What Are Personal Loans and How They Work
You might need money for a car repair, a medical bill, or something you’re planning to buy. A personal loan can help you cover that single expense and repay it over time. This guide explains what a personal loan is, how it works, and what to look out for, so you can make an informed decision.
For a quick overview of amounts, terms, and typical costs, see how personal loans work.
What Is a Personal Loan?
A personal loan is a sum of money that you borrow all at once in one lump sum. You’ll agree to pay it back in the same monthly payments over a set period, which is called the term.
Most personal loans are unsecured. That means you won’t put down a car or a house as collateral. The terms you’ll receive can depend on your overall credit profile and your income.
Why People Use Personal Loans
People use personal loans for various purposes. You’ll see examples such as car repairs, medical bills, moving costs, and items you plan to purchase. These are only examples, not advice you should follow. You’ll want to consider your budget and goals before deciding to borrow.
How a Personal Loan Is Built
Loan Amount
This is how much you’ll borrow. You’ll want to pick an amount that fits your budget. You should borrow only what you need so the payment stays something you can manage.
Term
The term refers to the length of time you’ll have to repay it, typically measured in months or years. A shorter term will often mean a higher monthly payment, but you’ll pay less interest over the total period. A longer term will often lower the payment, but it can raise the total cost you’ll pay.
Interest and APR
Interest is the price you’ll pay to borrow. APR is a broader measure that can include certain fees along with the interest. You’ll want to use APR for simple, apples-to-apples comparisons.
Fees
Some loans will include an origination fee or a late fee. Not all loans have the same fees. You’ll want to read the agreement to understand the full cost you’ll be paying.
Monthly Payment
You’ll pay the same amount each month until the loan is paid off. Each payment typically includes a portion of the principal and a portion of the interest. A fixed payment can make your planning easier.
From Request to Funding: The High-Level Steps
You’ll complete a short form with your name, address, and identity details. You may also be asked to share information about your income and employment. Some lenders will review your bank activity.
Review and Decision
The lender will review your information and might check your credit. You’ll receive a decision after the review. Timing can vary. We won’t promise same-day results.
Funds Sent if Approved
If you accept the terms, the lender will send the money to your bank account. You’ll use the funds for the planned expense and keep your receipts and agreement in one place.
Repayment Basics
Due Date and Autopay
Your payment will be due on the same date each month. Autopay can help you make timely payments. You can also set phone reminders or calendar alerts to help you stay on track.
Late Payments
If you miss a payment, you might be charged a late fee. Missing payments can also harm your credit. A payment that’s more than 30 days late might be reported to the credit bureaus. You’ll want to contact the lender if you think you’ll be late, so you can ask about your options.
Quick Cost Example
Here’s a simple example to illustrate how the term and rate affect your cost.
- If you borrow $5,000 at an APR of 12 percent for 24 months, your monthly payment will be about $235, and the total you’ll pay over two years will be about $5,640.
- If the same $5,000 is paid back over 48 months at the same APR, the monthly payment will decrease to approximately $132. Still, the total amount paid will increase to around $6,336.
This illustrates why it’s beneficial to consider both the payment and the total cost you’ll incur.
Smart Borrowing Habits
Make sure to read the entire agreement, including the rates, fees, and due date. You should check the total cost, not just the payment amount.
Only borrow what you can afford to repay within your budget. You should pay on time each month. If finances become tight, you’ll want to discuss this with the lender promptly. A short call can prevent extra fees you don’t want to pay.
Conclusion
A personal loan provides a fixed amount of money with a predetermined payment schedule. You’ll repay it in fixed monthly payments over a specified term. By knowing the amount, term, APR, fees, and steps involved in the funding request, you can decide if a personal loan fits your needs and budget.