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How Do Personal Loans Work?

Lauren Nicholson
Written by Lauren Nicholson
Jessica Sain-Baird
Edited by Jessica Sain-Baird
Updated on:
January 17, 2025
Content was accurate at the time of publication.
We are committed to providing accurate content that helps you make informed money decisions. Our partners have not commissioned or endorsed this content. Read our editorial guidelines here.
Key takeaways
  • You can use a personal loan to borrow money for almost any expense.
  • You’ll pay back the amount you borrowed, plus interest and fees.
  • For around two to seven years, you’ll make equal monthly payments until your loan is paid off.
  • Getting a loan requires a hard credit pull, which will take around five points off your credit score.

What is a personal loan?

A personal loan is a common way to borrow money that you don’t already have in your bank account. You’ll repay the money — plus interest and fees — in equal monthly payments over a set period of time. You can use a personal loan for almost any kind of expense, and you’ll typically get your money within one to 10 business days.

You can also explore other ways to borrow money, including credit cards and lines of credit.

Personal loan or credit card?

Credit cards are typically best for small, recurring expenses like bills, while personal loans are best for large, one-time expenses. Learn more about when to use personal loans versus credit cards.

Amount

You can typically borrow $600 to $200,000 with a personal loan, depending on the lender and your credit score.

If you have bad credit, you may not qualify for the full loan amount. You can improve your odds of getting more money by adding a cosigner or co-borrower to your loan.

Cost of borrowing

You’ll pay interest and fees to take out a loan. This is called the annual percentage rate, or APR, and is expressed as a percentage of the loan. The better your credit score, the lower APRs you’ll qualify for and the less expensive your loan will likely be.

Learn more about upfront personal loan fees.

Repayment period

Loans come with set repayment periods, typically between two and five years. Long-term loans come with smaller monthly payments because you spread out your payments over time, but you’ll pay less money on interest with a short-term loan.

Uses

Common reasons to get a loan include consolidating debt, paying bills, doing home improvements and making large purchases. More than half of LendingTree users get a personal loan for debt consolidation, making it the top reason to get a personal loan.

You can use a personal loan for almost anything, but lenders typically don’t allow you to use the money for your business or secondary education (college or graduate school). Consider getting a small business loan or student loan to cover business or education expenses.

How to qualify

Every lender has its own personal loan requirements, but lenders typically consider your:

  • Credit score. Your credit score is a three-digit number that measures how likely you are to make on-time payments. You can check your score for free (and without impacting your credit) with LendingTree Spring.
  • Credit history. When lenders pull your credit report, they’ll be able to see your credit history. This includes the status of your current loan and credit card accounts, any late or missed payments and any bankruptcies or accounts in collections.
  • Debt and income. Lenders often calculate your debt-to-income ratio to determine if you can afford to take on new debt.

Beware of any lender that guarantees approval before you apply. This is a common sign of a personal loan scam.

Did you know?

Lenders may also ask for documents proving your identity, address and employment. Having your W-2 and government ID ready ahead of time will speed up the application process.

What is the interest rate on a personal loan?

Interest rates for the best personal loans currently run from 5.99% to 35.99%.

Personal loan interest rates are fixed, meaning they don’t change with the market. That’s why loan payments are predictable — they’re the same every month for the duration of the loan.

Most lenders advertise loans with a range of interest rates. Lenders reserve their lowest rates for borrowers with excellent credit. Borrowers with bad credit will get high interest rates, if they qualify for a loan at all.

Where can I get a personal loan?

The best places to get a personal loan are banks, credit unions and online lenders. You can apply for a loan directly on the lender’s website or use a lending marketplace like LendingTree to compare rates from multiple lenders. 

Getting six or more loan offers could help you save up to $3,138 on your loan, so it’s worth your time to check your rates with several lenders. You can do this quickly by using a lending marketplace, or you can check your rates by prequalifying on each lender’s website.

Steer clear of predatory lenders

Not all lenders are created equal. Watch out for payday loans with triple-digit APRs. This is one form of predatory lending that can land you in a cycle of deb

How to get a personal loan

Here’s how it works when you apply for a loan.

  • Research multiple lenders. Take the time to compare rates, fees and loan terms from several lenders. Look for lenders that offer reasonable APRs — experts consider rates below 36% to be affordable for most consumers — and repayment terms that fit with your schedule and budget.
  • Apply for prequalification. You can submit an application to prequalify for a loan directly on the lender’s website or use a service like the LendingTree marketplace to prequalify with several lenders at once. Prequalifying allows you to check your potential rates without impacting your credit score.
  • Compare your offers. Once you have several offers in hand, compare rates, monthly payments and fees. Use a personal loan calculator to calculate the total interest you’ll pay with each offer. Choose the offer that charges you the least interest but still has monthly payments you can afford.
  • Submit a loan application. Once you’ve chosen your offer, you’ll need to submit a formal application with the lender. The lender will ask you a few additional questions and may require you to send in documentation to confirm your identity, address and employment. At this point, the lender will do a hard credit pull that will cause your credit score to drop around five points.
  • Get your money. After the lender approves your application, you’ll get your money as a lump sum. Lenders typically send money via direct deposit, but many lenders will send the money directly to your creditors if you’re consolidating debt.

The entire loan application process from start to finish typically takes one to 10 business days.

Save time and money

You can get offers from up to five lenders in just a couple of minutes when you fill out a single form with LendingTree. The average LendingTree user saves $1,659 by shopping around on our platform.

Frequently asked questions

Yes, you can refinance a personal loan. When you refinance, you take out a new loan to replace your current loan. People typically refinance to get lower rates or monthly payments, which can happen if their credit score has improved or if market rates are going down.
An unsecured personal loan is a loan backed by the borrower’s promise to repay instead of a piece of collateral like a car or house. Interest rates for unsecured loans tend to be higher than rates for secured loans, making them more expensive to pay off. That said, you risk losing your collateral if you stop making payments on a secured loan.
Personal loans typically don’t come with prepayment penalties, but some lenders do charge a fee for early payment. Check with your lender before making early payments to make sure you won’t be on the hook for a penalty fee.
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