable monthly payments and a clear payoff date.
Unlike a credit card, which is a revolving line of credit, a personal loan gives you a one-time amount that you borrow and then pay back over time. That makes it well-suited for one-off expenses or consolidating other debts.
- Lump sum paid out upfront
- Fixed monthly payments over a set term
- Can be used for a variety of purposes, such as debt consolidation, major purchases, or unexpected expenses
- Often unsecured, but secured versions are available
Sources: Consumer Financial Protection Bureau
Secured vs. Unsecured Personal Loans
The broadest distinction among personal loans is whether they are secured or unsecured. Both types provide a lump sum you repay over time, but they differ in how the lender manages risk.
- Unsecured: no collateral, higher rates, stricter credit requirements
- Secured: collateral required, lower rates, easier to qualify
Sources: CNBC Select, Experian, OneMain Financial
Fixed-Rate vs. Variable-Rate Loans
Beyond collateral, personal loans can also differ by rate structure. The two main options are fixed-rate and variable-rate loans.
With a fixed-rate loan, the interest rate stays the same for the entire loan term. Your monthly payment will also be the same each month, which makes budgeting easier.
With a variable-rate loan, the interest rate can change over time, based on a benchmark index. Initial rates are often lower than fixed rates, but they can increase, which means your monthly payment may become less predictable. Consider whether you can handle potential payment increases before choosing a variable-rate loan.
Sources: CNBC Select, Experian
Debt Consolidation Loans
Debt consolidation loans are a popular type of personal loan. They let you borrow enough to pay off multiple higher-interest debts, such as credit card balances, and then make one single monthly payment to the consolidation lender instead of several separate payments.
If you qualify for a lower interest rate than you're paying on your current debts, consolidating them can reduce the total interest you pay and simplify your monthly finances. It's important to compare the APR on the debt consolidation loan with your current rates to see if it's beneficial.
Debt consolidation can be a useful strategy, but it works best when you also avoid running up new credit card debt while you're paying off the loan.
Sources: CNBC Select, OneMain Financial
Personal Loans for Major Purchases
Personal loans can be used for a wide range of major purchases, such as a new appliance, a wedding, or a home improvement project. Because the funds are paid out as a lump sum, they give you the cash you need upfront.
When you take out a personal loan for a purchase, be sure to factor in the total interest you'll pay over the life of the loan. Some purchases, like travel, may not be a good idea to finance unless you can comfortably afford the payments.
Co-signed and Joint Personal Loans
If you have limited credit history or don't qualify on your own, you might consider a co-signed or joint personal loan. These involve a second person who applies with you and shares responsibility for repayment.
With a co-signed loan, the co-signer does not receive the loan proceeds but promises to repay the debt if you default. With a joint loan, both borrowers are equally responsible for the balance and are both typically involved in the application. Lenders look at both applicants' income and credit in either case, which can improve your chances of approval and may help you get a better interest rate.
Before you ask someone to co-sign or take out a joint loan, make sure they understand the responsibility they are taking on. If you miss payments, it can affect both of your credit scores.
Sources: CNBC Select, Experian
How Loan Type Affects Rates
The choice between a secured and unsecured loan has a direct impact on the interest rate you're offered and how difficult it is to get approved. Secured loans are generally cheaper because the lender has the security of collateral, and they may be easier to qualify for if your credit isn't excellent.
Unsecured loans tend to have higher annual percentage rates (APRs) and require a stronger credit profile.
The type of personal loan you choose should fit your financial situation and your goal. For example, if you have valuable collateral and want to get the best possible rate, a secured loan might appeal to you. If you don't want to tie up an asset, an unsecured loan may be more appropriate, as long as you can obtain it at a reasonable rate.
Sources: CNBC Select, Experian, OneMain Financial
Comparing Secured and Unsecured Personal Loans
| Attribute | Unsecured personal loan | Secured personal loan |
|---|---|---|
| Collateral required | No | Yes |
| Typical interest rate | Higher | Lower |
| Approval difficulty | Stricter requirements | Easier to qualify |
Sources: CNBC Select, Experian
High-Cost Alternatives and Legal Protections
Not all borrowing options are created equal. Payday loans, title loans, and pawnshop loans are often high-cost and can lead to a cycle of debt or the loss of your property. These are not the same as personal installment loans and typically come with much higher fees and more aggressive repayment terms.
For servicemembers and their dependents, the Military Lending Act provides a 36% annual interest rate cap on certain consumer loans, including payday loans, vehicle title loans, and most installment loans. This protection does not apply to all credit products, so if you are in the military community, be sure to check whether a lender is compliant.
If you are considering any type of loan, it's important to understand the fees, the annual percentage rate, and the repayment terms before you sign. Compare offers from multiple lenders to find the one that best fits your needs.
- Payday loans, title loans, and pawnshop loans often carry high fees and risks.
- The Military Lending Act caps interest at 36% for covered servicemembers on certain loans.
Sources: CNBC Select, OneMain Financial, Consumer Financial Protection Bureau
Frequently asked questions
Can I use a personal loan for medical expenses?
Yes, you can generally use a personal loan for unexpected expenses, such as medical bills. Personal loans are commonly used for unexpected expenses, and medical bills can be a major example. You might choose a personal loan over a credit card to get a fixed repayment schedule and possibly a lower interest rate.
Sources: Consumer Financial Protection Bureau, CNBC SelectWhat is the difference between a personal loan and a line of credit?
A personal loan is a closed-end installment loan: you receive a lump sum upfront and repay it in fixed monthly payments over a set term. A line of credit is a revolving credit account, like a credit card, that lets you borrow up to a limit, repay, and borrow again. Personal loans are well-suited for one-time expenses, while lines of credit are more flexible for ongoing borrowing needs.
Sources: Consumer Financial Protection BureauAre personal loans for travel a good idea?
Using a personal loan to finance travel can be a way to pay for a large trip if you don't want to drain your savings, but it's important to weigh the costs. Since you'll pay interest on the loan, the overall cost of your trip will be higher. Only take out a loan if you can comfortably handle the monthly payments without straining your budget.
Sources: CNBC SelectCan I get a personal loan with a co-signer?
Yes, many lenders allow you to add a co-signer to a personal loan application. A co-signer with a stable income and good credit can improve your chances of approval and may help you secure a lower interest rate, because the lender considers both of your credit profiles. Keep in mind that the co-signer is legally responsible for the debt if you default, so you should discuss the commitment openly with them before applying.
Sources: CNBC Select, ExperianSources
- What is a personal installment loan? — Consumer Financial Protection Bureau
- 8 Types of Personal Loans And How They Work — CNBC Select
- What Are the Different Types of Personal Loans? — Experian
- 9 Different Types of Personal Loans to Know — OneMain Financial
- Military Lending Act (MLA) — Consumer Financial Protection Bureau