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Understanding Personal Loans: What This Guide Covers

A personal loan is money that you borrow from a lender, which you agree to pay back over time with interest. Unlike a home loan (which is tied to a house) or a car loan (which is tied to a vehicle), a personal loan is unsecured. This means you don't put up any property as collateral. Personal loans can range from $500 to $100,000 or more, depending on the lender and your financial situation.

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This free informational guide walks through how personal loans work, where to find them, and what factors affect the terms you might receive. The guide does not determine whether you would receive a loan or what interest rate you would get—that depends on each individual lender's own review of your financial information. Instead, the guide provides background knowledge to help you understand the landscape of personal borrowing.

Personal loans serve different purposes for different people. Some people use them to consolidate credit card debt into one monthly payment. Others use personal loans to pay for medical bills, home repairs, wedding expenses, or education costs. According to the Federal Reserve, consumer lending (which includes personal loans) reached approximately $4.6 trillion in 2023, showing how common borrowing is in the United States.

The guide covers topics like interest rates, loan terms, repayment schedules, and how to compare offers from multiple lenders. It also explains the role of credit scores and what information lenders typically review when considering loan requests. Understanding these basics before you approach a lender can help you make more informed decisions about borrowing.

Practical Takeaway: Before reading further, write down why you might need a personal loan and how much money you think you would need to borrow. This will help you focus on the most relevant sections of the guide for your situation.

How Interest Rates and Loan Terms Affect Your Total Cost

The interest rate on a personal loan determines how much extra money you will pay on top of the amount you borrow. Interest rates for personal loans typically range from about 6% to 36% annually, though rates vary widely based on market conditions and individual lender policies. A lower interest rate means you pay less money overall; a higher rate means you pay more.

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The loan term—the length of time you have to repay the loan—also affects your total cost. Common personal loan terms range from 2 to 7 years. If you borrow $10,000 at 15% interest, the total amount you pay depends on your term length. Over a 3-year term, you might pay roughly $2,425 in interest. Over a 5-year term, that same $10,000 loan might cost you $4,050 in interest. Longer terms mean lower monthly payments but higher total interest paid. Shorter terms mean higher monthly payments but lower total interest paid.

Your credit score plays a major role in the interest rate you receive. Credit scores typically range from 300 to 850. People with scores above 750 often receive rates in the 6% to 12% range. People with scores between 650 and 750 might receive rates between 15% and 24%. People with scores below 650 may face rates of 25% or higher, or may have difficulty finding lenders willing to work with them at all.

Beyond credit score, lenders also look at your income, employment history, existing debts, and savings. Some lenders focus heavily on credit history, while others weigh income or employment stability more strongly. A few lenders work specifically with people who have lower credit scores, though these loans often come with higher interest rates to reflect the increased risk the lender takes on.

Practical Takeaway: Use an online loan calculator (available on many lender websites and financial education sites) to see how different interest rates and term lengths change your monthly payment and total cost. Plug in a realistic interest rate range based on your credit score to get a sense of what you might expect.

Types of Personal Loan Lenders and Where to Find Them

Personal loans come from several types of lenders, each with different requirements and processes. Traditional banks like Wells Fargo, Bank of America, and Chase offer personal loans primarily to customers with good-to-excellent credit scores and established banking relationships. These loans often come with lower interest rates but stricter approval requirements. Credit unions, which are member-owned organizations, also offer personal loans. Credit union loans often have lower rates than banks, and credit unions may be more flexible with approval for members with fair credit.

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Online lenders have grown significantly in recent years. Companies like LendingClub, Prosper, Upstart, and others operate primarily through websites and apps. Online lenders often process applications quickly—sometimes within 24 hours—and may work with a wider range of credit scores than traditional banks. However, online lending is less regulated than traditional banking in some areas, so it's important to research any online lender before providing personal information.

Peer-to-peer lending platforms connect individual investors with borrowers. These platforms vet borrowers and set loan terms, then investors fund the loans. Peer-to-peer lending can offer lower rates than traditional lenders for some borrowers, though the process typically takes longer than online lending.

Some employers and financial institutions offer personal loans as an employee benefit. If your employer offers this, it's worth exploring, as these loans sometimes have lower rates or more flexible terms than outside lenders. Some nonprofits also offer small personal loans, particularly to people with limited credit history or lower incomes. These are sometimes called "community development finance institutions" or CDFIs.

Avoid payday lenders and title loan companies. These charge extremely high interest rates (often 300% to 500% or higher annually) and are designed to trap borrowers in cycles of repeated borrowing. The Consumer Financial Protection Bureau has documented widespread complaints about these lenders.

Practical Takeaway: List at least three different types of lenders you could approach—for example, your current bank, a credit union you're eligible to join, and one online lender. Visit each one's website to see what information they require and what their general rate ranges are.

What Information You'll Need When Looking Into Personal Loans

Before you talk to any lender, gather key information about your financial situation. Lenders ask for this information to assess risk and determine what rates and terms they might offer. Having this ready makes the process smoother and shows you've thought through your borrowing needs.

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First, gather income documentation. Most lenders want to see recent pay stubs (usually the last two months), tax returns (usually the last two years), and proof of employment. If you're self-employed, you'll typically need profit-and-loss statements or tax returns. Lenders want to know that you have stable income to repay the loan. According to the Bureau of Labor Statistics, the median weekly earnings for full-time workers in 2023 was roughly $1,200, though this varies widely by industry and location.

Second, know your credit situation. You can get a free credit report once per year from each of the three major credit bureaus (Equifax, Experian, and TransUnion) at annualcreditreport.com. Review this report for errors. You can also purchase your credit score from these bureaus or get a free or low-cost score from many online lenders, credit card companies, and financial websites. Write down your score and review the report to understand what's affecting your score.

Third, list your existing debts and monthly obligations. Write down all credit cards, car loans, student loans, mortgages, and any other debts. Include the balance on each and the monthly payment. Lenders calculate your debt-to-income ratio (total monthly debt payments divided by gross monthly income). If this ratio is too high—generally above 40% to 50%, depending on the lender—you may face difficulty getting approved.

Fourth, decide how much you need to borrow and when you need the money. Lenders typically fund loans within 1 to 5 business days after approval, though online lenders sometimes fund the next business day. Budget for this timing in your planning.

Finally, consider having a co-signer if your credit score is lower or your income is limited. A co-signer (often a family member or close friend with better credit) agrees to repay the loan if you don't. This makes lenders more comfortable and sometimes results in a lower interest rate. However, the co-signer's credit