A two-year personal loan had an average interest rate of 11.92% APR in May 2024, while the average credit card rate was 21.51% APR, according to the Federal Reserve. If you have good credit, personal loans can be an attractive alternative to credit cards, particularly for large expenses.
What is a personal loan?
A personal loan is a type of unsecured installment loan that typically has a fixed interest rate and fixed monthly payments. Loan features, approval and repayment can vary somewhat between lenders and are based on what you can qualify for.
Personal loan features
Personal loans generally have the following features, which can vary by lender and are often dependent on your credit score and income:
APR range: 6.99% to 35.99%
Available repayment terms: Typically one to seven years
Available loan amounts: Generally $1,000 to $50,000 or $100,000 (up to $200,000 for some lenders)
Fees: May have origination fees, which can be up to 12%
An APR is a yearly percentage that represents the interest rate plus any upfront fees.
Personal loan approval
When you apply for a personal loan with a bank, credit union or online lender, the lender reviews your credit history, income and other debts to determine how much you can afford to repay and how likely you are to repay the loan in full. If approved, the lender gives you a loan offer that includes the loan's annual percentage rate (APR), repayment term, loan amount, monthly payment and upfront fees.
You can often get rate estimates by prequalifying for a personal loan, which is a quick process offered through online lenders and doesn’t hurt your credit.
Repayment and reporting
Each monthly loan payment includes a portion of the principal, or the money you borrowed, plus interest. As you pay off the loan, more of your payment goes toward paying down the principal than paying interest. This is because loan payments are amortized over the life of the loan to keep them equal. As you pay down the loan principal, you owe less in interest, which means more of your payment can go toward the principal.
It's crucial to make each payment on time, since most personal loan lenders report your payments to the three major credit bureaus—Equifax, TransUnion and Experian—and a late payment can harm your credit score.
Types of personal loans Unsecured loans
An unsecured personal loan is a loan that allows you to borrow money without having to put up collateral, like a home, savings account or car. Lenders instead approve borrowers based on credit history, on-time payments and income.
Because it's riskier to lend to someone who doesn't offer an asset as collateral, lenders often charge higher interest rates on unsecured loans. Unsecured personal loans are common—consumers held a total of 28.86 million outstanding unsecured personal loans in 2023, according to Experian.
Lenders can start debt collection or file a lawsuit against you if you fail to repay an unsecured loan, but they can’t take your property.
Secured loans
Secured loans are loans that are backed by an asset or collateral. If you fail to repay a secured personal loan, the lender can take your property in addition to sending your debt to collections or pursuing legal action against you. Secured loans may be easier to qualify for and come with lower interest rates than unsecured loans, because the assets pledged reduce the risk for the lender.
Some online lenders, like Upgrade, Best Egg and Oportun, offer secured loans. It may be possible to get a secured loan with fair credit or even bad credit, provided you meet the lender's requirements. If you're using a vehicle as collateral, the lender may require you to own your car outright. In 2023, consumers held a collective 29.75 million outstanding secured loans, according to Experian.
How do lenders determine your interest rate?
Personal loan lenders evaluate the following criteria when determining your interest rate:
Credit score and payment history
The lowest advertised rates for personal loans are typically only available to exceptional-credit borrowers, people who have a FICO score of 800 or above. The lower your credit score, the higher your interest rate may be. Some lenders may also deny borrowers with fair or poor credit.
However, lenders like Upstart require a credit score of 300 or above, opening the door for bad-credit borrowers. Lenders also look closely at your payment history when assessing their lending risk.
Monthly income and debts
Lenders check to ensure you have sufficient income to repay the loan while managing your current expenses and debts. Some lenders also set specific minimum annual or monthly income requirements, though these are often not disclosed to consumers.
Lenders also consider your existing debts relative to your income. Your debt-to-income ratio (DTI), which is the share of your monthly income that goes toward repaying outstanding debts, is one measure lenders use to evaluate your capacity for repayment. If your DTI is very high, a lender may deny your application or offer you a higher interest rate. Some also have specific maximum debt-to-income requirements.
