Personal Loans » Advice » 9 Things To Know About Personal Loans
Advertiser Disclosure This website is an independent, advertising-supported comparison service. The product offers that appear on this site are from companies from which this website receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). This website does not include all card companies or all card offers available in the marketplace. This website may use other proprietary factors to impact card offer listings on the website such as consumer selection or the likelihood of the applicant’s credit approval. This allows us to maintain a full-time, editorial staff and work with finance experts you know and trust. The compensation we receive from advertisers does not influence the recommendations or advice our editorial team provides in our articles or otherwise impacts any of the editorial content on The Smart Investor. While we work hard to provide accurate and up to date information that we think you will find relevant, The Smart Investor does not and cannot guarantee that any information provided is complete and makes no representations or warranties in connection thereto, nor to the accuracy or applicability thereof. Learn more about how we review products and read our advertiser disclosure for how we make money. All products are presented without warranty.

9 Things To Know About Personal Loans

There are things it's great to know BEFORE you apply for a personal loan. Here are our top 9 things you should know about personal loans
Author: Baruch Mann (Silvermann)
Baruch Mann (Silvermann)

Writer, Contributor


Baruch Silvermann is a financial expert, experienced analyst, and founder of The Smart Investor.  Silvermann has contributed to Yahoo Finance and cited as an authoritative source in financial outlets like Forbes, Business Insider, CNBC Select, CNET, Bankrate, Fox Business, The Street, and more.
Interest Rates Last Update: June 3, 2024
The banking product interest rates, including savings, CDs, and money market, are accurate as of this date.
Author: Baruch Mann (Silvermann)
Baruch Mann (Silvermann)

Writer, Contributor


Baruch Silvermann is a financial expert, experienced analyst, and founder of The Smart Investor.  Silvermann has contributed to Yahoo Finance and cited as an authoritative source in financial outlets like Forbes, Business Insider, CNBC Select, CNET, Bankrate, Fox Business, The Street, and more.
Interest Rates Last Update: June 3, 2024

The banking product interest rates, including savings, CDs, and money market, are accurate as of this date.

You can trust the integrity of our unbiased, independent editorial staff. We may, however, receive compensation from the issuers of some products mentioned in this article. Transparency is a core value for us, see how we make money.

Table Of Content

Personal loans are one of the most readily available forms of finance. They can provide a way to access funds with a structured repayment plan, so you can fund a larger purchase, restructure your finances or pay for a project.

While they are a common form of finance, many people feel a little confused about personal loans and how they work. To help you to determine if a personal loan is the right choice for you, we’ll delve into 9 things to know about personal loans.

1. How Do Personal Loans Work?

Generally, personal loans are an unsecured form of finance. This means that they have a quite straightforward application process. Typically, you can use the loan proceeds for practically any purpose, but some lenders may impose some restrictions.

Once you complete your application and it is approved, the funds are deposited into your designated bank account as a lump sum. You can then use the funds to make your purchase, pay off debts or other purposes.

Typically, your monthly repayments will begin approximately 30 days after you receive the funds. You’ll have a payment schedule with a fixed interest rate, so you’ll know how much you need to pay each month.

The repayment period can vary according to your loan amount and financial circumstances. It could be as little as one year up to five or seven years. However, there are some lenders that offer personal loans for up to 10 years.

Just bear in mind that while a longer term can reduce your monthly repayments, the longer the term, the more interest you pay over the lifetime of the loan.

things to know on personal loans
(Photo by TaniaKitura/Shutterstock)

2. Types of Personal Loans

While many people consider personal loans to be just one financial product, there are several types of personal loans.

Most personal loans have a fixed rate, so this is considered to be the standard personal loan. The fixed rate means that you lock in your rate and monthly repayments for the lifetime of the loan.

This is a good option if interest rates are predicted to rise in the coming months or you want the reassurance of consistent payments every month, as the fixed rate makes it easier to budget, since you don’t need to worry about changing repayments.

A variable rate personal loan has a rate that can change according to the benchmark rates set by the bank. Depending on how the rate fluctuates, your loan rate and monthly repayments can both rise and fall.

