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Personal loans can help you achieve a variety of financial goals. Find out how they work and where to find one. (Shutterstock)

A personal loan is a sum of money that you borrow from a lender and agree to repay, with interest, over a certain period of time. It’s usually unsecured, which means you don’t have to offer collateral, like your house or your car. You can use a personal loan to consolidate debtpay medical bills, fund home improvement projects, or cover virtually any other expense.

Visit Credible for view your prequalified personal loan rates from various lenders, all in one place.

What is a personal loan?

A personal loan is a product offered by financial institutions such as banks, credit unions and online lenders. Once you withdraw one, you pay it back in equal installments, with interest, over a period of time. Repayment times can vary from a few months to a few years, or even more.

Most personal loans are unsecured, so you don’t have to worry about putting collateral on the line. Instead, factors like your credit and income will determine whether you qualify and the rate of interest you will get. Secured personal loans require you to provide collateral, such as jewelry or a car.

Because they present less risk to lenders, secured loans could have interest rate than unsecured loans. You may find it easier to qualify for an unsecured loan if you have poor or fair credit. Remember that the lender will have the right to seize your collateral if you cannot make your payments.

How do personal loans work?

A personal loan is an installment loan, so you will get all the money you borrow in one lump sum. Your Repayment period will depend on the lender and your particular situation. If you choose a fixed rate loan, the interest rate will remain the same throughout its term. A variable rate loan, on the other hand, will come with a fluctuating interest rate that can go up or down.

Most lenders will allow you to apply for a personal loan from the comfort of your own home. You will need to share some basic personal and financial information. You may also need to submit certain documents, such as government-issued ID and your pay stubs.

The funding time for a personal loan is usually around a few business days. But some lenders offer same-day or next-day financing after your application is approved. This is great news if you have emergency expenses and need cash right away.

Credible, it’s easy to compare personal loan rates from various lenders, without affecting your credit score.

How much does a personal loan cost?

A number of factors affect how much you’ll pay for a personal loan, including your credit, income, interest rate, fees, and how much you borrow. The lender you choose will also play a role in the cost of your personal loan.

It’s a good idea to borrow only what you need to keep your repayment costs as low as possible. You can use Credible personal loan calculator to estimate your monthly payments, as well as the amount you will pay over the term of the loan.

Advantages and disadvantages of personal loans

Before taking out a personal loan, be sure to weigh the pros and cons.

Advantages

  • Low rates — Compared to credit cards and other credit products, personal loans offer low interest rates. A lower rate can save you hundreds or even thousands of dollars over the life of the loan.
  • Flexible – You can use funds from a personal loan to pay just about any expense. It could be a car repair, a kitchen renovation, or even a vacation.
  • Potentially quick funding — Some lenders will fund your loan soon after you are approved. Depending on the lender, you may be able to receive your money the same day or the next business day after approval.
  • Can help you build your credit — As long as you make your payments on time, every time, a personal loan could improve your credit. A higher credit rating can open the door to lower rates and more favorable terms in the future.

The inconvenients

  • Must meet certain eligibility requirements — Most personal lenders require you to have a certain credit score and a stable income. It can be difficult to get approved if you don’t have the best credit.
  • Interest and fees — Personal loans are not free. Once you’ve signed up, you’ll have to pay interest and any fees charged by the lender, like origination fees and late payment fees.
  • Get into more debt — A personal loan will increase your debt. If you’re already drowning in debt because you have credit card debt, student loans, and car loans, for example, it might be difficult to add an extra debt payment each month.
  • Can hurt your credit — Even one missed payment can lower your credit score. A lower credit score will limit the credit products you will be approved for, and you will likely receive higher interest rates on loan products.

How to get a personal loan

If you want to apply for a personal loan, follow these steps:

  1. Check your credit. Since most lenders look at your credit score when deciding whether or not to approve you for a loan, it’s a good idea to check your credit before applying. Go to AnnualCreditReport.com to request copies of your credit reports from the three major credit bureaus. Dispute any errors or inaccuracies that could lower your score.
  2. Compare the prices. Not all personal loans are created equal. That’s why you should do your research and explore all your options with banks, credit unions, and online lenders. Compare interest rates, fees, terms, qualification requirements and financing times to find an option that’s right for you.
  3. Get prequalified. The prequalification process can help you understand if you are likely to be approved for a loan and what loan terms you can lock in. To be prequalified, you will usually need to provide the amount you want to borrow, how you will use the funds, your annual income, your employment status, and the last four digits of your Social Security number. When you’re prequalified, the lender will usually do an indirect credit check, which won’t hurt your credit score.
  4. Apply. Once you’ve found a loan offer you want to go ahead with, you’ll need to complete a formal application. Be prepared to include your name, address, phone number, date of birth, employment status and income. You will also need to submit documents, such as pay stubs or bank statements. During this stage, the lender may make a firm credit application, which will temporarily lower your score.
  5. Get funded. After approval, the lender will deposit your funds, usually by direct deposit into your bank account. You can receive the loan funds the same day, the next business day, or within a few business days, depending on the lender.

If you’re ready to apply for a personal loan, Credible makes it quick and easy compare personal loan rates to find the one that best suits your needs.