Tip: You can calculate your DTI by adding up your monthly debt payments, dividing by your gross monthly income and multiplying by 100 to get a percentage. Lenders generally like to see a DTI around 36% or lower.
Loan amount and type
The size of the loan you apply for also impacts the interest rate you'll pay. You may be able to qualify for a loan of $50,000 or more, but some lenders may charge higher interest rates for either small or large loan amounts. You should never borrow more than you need, even if it gets you a lower interest rate. In some cases, the rate may also vary depending on the loan purpose.
If a lender offers secured loans, you'll likely pay a lower rate by choosing this option over unsecured loans and offering collateral.
Repayment term
Lenders often offer lower interest rates for shorter-term loans (around 12 to 24 months). Because you'll also be paying interest for fewer months, a shorter repayment term can also save you a significant amount of money in total interest. But short-term personal loans also come with higher monthly payments, and it's most important to choose a loan that fits your budget so you're not overextended.
What can a personal loan be used for?
A personal loan can be used for almost any personal expense, from veterinary bills to moving costs.
Common reasons for taking out a personal loan include:
Debt consolidation (including credit card consolidation)
Major purchases
Emergency expenses
Home improvement
Medical bills
Moving costs
Special occasions such as weddings
Vacations
What can a personal loan not be used for?
Some lenders permit more loan purposes than others, but there are a few uses that are often prohibited. These can include:
College tuition
Investments
Gambling
Real estate purchases
Down payments on homes
Business expenses
Medical expenses
Vehicle financing
Note that permitted uses for loans differ by lender. Some may allow you to use your personal loan for medical or business expenses, for example, while others exclude both of these uses.
Personal loan requirements
Qualification requirements for a personal loan vary by lender, and many lenders don't disclose specific minimum requirements. Generally, lenders want to make sure you have:
At least fair credit (a FICO score between 580 and 669)
Strong history on on-time payments
Sufficient income to cover your debts
Some lenders have set rules, such as a minimum credit score and a maximum DTI, used to quickly determine whether you'll be approved and what amount and rate you'll qualify for. Others may use more sophisticated underwriting processes to evaluate your overall financial situation, in which case a low DTI may make up for a low credit score, and vice versa. For example, Upstart accepts applicants with credit scores as low as 300 provided they meet other requirements.
Different types of institutions can also have different requirements and exceptions. Credit unions, for instance, are often more lenient toward prospective borrowers who have weaker credit profiles than traditional banks because they're not-for-profit institutions owned by members. Banks tend to have the strictest credit and income requirements, while online lenders generally accept the riskiest applicants.
Requirements for bad- or fair-credit loans
Note that if you're applying for a secured loan, the lender may have requirements regarding the asset you use as collateral. And if you apply for a loan with a cosigner or co-applicant who agrees to be responsible for the loan, the lender considers that person's financial information as well as your own, which can improve your chances of approval if the cosigner or co-applicant has good credit.
What documents do you need?
During the application process, lenders often prompt you to upload documents that prove your identity, income and employment. In addition to providing your contact info and Social Security number, you may need to upload copies of the following:
Pay stubs, W-2s or tax returns
Proof of other income sources, such as pension plan statements or a disability benefits letter
Proof of identity, such as a driver's license or a Social Security card
Utility bills or other housing bills that prove your address
Current credit account statements
Rental lease or mortgage agreement
Required authorization forms
A lender may also request supplemental documentation after receiving your application if it feels it needs to verify any of the information you provide.
How to apply for a personal loan
Each lender has its own application process, but you'll typically complete the following steps:
Research lenders: You can start by narrowing down your options to lenders you may qualify for. Check each lender's reputation on customer review sites, like TrustPilot or Better Business Bureau (BBB), and review the loan amounts and terms they offer.
Prequalify with a handful of lenders: Most lenders allow you to prequalify online, which gives you an estimate of the APR and other terms you can expect based on your credit score. Going through prequalification is quick and only requires a soft credit check, so it won't damage your credit. If you prequalify with several different lenders, compare quotes between them.
