Guide to Personal Loans and How They Work
Updated: April 21, 2026
Whether you’re looking to consolidate debt, purchase a big-ticket item, or cover an emergency expense, a personal loan could be just the solution you need. But while personal loans offer a great deal of flexibility, there are a few things to know before you apply.
This guide to personal loans for beginners will help you get up to speed. Learn how personal loans work, the different types of personal loans, their key benefits, and what you can expect before and after you apply.
What Is a Personal Loan?
A personal loan is a type of installment loan issued by banks, credit unions, or online lenders. Borrowers receive a lump sum of money they pay back in regular, fixed payments over a set term.
The two main types of personal loans are:
Secured loans
These loans are backed by a valuable asset, like a car or house. You might have an easier time qualifying for a secured personal loan, but you risk losing the asset if you don’t make your payments.
Unsecured loans
Unlike secured loans, unsecured loans don’t require an asset, but lending requirements may be stricter. If you don’t meet these requirements, applying with a cosigner could help.
Personal loan amounts vary by lender but could start at a few hundred or several thousand dollars. Some lenders, including SoFi, offer personal loans up to $100,000.
How Do Personal Loans Work?
Personal loans work similarly to other types of installment loans. To qualify, you’ll need to meet certain criteria, including credit score and debt-to-income ratio (DTI) requirements.
If approved, you’ll generally receive the full loan amount in a lump-sum payment. You’ll then start repaying that loan in fixed monthly payments, which go toward the loan’s principal and the interest.
Notably, the process is often a little different if you’re using the funds to consolidate debt. In that case, the lender may pay your creditors directly rather than transferring the money into your account. You’re still responsible for making on-time payments for the new loan.
As you review personal loan options, consider:
• Repayment terms: Many lenders offer personal loans with terms ranging from two to seven years. Longer terms usually mean smaller monthly payments but higher overall interest charges.
• Interest rates: Usually expressed as an annual percentage rate (APR), this is the cost of borrowing money. The higher the interest rate, the more money you could pay in overall interest.
Personal loans usually have a fixed interest rate. With a fixed-rate loan, your monthly payments remain the same for the life of the loan. Some loans, like adjustable-rate mortgages (ARMs), have variable rates that change over time.
Your interest rate affects your monthly payment and total repayment costs. Lenders may consider factors such as your credit history, amount borrowed, and repayment term when determining your personal loan interest rate.
Personal Loan Rate Examples
Say you get a $10,000 personal loan with a five-year term and a 10.00% APR. You’d pay about $212 monthly, and the total loan cost would be $12,748.
If that same loan had a 15.00% APR, your monthly payment would be about $238. You’d pay a total of $14,274.
Applying for a personal loan? Here’s a tip: A personal loan calculator can help you estimate how much it’ll cost.
Types of Personal Loans
As you research your options, you’ll find there are several types of personal loans. The type you choose may depend on how much you’re borrowing, your credit and financial history, your current debt load, and other factors.
Some common options include:
Unsecured loans
These don’t require collateral but may have more stringent lending requirements.
Secured loans
Some options, like auto or mortgage loans, require collateral in exchange for funds.
Fixed-rate loans
These have fixed interest rates, so you’ll know upfront what your monthly payments and total interest charges will be.
Variable-rate Loans
A variable-rate loan might have a lower initial rate than a fixed-rate option, but the rate and your monthly payment will change over time.
Cosigned loans
If you’re unable to qualify for a loan on your own, consider using a cosigner. This is someone who essentially agrees to back the loan and make payments if you can’t.
Debt Consolidation loans
These let you merge multiple unsecured debts, like credit cards, into one loan with a single monthly payment and interest rate. Depending on the new rate, you could save money on interest.
Some lenders also market personal loans for highly specific uses, like medical, vacation, and wedding loans.
What Are Personal Loans Used For?
A key benefit of personal loans is their flexibility. You may be able to use personal loans for things like:
- Wedding expenses
- Vacation expenses
- Family planning
- Car repairs
- Home remodel or home improvements
- Debt consolidation
- Moving or relocation expenses
- Medical bills
- Emergencies
Say you’re remodeling your kitchen and expect it to cost $20,000. You could use a personal loan to foot the bill now, giving you more time to pay it later.
Be aware that you might not be able to use a personal loan for any purpose. Specifically, lenders typically won’t let you use the funds for college tuition, a down payment on a home, or business-related expenses. In these cases, you may need to tap into your savings or explore an alternative to personal loans, like student loans, mortgages, or small business loans.
How to Qualify for a Personal Loan
To get approved for a personal loan, you’ll need to meet the individual lender’s requirements. While these can vary, here’s what you’ll typically need:
- Minimum credit score: There’s no specific credit score requirement, but the better your score, the better your approval odds. A good credit score—generally 670 or higher—could also get you a lower interest rate.
- Low debt-to-income ratio: Your DTI is how much of your pre-tax monthly income goes toward your monthly debt payments. There’s no universal requirement, but a lower ratio could help you qualify for a personal loan.
- Proof of income and employment: Lenders generally want to see that you’re currently employed—or self-employed—and earn enough money to pay back your new loan. This might mean providing W-2s, recent bank statements, pay stubs, or a letter of employment.
Some lenders may also require collateral for personal loans. One upside to using your home, car, or other valuable asset to back up a loan is that it could help you qualify for a lower interest rate. But if you default, the lender could seize the property.
Are you a beginner seeking a personal loan? Here are some quick tips to boost your loan approval chances:
- Monitor your credit score.
- Review your credit reports (and be prepared to dispute any errors you find).
- Pay down existing debts (or boost your income).
- Maintain stable, steady income and employment.
