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The Basics of a Personal Loan


A personal loan is money borrowed from a lender, such as a bank, credit union, or other financial organization.

You can take out a personal loan for basically any reason; most people apply for a loan to cover emergency expenses, such as unexpected medical bills or auto repairs, or for an expensive one-time cost, such as home renovations or repairs. Other common uses include debt consolidation and credit card debt refinancing.

Personal loans are repaid to the lender in monthly installments over an agreed upon repayment period. Along with paying back the sum loaned, the borrower must also pay interest on the loan. Interest is expressed as a percentage of the owed balance.

Interest is basically the fee the lender charges for the service of borrowing their money. Generally, the longer it takes you to repay the loan, the more interest you will pay.

What factors impact my personal loan interest rate?

The single most important factor impacting your personal loan interest rate terms is your personal credit history and credit score.

If you have poor credit, or even little to no credit history, you represent a higher risk to lenders. You don’t have a strong history of paying back your debts, so they can’t trust that you’ll pay back your personal loan on time, resulting in higher interest rates.

The higher your credit scores, the more likely you’ll be able to qualify for loans with lower interest rates.

In addition..

Examining your credit scores to determine your interest rates, lenders may also consider your annual income, debt-to-income ratio, employment status, other loans and debt, and your credit history and reports.

The loan amount and length may also impact your personal loan interest rate.


Personal loan amounts can range from $1,000 to $50,000, with loan repayment lengths ranging from 12 to 60 months. In general, a longer loan term will mean lower monthly payments, but overall you’ll be paying more in interest.

The more money you borrow, the longer it generally will take to pay it off, which again will leave you paying more in interest.

If you are curious about how much you will pay in interest for personal loans, investigate your options at the banks and credit unions you are considering borrowing from.

Many lenders will allow you to prequalify for a loan so you can find out what interest rates you would be looking at based on your credit score and the type of loan you are looking at.

What can I expect when taking out a personal loan?

Once you’ve selected a lender and pre-qualified for a personal loan, you can officially begin the application process.

Typically to apply for a personal loan, you will need to provide a form of identification, such as a passport or driver’s license, proof of address, such as utility bills, and proof of income, such as a pay stub or W-2.

Your lender will check your credit score and set your interest rates and repayment terms. Upon your agreement to these terms and final approval, you will receive your funds, typically as a deposit into your bank account, within about one week.

You can generally use these funds as you wish. You can expect monthly payments, including interest, to begin according to the terms set out in your personal loan agreement.

Take care to make every payment in full and on time to avoid lowering your credit score and accruing debt. Make sure to borrow only what you need and follow your repayment terms exactly. Paying back a personal loan can increase your credit score, which will make it easier and cheaper to borrow money in the future.

A personal loan can be an important financial tool to cover unexpected costs and large expenses that you can’t afford upfront and to build your credit.

Understanding the average personal loan interest rate and what factors influence personal loan interest rates can help you find an affordable loan that fits your personal needs.