Many variable rate loans have a lower APR compared to fixed rate loans, but they may also have a cap to limit rate changes over a set period or the lifetime of the loan.

While they may not be as readily available, a variable rate personal loan can be a good choice if you need a loan now but the rates are expected to fall.

If you would struggle to qualify for a loan or may be offered a higher rate, a joint loan or one that is co-signed could be a solution. Essentially, you’re sharing the responsibility to repay the loan with a partner, family member or friend.

These types of personal loans can be secured or unsecured, but essentially, they allow you to consolidate your existing credit card debt and loans into one new loan.

The benefit of this is that you have just one monthly payment. Additionally, many banks and financial institutions offering debt consolidation loans will allow you to designate payees for loan funds, so the funds will be transferred to clear your outstanding balances with the remaining funds then going into your bank account.

This is the least attractive type of personal loan as they tend to carry extremely high rates. Essentially, you can borrow smaller amounts of money until your next payday.

Unfortunately, if you fail to meet the agreed repayment terms, you could end up with penalties and fees, which could lead you spiraling into a debt cycle.

3. Personal Loans Key Terms

Before you consider a personal loan, there are some key terms that you should be familiar with. These include:

  • APR: The APR or Annual Percentage Rate is the annual interest cost of yoru personal loan. The APR includes the loan interest rate and any fees into one percentage rate, so you can gain insight into the yearly cost of your loan. If there are no fees associated with your loan, the APR and interest rate will look the same.
  • Interest Rate: The interest is the charge for borrowing your funds. You’ll incur interest throughout the lifetime of your loan, according to the remaining principal every month. Initially, your monthly payments will pay down outstanding interest before it goes towards bringing down the principal balance.
  • Fixed vs Variable: As we touched on above, whether your loan has a fixed or variable rate can have a significant impact on your monthly repayments and the overall cost of your loan. So, be sure to check if the loans you’re comparing have fixed or variable rates.
  • Secured or Unsecured: Whether your loan is secured or unsecured refers to if there is collateral attached. Many personal loans are unsecured, so the lender assesses your qualification based solely on your credit profile. However, if you need a larger sum or you don’t have perfect credit, you may need to look at a secured loan. Security provides the lender with reassurance that should you default, they can seize the collateral and sell it to recoup any losses. This reduces the lender’s risk, so it is usually accompanied with a lower interest rate.
  • Term: The loan term represents the lifetime of the loan. It is the number of months when you will need to make repayments. Typical personal loan terms are 12 to 60 months, but some lenders do offer longer terms.
  • Principal: The loan principal is the amount of money that you have borrowed from the lender. When you make your monthly repayments, it will be used to cover the accrued interest and reduce the loan principal. Your interest will then be calculated on the remaining principal balance.
  • Amortization: A loan amortization is the process of paying down the outstanding balance with fixed payments. Your lender will provide an amortization or repayment schedule which will detail how much you need to pay each month, when your payment is due and how the payment will be divided between the accrued interest and your loan balance.
  • Origination Fee: The origination fee is a one time cost that is charged upfront by the lender to cover any administrative expenses. Origination fees are typically a percentage of the loan amount. For example, if you have a $10,000 loan and the origination fee is 4%, $400 will be deducted from your loan funds, so you’ll receive $9,600 into your bank account. Just be aware that not all lenders charge an origination fee, so it may be worth looking for loans that don’t have this charge.
  • Prepayment Penalty: A prepayment penalty is an early payoff fee that is charged if you repay your loan ahead of the schedule. The fee allows the lender to recoup some of the money lost on interest payments if you repay the loan early.

4. Personal Loan Pros and Cons

Like any financial product, there are both pros and cons associated with personal loans. These include:

Lower Rates Than Credit Cards
High Rates For Less Than 700 Score
Set Schedule
Higher Interest Rates
Straightforward Application Process
Security May Be Required
Direct Creditor Payment
You’ll Need to Shop Around

Personal loans typically have far lower rates compared with credit cards, which can provide a more affordable way to consolidate debt, finance a purchase or fund a project.

With a personal loan, you’ll know how much you need to repay each month, which makes it easier to budget. 