Getting your finances and credit in order could help boost your approval odds and make it easier to qualify for a loan amount that meets your needs.
Helpful tools and articles:
How to Apply for a Personal Loan
Often, you can apply for a personal loan online. Here’s the typical process:
1. Shop around. Compare multiple lenders’ offers. Check their typical rates, loan amounts, and fees.
2. Review the requirements. Make sure you meet the lender’s required credit score, income, DTI, and other criteria. Check your credit score and overall financial health before applying.
3. Gather your documents. Get the necessary papers ahead of time. If you’re applying for a secured loan, you may also need proof of collateral.
4. Prequalify. Some lenders let you check what terms and rates you might qualify for before you apply. This process is usually quick, easy, and handled online.
5. Apply for the loan. Complete the formal loan application and wait for the lender’s decision.
Wondering how long it takes to get approved for a personal loan?
Approval and funding timelines depend on the lender. In some cases, you may get approved within one to three business days and receive the funds in a week or less. With SoFi personal loans, you could get same-day funding.
Helpful tip: Prequalification may result in a soft credit check, which is when the lender checks your credit. Unlike a hard credit check, which occurs when you officially apply for financing, this doesn’t affect your credit score.
Can You Pay Off a Personal Loan Early?
In many cases, you can pay off a personal loan early. It might even be a good idea since it can save you money on interest. Early repayment also means one fewer debt to worry about.
However, some lenders charge prepayment penalties, which could negate any interest savings. You can find information about this in your loan documents. Or you can contact your lender directly.
If your loan does have a prepayment penalty, consider asking your lender whether they’ll waive it for you. You may also want to calculate whether it makes sense to pay off the loan early, even with the penalty, and what impact (if any) the move will have on your credit.
Helpful tip: When applying for a personal loan, ask about penalties or fees. That way, you’ll know what to expect ahead of time.
Alternatives to Personal Loans
Personal loans could be a smart option to fund a major project, cover a large expense, or deal with a sudden emergency. But there are plenty of alternatives, including:
- Home equity line of credit (HELOC): HELOCs work similarly to credit cards, but they let you tap into a portion of your home equity. You can use the funds for things like home improvements, medical debt, or emergencies. You’ll only pay interest (HELOCs usually have a variable rate) on what you borrow. But if you don’t repay what you owe, you risk the lender foreclosing on your home.
- Credit card: Credit cards let you repeatedly borrow up to a set limit. As long as you keep up with payments and stay below the limit, you may be able to borrow indefinitely. You’ll still need to make minimum payments every billing cycle, including interest. This might be a good option for smaller, everyday purchases. Some credit cards let you earn rewards or cash back, but interest rates can be high.
- Personal line of credit: Unlike personal loans, personal lines of credit offer revolving credit you can draw from on an as-needed basis, up to a preset limit. You may need an active checking account with the same bank or credit union to qualify.
Pros and Cons of Personal Loans
It’s good to weigh your options carefully before applying for financing. Check out these main personal loan benefits and drawbacks.
Personal Loan Benefits
- Flexible funds usage
- Depending on credit, may offer lower interest rates than credit cards
- Usually fixed rates
- Borrowing limits can be high
- Typically unsecured (no collateral required)
- Can be used to consolidate many debts into one
- Potentially quick approval and funding timeline
- Could help build credit (with on-time payments)
Personal Loan Drawbacks
- Typically can’t be used for business-related expenses or tuition
- Rates vary widely
- Some lenders charge extra fees (like origination fees)
- Adds to existing debt load
- Predatory lenders exist (and watch out for scams)
Quick Tip: Beware of lenders who advertise guaranteed loans. If they are legitimate, they need to know your creditworthiness before offering you a loan.
Is a Personal Loan Right for You? The Takeaway.
With their flexibility, personal loans can be a smart choice if you’re looking to finance a major project like a home remodel or to consolidate high-interest debt. As you’re exploring different types of loans, put time into figuring out how much you’re able to borrow and how much you can afford to pay off each month. It’s also a good idea to maintain a stable income, keep your debt-to-income ratio low, and monitor your credit and promptly resolve any issues that come up.
SoFi offers flexible personal loans for nearly any purpose. But even if you’re not quite ready to apply, now may be a good time to compare rates. And remember: A personal loan calculator can help you run the numbers so you know what to expect before you borrow.
Apply for Your Personal Loan.
Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. See your rate in minutes.
SoFi’s Personal Loan was named NerdWallet’s 2026 winner for Best Personal Loan for Excellent Credit.
FAQ
What can a personal loan be used for?
You can use personal loans to pay for things like home improvements, medical expenses, or big-ticket items like weddings or cross-country moves. They generally can’t be used for business-related costs, tuition, or a down payment for a home.
What is required to apply for a personal loan?
You’ll generally need documents proving your income and employment. This could be recent pay stubs, bank statements, or W-2s. You’ll also need information about your assets and existing debts. Credit score, income, and debt-to-income requirements vary by lender.
What are the disadvantages of a personal loan?
While personal loans have many benefits, they do come with some level of risk. You’ll be responsible for repaying what you borrow plus interest. If you don’t, your credit score may take a hit. And if you take out a secured loan, the asset you backed it with could be at risk. Some lenders may also set higher interest rates or charge a one-time origination fee.
How can I get approved for a personal loan?
Shop around and see what different lenders require. Generally, you’ll need good credit, a low debt-to-Income ratio, and sufficient income. There’s no hard-and-fast rule when it comes to qualifying, but one tip to boost your loan approval odds is to monitor your credit, pay down any existing debts, and maintain steady income.
How long does it take to get approved for a personal loan?
It depends on the lender, but you could potentially get approved the same day you apply, or within a few business days.
SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.
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 .
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