If you have questions about types of personal loans, what actually goes into getting a personal loan, or simply what a personal loan is, we’ve got answers for you. A personal loan is one of the many types of loans offered by most banks, credit unions, or online lenders, like SoFi.
Most loans specify what the money should be spent on: mortgages are used to purchase or refinance homes and student loans are used to pay for an education. When it comes to personal loans, there aren’t as many restrictions on where you can or can’t spend the money, which allows for much more flexibility than traditional loans.
How Does a Personal Loan Work?
Personal loans are fairly straightforward. At the most basic premise, they are simply a borrowed sum of money that the borrower then pays back with interest. When you apply for your personal loan, you typically need to specify the amount of money you wish to borrow.
Personal loans can range anywhere from $1,000 to $100,000, depending on the lender. Once you apply and are approved for the loan, you’ll receive the amount of money you were approved for in a lump sum, minus any origination fees that some lenders may charge. Then, you pay back that money in installments which are set by the specific terms of your loan.
When taking out a personal loan, the interest rate will usually be determined by a combination of things like your financial history, income, debt, and your credit score. Generally speaking, the better your credit score, the better chance you have to receive a lower interest rate on your loan. The higher the interest rate, the more money you will ultimately pay over the life of your loan.
Types of Personal Loans
There are a variety of different types of personal loans. Factors like how much money you plan to borrow, your credit and financial history, and how much debt you already have will influence which type of personal loan is right for you. Here are some of the most popular types of personal loans:
Unsecured vs. Secured Personal Loans
An unsecured personal loan is the most common type. Since it is unsecured, it’s not backed by any collateral, like a home or car, which make them a riskier loan for lenders. The approval and interest rate you receive on an unsecured personal loan is mostly based on your credit score. Personal loan interest rates typically range from 5% to 36% and the repayment terms often vary from one to seven years.
A secured loan requires collateral to “secure” the loan. Think of a house when it comes to a mortgage loan, or a car when it comes to a car loan. If you fail to repay your loan, the lender can then seize the collateral.
Some banks now offer secured personal loans where you can borrow against the equity of your car, personal savings, or other assets. Since secured loans are backed by an asset that the lender can seize if you default on the loan, they generally come with a lower interest rate than an unsecured personal loan.
Check out this piece on the pros and cons of both unsecured and secured personal loans for some more in depth information on the two.
Fixed Rate vs. Variable Rate Personal Loans
Most personal loans are fixed rate loans, meaning your rate and monthly payment stay the same or are “fixed” for the life of the loan. Fixed rate loans can make sense if you are looking for something with consistent payments each month. A fixed rate loan is also worth considering if you are concerned about rising interest rates on longer-term loans.
As the name suggests, the interest rate on a variable rate loan can fluctuate over the life of the loan. Interest rates on this type of loan are tied to benchmark rates or indexes. Based on how the benchmark rate or index changes, the interest rate on your loan—as well as the monthly payments and total interest costs—will also change.
Generally, variable rate loans carry lower annual percentage rates, or APRs. Sometimes a variable rate loan even comes with a cap on how much the interest rate can change over a specific period, or even over the life of the loan. A variable rate loan could be a good choice if you are taking out a small amount of money with short repayment terms.
Debt Consolidation Loans
A debt consolidation loan is a type of personal loan that rolls multiple debts into a single, new loan. Generally, the new loan generally a lower APR than the rates on existing debts, which will reduce the money you spend on interest over the life of the loan. By consolidating the debts, you only have to manage one monthly payment.
Want to see if a personal loan
is the right choice for you?
Check out SoFi personal loans.
Reasons to Apply for a Personal Loan
One of the reasons personal loans are so popular is their versatility. Not only can you take out a small or large personal loan, you can also use the money to pay for almost anything you want. For example, if you have a large looming expense coming up, a personal loan could help cover the bill if you’re a bit tight on cash and would rather pay it off overtime. People take out personal loans for a number of reasons. Here are some of the most common uses:
Consolidating Credit Card Debt
Consolidating credit card debt is one of the most common uses for a personal loan. Interest rates on credit cards can be very high—it’s not uncommon to see APRs between 15% and 20%.
In addition, credit cards often have variable interest rates which can make it more challenging to set up a budget. Rates on personal loans can be half as much as most credit cards, which means you could significantly reduce the total amount of money you spend to pay off your debt.
Home Improvement Projects
If you are embarking on a home improvement project, a personal loan could be a great option for you. Depending on the types of upgrades you are making, your project could rack up a bill anywhere from a couple hundred dollars to tens of thousands of dollars.