The exception to this is if you have a variable rate. However, your lender will notify you of any rate changes and the implementation date.

Personal loans are readily available and have a straightforward application process. If you’re applying for an unsecured loan, you could have the funds in your bank account in a matter of days.

Some lenders may also allow you to prequalify, so you can check your eligibility with only a soft credit inquiry.

If you’re using your personal loan for debt consolidation, your lender may offer direct credit payments.

This means that you can designate accounts to receive funds before the remaining balance is sent to your bank account.

As with most financial products, the best personal loans are reserved for those with good or excellent credit. So, if you have poor credit, you may find that you’re paying far more than the advertised rates.

The FED increases the rates, and so the interest rates on personal loans. the amount you'll pay on interest is high, especially if you compare it to 1-2 years ago.

Additionally, if you have poor credit you may need to provide some form of security for your personal loan to mitigate the risk for the lender.

Since personal loans are one of the most popular finance options, there are plenty of products on the market. 

This means that it is crucial that you shop around to find the right loan for you.

5. Personal Loan Eligibility Considerations

There are a number of eligibility factors that lenders consider when making a personal loan approval decision. These include:

  • Your Credit Score: The most obvious factor lenders will consider when assessing your eligibility is your credit score. If you have excellent credit, you have a far greater chance of approval compared to someone with poor credit. Lenders use your credit score to create a risk profile, which will not only determine your eligibility, but also your rate.
  • Your Income: The lender will also need to check that you have sufficient income to not only meet your current financial obligations, but also your new loan repayments. Lenders have their own criteria to determine what is sufficient income, but be sure to be honest about your current financial obligations.
  • Your Employment Status: The lender needs to know that you will be able to continue making repayments for the lifetime of your loan. So, if you’ve recently changed jobs, you may be less likely to qualify compared to someone in the same job for years.
  • The Loan Term: Lenders will also need to evaluate the loan amount and loan term. Many lenders will limit the loan term according to the amount. So, if you’re looking to borrow a small amount, you are likely to be restricted to a shorter loan term.
  • Security: Finally, the lender will assess whether you need to provide security or a co-signer to qualify for your loan.

6. Where You Can Get a Personal Loan

As personal loans are quite common, there are several places where you can get one.

The first stop when you’re shopping for a personal loan is your local bank. In fact, you may find that you have an easier time qualifying for a loan when you already have a relationship with a bank.

So, it is well worth checking the loan offers with the bank that holds your checking or savings account.

 You’ll need to be a member of a credit union to apply for a personal loan, but many credit unions will arrange for you to open a savings account and apply for a loan at once.

The membership criteria can vary depending on the specific credit union, some credit unions are free or almost free. Since credit unions are owned by their members rather than shareholders, they tend to offer competitive loan rates.

There are also lenders that work exclusively online. This can lower the financial institutions’ overhead costs, so they can be highly competitive. However, you need to be wary about using an online lender that does not have a good reputation.

Unfortunately, there are some online lenders that use scam or pressure tactics to encourage people to sign up for inappropriate products. So, be on the lookout for offers that seem too good to be true, or lenders who won’t provide full terms and conditions for you to check before you sign on the dotted line.

Peer to peer lending has become more popular, but each platform has its own requirements and application time frames. While some P2P lenders have more flexible requirements, some require that you wait until funding is approved, which can take far more time.

7. How to Get a Personal Loan

Fortunately, personal loans are one of the most straightforward finance options, so you can often get a personal loan in a few simple steps.

  1. Shop Around: The first thing you need to do is to shop around and compare rates. A good starting point is your bank, but there are also online comparison sites that you can use to check rates, monthly repayments and other terms. Just be sure that you’re comparing like for like products and check the terms and conditions to ensure that you’re familiar with any charges that could be applied to your account.
  2. Complete an Application: Once you decide on a personal loan and lender, you’ll need to complete an application form. You’ll need to provide some personal information including your full name, address, phone number, email address and Social Security Number. The lender will also need some financial details including your income and information about your current bills and financial obligations.
  3. Provide Supporting Documents: Banks and financial institutions require proof of ID and proof of your address to support their application with. Approved proof of ID documents includes government-issued ID such as a driver’s license or passport. Typically, a utility bill or bank statement would be sufficient for proof of address. The process for submitting your supporting documents will depend on the financial institution. If you’re using an online lender, you may need to upload the documents as part of the application form or you may need to email them later.
  4. Await Approval and Funding: Once you’ve submitted your application and supporting documents, you’ll need to wait on the approval decision. The timeframe for this can vary from one or two business days to longer. When you have the approval decision, the financial institution will detail when you’ll receive the loan funds.

