Personal Loans: How They Work and When to Use One
A personal loan gives you a lump sum to repay in fixed monthly payments. It can be a cheaper way to consolidate high-interest debt or pay for a big expense, but it isn't always the right tool. Here's how personal loans work, what they cost, how to compare offers and when to avoid one.
By Pond.com editors Updated 4 min read
Quick answer
- A personal loan is usually unsecured, with a fixed rate and fixed monthly payments over 2 to 7 years.
- Rates depend mainly on your credit score and income, and some lenders charge an origination fee of up to around 10%.
- Consolidating high-interest credit card debt into a lower-rate loan can save money, as long as you don't run the cards back up.
- Compare the APR, which includes fees, and the total cost over the life of the loan, not just the monthly payment.
- Prequalify with several lenders to see your rates without affecting your credit score.
A personal loan is money you borrow from a bank, credit union or online lender and repay in equal monthly payments over a set term. Because the rate and payment are usually fixed, it's predictable. Used for the right reasons, a personal loan can save you money. Used for the wrong ones, it's just more debt.
This guide is general information, not financial advice.
How personal loans work
- You borrow a lump sum, often from about $1,000 to $50,000 or more.
- You repay it in fixed monthly payments over a set term, typically 2 to 7 years.
- Most are unsecured, meaning you don't put up collateral. Secured personal loans, backed by savings or a car, can offer lower rates.
- The rate depends on you, mainly your credit score, income and existing debts.
What it costs
- Interest rate: borrowers with excellent credit get the lowest rates; fair or poor credit can mean rates of 25% to 36% or more.
- Origination fee: some lenders charge 1% to 10% of the loan, usually taken out of the money you receive.
- APR: the annual percentage rate includes the interest rate and fees, so it's the best number for comparing loans.
- Total cost: a longer term lowers the monthly payment but usually means paying more interest overall.
Example
Borrowing $10,000 at 12% APR:
| Term | Monthly payment (approx.) | Total interest (approx.) |
|---|---|---|
| 3 years | $332 | $1,960 |
| 5 years | $222 | $3,350 |
When a personal loan makes sense
- Consolidating high-interest debt, such as credit cards charging over 20%, into one lower-rate loan with a fixed payoff date.
- A necessary large expense without a cheaper option, such as an urgent home repair or medical bills, after you've asked about payment plans.
- Replacing a more expensive option, such as a payday loan or a high-rate store card.
When to think twice
- Paying for wants such as vacations or weddings. Saving up first costs nothing in interest.
- Consolidating debt without changing habits. If you pay off cards with a loan and then run them up again, you'll owe more than before.
- When cheaper options exist, such as a 0% balance transfer card you can pay off in time, a payment plan from a hospital, or an auto loan for a car.
- When the payment would strain your budget. See our guide to making a budget.
Widely available personal loan lenders, ordered by their lowest advertised APR.
| Provider | APR range | Loan amounts | Origination fee | Details |
|---|---|---|---|---|
| Upstart Personal loans, opens in a new tab Considers education and work history as well as credit. Terms of 3 or 5 years. | 6.30%–35.99% | $1,000–$75,000 | Up to 12% | Considers education and work history as well as credit. Terms of 3 or 5 years. Visit site Upstart Personal loans, opens in a new tab |
| SoFi Personal loans, opens in a new tab Lowest rates include autopay and member discounts. | 6.49%–34.99% | $5,000–$100,000 | None required | Lowest rates include autopay and member discounts. Visit site SoFi Personal loans, opens in a new tab |
| Patelco Credit Union Personal Loan, opens in a new tab Credit union; you'll need to become a member. Terms up to 7 years. | 6.99%–17.90% | $300–$100,000 | None | Credit union; you'll need to become a member. Terms up to 7 years. Visit site Patelco Credit Union Personal Loan, opens in a new tab |
| Upgrade Personal loans, opens in a new tab | 7.74%–35.99% | $1,000–$50,000 | 1.85%–9.99% | Visit site Upgrade Personal loans, opens in a new tab |
| PenFed Credit Union Personal loans, opens in a new tab Credit union open to anyone; membership is set up when you apply. Terms up to 5 years. | 8.99%–17.99% | $600–$50,000 | None | Credit union open to anyone; membership is set up when you apply. Terms up to 5 years. Visit site PenFed Credit Union Personal loans, opens in a new tab |
How we chose these
We included widely available personal loan lenders, from online lenders and credit unions that most people can join. Lenders are ordered by the lowest APR they advertise. We check each lender's own website and independent reviews. Credit union loans cap rates at 18% APR, while online lenders can charge more but may approve a wider range of credit. Pond.com isn't paid by any lender listed here.
APRs are fixed for the life of the loan. You'll be offered a rate within the range based on your credit, income, loan amount and term; the lowest rates go to applicants with excellent credit and may need autopay. Origination fees come out of the money you receive. Checking your rate with most lenders uses a soft credit check that doesn't affect your score.
For information only, not a recommendation. Rates and terms change often and may depend on where you live; check the details with the provider before you apply. Pond.com isn't paid by any provider listed here.
How to get the best loan
- Check your credit reports and score first. See how credit scores work.
- Prequalify with several lenders, including your bank, a credit union and online lenders. Prequalifying uses a soft credit check that doesn't affect your score.
- Compare APRs, fees, terms and total cost, not just the monthly payment.
- Check for prepayment penalties. Most personal loans have none, so you can pay early and save interest.
- Read the loan agreement before you sign, including late fees and what happens if you miss a payment.
- Apply formally with the lender you choose. This causes a hard inquiry.
Avoid predatory lenders
Personal loan vs other options
| Option | Typical cost | Best for |
|---|---|---|
| Personal loan | Fixed rate; varies widely by credit | Consolidating debt; large one-time costs |
| 0% balance transfer card | 0% for a set time, plus a transfer fee | Paying off card debt within the intro period |
| Home equity loan or HELOC | Usually lower rates, but your home is collateral | Large home projects, for homeowners with equity |
| Credit card | High APR unless paid in full | Small purchases paid off each month |
| Payday loan | Extremely high | Best avoided |
Common questions
Most lenders allow almost any personal use, such as consolidating debt, home repairs, medical bills, moving or a big purchase. Some restrict uses like college tuition, business costs or investing. A loan for a car or home is usually cheaper as a dedicated auto loan or mortgage.
Many lenders want a score of at least the mid-600s, and the best rates go to scores in the 700s and above. Some lenders work with lower scores, but at much higher rates. Credit unions can be more flexible.
A one-time fee some lenders charge to process the loan, often 1% to 10% of the loan amount, usually taken out of the money before you receive it. It's included in the APR, which is why comparing APRs gives a fairer picture.
For a large expense you'll repay over several years, a personal loan usually has a lower rate than a credit card, plus fixed payments and a set payoff date. For small purchases you can repay within a month, a credit card paid in full is cheaper.
No. Prequalifying uses a soft credit check, which doesn't affect your score. A hard inquiry happens only when you formally apply, and it may lower your score by a few points for a short time.