Choose the loan that meets your needs: Narrow down your options to lenders with a monthly payment that fits your budget. Out of those, choose the loan that costs the least overall. To break a tie, consider discounts such as auto-pay interest rate discounts and other perks.
Proceed with the application: Authorize a hard credit check to formally apply for a loan. This will likely cause a small decrease in your credit score. You may need to answer additional questions not answered when you went through prequalification or upload supplemental documents to complete your application.
Review and sign your loan agreement: Review your final APR, which may differ from the estimate you received during prequalification. Read your agreement carefully and make sure you understand the terms. Call a customer service representative or visit a branch if you have questions. Then, e-sign your loan documents to receive the funds.
Related: How To Get a Personal Loan
Some lenders offer same-day or next-day funding, but depending on the lender and funding method you choose, it may take up to five business days or more to receive your funds.
What are personal loan alternatives?
If a personal loan isn't quite the right fit for your financial situation, consider the following alternatives:
APRs
Repayment terms
Funding amounts
Fees
Personal line of credit
Variable, based on Prime Rate
Continuous draw period (often three to five years) followed by repayment period
$1,000 up to $50,000
Origination fees, late payment fees, annual fees, advance fees etc.
0% APR credit card
0% APR during promotion, variable APR after
Continuous
Up to $50,000 or more, but limits vary considerably by credit card and issuer
Late payment fees, annual fees, balance transfer fees, foreign transaction fees, etc.
Home equity loans
Fixed
Five to 30 years
Dependent on your home’s equity
Closing costs, origination fees, appraisal fees, etc.
HELOC
Variable
Continuous draw period (up to 10 years) followed by repayment period (up to 20 years)
Dependent on your home’s equity
Origination fees, application fees, annual fees, repayment fees, cancellation fees, etc.
Payday alternative loans
Fixed, up to 28% interest rate
One to six months
$200 to $1,000
Application fees
Personal line of credit
A personal line of credit allows you to borrow repeatedly up to your credit limit and make minimum monthly payments on the amount you borrow. It works like a credit card but allows you to access cash at a lower interest rate. You may pay other fees, like origination, late payment or over-limit fees.
0% APR credit card
Many credit card issuers offer promotions for new cardholders that allow you to avoid interest on new purchases and/or balance transfers from other credit cards for a limited time, as long as you make minimum payments. Balance transfer fees may apply and range between 3% to 5%.
This can be helpful for people who need to make a major purchase or consolidate debt and are capable of paying off the full amount—or at least a considerable portion of it—within 12 to 21 months. After the promotional period, a high interest rate usually applies.
Home equity loan or HELOC
A home equity loan or home equity line of credit allows you to borrow against the equity in your home, generally up to 80%. You may pay higher upfront fees, like 2% to 5% closing costs, and wait longer to get your money (up to 30 business days) than personal loans, but you may also get a lower interest rate and have the option of a longer repayment term, sometimes up to 30 years.
Just be aware that your home acts as collateral for these types of loans, so you could lose your home to foreclosure if you can't repay them.
Payday Alternative Loan
If you have poor credit, consider taking out a Payday Alternative Loan (PAL I or II) from a credit union. You can only borrow up to $2,000, and you'll need to repay the money within 12 months. But interest rates are capped at 28% and there's typically no credit check.
FAQ Where can I get a personal loan?
You can get a personal loan from a bank, credit union or online lender. Brick-and-mortar banks and credit unions may offer in-person customer support, but online lenders and online banks may offer faster funding. If your credit score needs work, it might be easier to get approved for a loan from a credit union or online lender that offers bad credit loans.
Learn More: Where Can I Get a Personal Loan?
Can I get a personal loan with bad credit?
Getting a personal loan with bad credit can be difficult, but you can improve your chances of approval by prequalifying with lenders that specialize in serving poor credit borrowers, offering up collateral or applying with a co-signer or co-applicant.
How does a personal loan affect my credit score?
Applying for a personal loan causes a slight dip in your credit score. From there, the impact depends on how you manage repayment. If you always make your payments on time, your credit score will likely improve, assuming you don't take on any other debt. On the other hand, missed or late payments will damage your credit.