What is a personal loan?
A personal loan is money borrowed from a bank, credit union or online lender that you repay in equal monthly installments, usually over two to seven years.
Personal loans are typically unsecured, which means they don’t require collateral. Lenders instead consider your credit profile, income and debts during the loan approval process. If you fail to repay the loan, your credit can take a hit.
When should I get a personal loan?
A NerdWallet survey published in October 2022 revealed that nearly one-quarter of Americans (24%) took out a personal loan within the past 12 months, borrowing on average $5,046.
Personal loan funds can be used for almost any purpose, but taking a loan makes the most sense when:
- It’s the least expensive form of financing.
- It’s used for something with the potential to increase your financial standing, like debt consolidation or home improvements.
- You can manage the monthly payments without stressing your budget.
In contrast, a personal loan used for events like a wedding, or discretionary expenses like a vacation, can be expensive. NerdWallet recommends using savings for nonessentials to avoid finance charges.
If you’re borrowing for emergency or medical expenses, consider less-expensive alternatives first, such as community assistance or payment plans.
Personal loan interest rates and fees
Personal loan interest rates vary by lender, and the rate you receive depends on factors like your credit score, income and debt-to-income ratio.
Borrowers with high credit scores generally receive lower rates, from about 11% to 15%, while those with low credit scores may get an APR around 25%. Here’s what interest rates on personal loans look like, on average:
| How’s your credit? | Score range | Estimated APR |
| Excellent | 720-850. | 11.3%. |
| Good | 690-719. | 15.6% |
| Fair | 630-689. | 22.3%. |
| Bad | 300-629. | 25.2%. |
Source: Average rates are based on aggregate, anonymized offer data from users who pre-qualified in NerdWallet’s lender marketplace from July 1, 2022, to Oct. 31, 2022. Rates are estimates only and not specific to any lender. The lowest credit scores — usually below a 500 credit score — are unlikely to qualify. Information in this table applies only to lenders with APRs below 36%.
Some lenders charge origination fees to cover the cost of processing the loan. Lenders deduct the fee from the loan proceeds or roll it into the balance. This one-time, upfront fee is included in the loan’s annual percentage rate, so consider this when comparing costs between lenders.
Other fees to watch out for include late fees, insufficient funds fees and prepayment fees, which are penalties for paying off your loan early.
Best place to get a personal loan
You can get a personal loan from online lenders, banks and credit unions. The best option depends on where you can get the rate, terms and features that fit your financial situation.
For example, if a fast and convenient loan application is important to you, then consider an online lender. On the other hand, if lower rates and in-person support matter, then a bank loan or credit union loan could be the better option.
Pros and cons of personal loans
Depending on your financial situation and the loan’s purpose, a personal loan can be the right move or one you should sidestep.
Pros
Lower starting APRs than credit cards. For consumers with strong credit, personal loans typically have lower APRs than credit cards. While some credit cards offer 0% interest during an introductory period, the rates are generally higher after the period ends.
Fixed rates and monthly payments. Personal loans have fixed rates and monthly payments over a set term, so you always know what you owe and for how long. Other financing options like home equity lines of credit have variable rates that can mean fluctuating monthly payments.
Flexible loan amounts. Depending on the lender and your creditworthiness, you may have access to personal loan amounts of $1,000 to $100,000. This range meets a wide variety of expenses, from small emergencies to large home improvement projects.
No collateral. Unlike home equity loans that require you to secure the loan with your house, unsecured personal loans don’t require collateral. You risk damaging your credit if you can’t repay, but you won’t lose any assets.
Cons
Maximum APRs can be high. If you have a low credit score, APRs on personal loans can be higher than credit card APRs.
Possible fees. Borrowers may have to pay fees — like origination or late fees — along with their loan payments.
Increase in debt. Taking a personal loan adds debt to your budget, so it’s important to factor in the additional obligation and feel comfortable about paying it off.
Summary of personal loan pros and cons
| Pros | Cons |
|---|---|
| Lower starting APRs than credit cards. Fixed rates and monthly payments. Flexible loan amounts. No collateral is needed. | Maximum APRs can be high. Fees are possible, depending on the lender. Increases the debt you owe. |
How to choose the best personal loan
Here are things to consider as you shop around and compare personal loans.
Soft credit check. Most online lenders let you check your estimated interest rate by performing a soft check of your credit during pre-qualification. This won’t affect your credit score, so it pays to take the steps to pre-qualify for a loan with multiple lenders and compare rates and loan features.
Annual percentage rates. Because APRs include interest rates and fees, they offer an apples-to-apples cost comparison for borrowers deciding between personal loan offers. Use our personal loan calculator to see estimated rates and payments based on credit scores.
Repayment terms. Having a wide variety of repayment term options gives you the option to get a shorter term and pay less interest or a longer term and have a low monthly payment. Based on your budget, one may make more financial sense than the other.
Loan amount. Depending on how much money you need, one lender could be more attractive than another. Some lenders offer small to midsize loan amounts, like $2,000 to $40,000, while others provide loans up to $100,000. Determining the amount you need ahead of time will help you compare and decide.
Special features. You may benefit from features like autopay rate discounts, unemployment protection or financial coaching. See if the lender you’re considering offers any perks that could help you reach your financial goals.