Some home renovations, like updating your kitchen or replacing windows could ultimately increase the value of your home. It’s important to feel comfortable in your living space and if you are eager to complete some renovations, a home improvement loan could allow you to start your next remodel.
Unexpected Medical Bills
When unexpected medical emergencies occur, depending on your health insurance plan, bills can really add up. While you want to focus on your health, the financial burden may be taking its own toll. Using a personal loan for medical costs can help pay for out-of-pocket expenses at a lower interest rate than some credit cards.
If you’re recently engaged, you’re likely riding high on joy and love. But when it comes to actually planning a wedding, things can get expensive. The average cost of having a wedding in the United States in 2017 was $33,391.
According to The Knot, who surveyed 13,000 couples in their annual wedding study , this number is actually on the decline, down from about $35,000 in 2016. And this doesn’t even include the honeymoon! If you’re not sure how you are going to pay for your wedding, you and your fiancé (or fiancée) may want to look into a wedding loan as a financing option.
If you’ve made the decision to move—for family, employment, or personal reasons—it can be a thrilling time. But with that excitement comes a long list of bills. From moving supplies to renting a truck or hiring movers, expenses can pile up quickly. If you’re in need of a little extra cash to get you through the move, funding a move with a relocation loan could be just the ticket.
Getting a Personal Loan
So, what does it take to actually get a personal loan? After you’ve determined that a personal loan is the right choice for your financial situation, you’ll need to determine exactly how much money you want to borrow.
A good rule of thumb is to take out no more than you absolutely need. It’s also a good idea to take a look at your budget and see how much money you’ll be able to afford to put toward the monthly payments. This way, you can minimize the risk of overextending yourself.
Related: How to Pay Tax on Personal Loans
The next step will be to determine which type of personal loan will work best for you. Whether it be unsecured, fixed rate, or secured, do some research and find out what will be best for your financial plan.
At this stage, it’s also a good idea to take a look at your current credit score and overall financial health. Your credit score is typically one of the biggest factors lenders consider when you apply for a personal loan. It’s helpful to know where your score falls as you begin the application process.
Once you’ve determined the amount of money you need to borrow, the type of personal loan you want to take out, and your financial health, it’s time to do some research and select a lender. Choosing the right lender could end up saving you a considerable amount of money when it comes to interest, fees, and repayment terms.
Oftentimes, lenders will allow you to see if you pre-qualify for a loan. Usually, you would provide personal information like your address, income, and social security number. A pre-qualified quote will often include the repayment terms and interest rate. Once you’ve seen a pre-qualified quote from a few different lenders, you can compare the interest rates, monthly payments, and total loan cost to see what works best for you.
After you’ve narrowed down your choices, here are a few important questions you may want to consider asking them:
What to Look for in a Personal Loan Lender
Can I borrow the exact amount I need?
Many lenders only offer loan amounts up to $40,000, but some offer even more depending on your financial profile. SoFi, for example, offers personal loans for up to $100,000.
What’s the best interest rate you can offer me?
Taking out a personal loan can be a great way to secure the money you need with a low interest rate. But to find a reasonable interest rate, you’ll want to shop around and do your due diligence. At SoFi, you can go through pre-qualification to see what interest rate you’d qualify for without affecting your credit score.
Are origination fees or prepayment penalties attached to the loan?
Some lenders charge an origination fee of 1% to 6% of the loan to process your application. Some personal loans have a prepayment penalty if you pay off your loan ahead of schedule.
What if I lose my job and can’t make payments for a few months?
Missed or late payments could end up lowering your credit score, incur late fees, or could eventually even lead to involving collections agencies or a lawsuits. Some lenders may offer protections for just these types of scenarios.
When you have selected a lender, it’s time to file the actual application. Every lender has different requirements for a personal loan application. Most require things like a photo ID, proof of address, and proof of income or employment. At this stage, the lender will usually do a credit check, which could affect your credit score.
Personal Loans at SoFi
When you’re ready to take out a personal loan, consider SoFi. Depending on your needs, you can take out a personal loan for $5,000 to $100,000.
There are no origination fees or prepayment penalties, and if you unexpectedly lose your job, SoFi personal loans include unemployment protection, allowing you to suspend your monthly payments in three-month increments for up to 12 months (though interest will continue to accrue). Plus, you’ll be eligible to receive job placement assistance in the meantime.
To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. A hard credit pull, which may impact your credit score, is required if you apply for a SoFi product after being pre-qualified.
The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website on credit.