8. Personal Loan Alternatives

If a personal loan does not seem like the right choice for you, there are some alternatives to personal loans. These include:

  • Credit Cards: If you’re planning on making a purchase, a credit card may be a good alternative to a personal loan. You’ll need to have a plan on how you can repay the balance or you could end up in debt, since credit cards typically have a high rate. However, you may be able to qualify for a card with a 0% promotional rate, which means that providing you can pay off the balance before the end of the promotional period, you’ll pay no interest at all.
  • Overdraft: If you need the funds for a short time or as a temporary arrangement, you may be able to qualify for an overdraft from the bank that holds your checking account. Overdrafts tend to be for smaller amounts, but they may be able to tide you over if you have an unexpected expense. Just be sure to check what overdraft fees will apply to your account.
  • Auto Loan: If you need money to buy a vehicle, an auto loan may be a more suitable loan option. Most auto loans are secured on the vehicle, so they can offer more attractive rates, since the lender has the option to seize the vehicle if you default on the loan.
  • Home Equity Loan: If you need a larger amount, a home equity loan may be better than a personal loan. Since these loans are secured on your property, they tend to have lower rates and offer longer terms. Just be aware that your home is at risk if you fail to keep up with your repayments. Additionally, the application process can be longer, as a home appraisal is usually required.

9. The Impact of Personal Loans on Your Credit Score

You will need to consider the impact of a new personal loan on your credit score.

Initially, the hard credit inquiry to apply for the loan may reduce your credit score by a couple of points, but this shouldn’t be a problem unless you have a very low score. If you have a good to excellent score, you’re not likely to notice a drop of two or three points.

Once you have your personal loan, the impact on your credit score will depend on your financial behavior. If you make your payments in full on time, every month, it will actually have a positive impact on your credit. However, if you miss payments, it will be noted on your credit report.

Another consideration for your credit report is that your credit utilization ratio will increase. Although you will have more credit, the available credit is likely to go down.

However, if you’ve used the loan to clear some credit card accounts, providing you keep the accounts open, your credit utilization ratio will drop, creating a positive impact on your credit score.

So, the key is to make sure that you behave responsibly and ensure that you stick to your repayment schedule and you should see no impact on your score initially, with a positive effect as you continue to make payments.


This depends on the financial institution. Some lenders have an expedited application process which means that you can get an approval decision and loan funding within a day or two.

However, some lenders do take longer to approve the loan and may require several business days for funding.

If you already have a relationship with a bank, it may offer better terms than an online lender.

However, some online lenders offer more competitive rates than traditional banks. Just be sure to check the reputation of the financial institution before you commit to a loan.

With plenty of personal loan options, you’ll need to compare rates, terms, fees and application times to choose the right loan for you.

Most personal loans are unsecured, but there are some financial institutions that do offer secured personal loans.

This will depend on your credit score, income and other factors, along with the maximum amounts offered from specific financial institutions.

Since a personal loan must be repaid, it is not classified as taxable income. However, if your loan is forgiven it will become a taxable cancellation of debt and you’ll need to file the appropriate paperwork with your tax return.

Picture of Baruch Mann (Silvermann)

Baruch Mann (Silvermann)

Baruch Silvermann is a financial expert, experienced analyst, and founder of The Smart Investor.  Silvermann has contributed to Yahoo Finance and cited as an authoritative source in financial outlets like Forbes, Business Insider, CNBC Select, CNET, Bankrate, Fox Business, The Street, and more.
Compare Personal Loans

#1 In Banking

Our Newsletter

Get expert advice, insider tips, fresh banking promotions and rate changes on savings accounts and CDs