How Do Personal Loans Work? (2024)

FAQs

How Do Personal Loans Work? ›

With personal loans: You borrow a lump sum upfront and agree to repay what you owe in fixed-monthly payments over the course of the loan term. You pay back the loan at a fixed interest rate or annual percentage rate (APR). The repayment period ranges from 2 – 5 years.

The term loan refers to a type of credit vehicle in which a sum of money is lent to another party in exchange for future repayment of the value or principal amount. In many cases, the lender also adds interest or finance charges to the principal value, which the borrower must repay in addition to the principal balance.

Personal Loan is an unsecured credit provided by financial institutions based on criteria like employment history, repayment capacity, income level, profession and credit history. Personal Loan, which is also known as a consumer loan is a multi-purpose loan, which you can use to meet any of your immediate needs.

While most reasons won't stop you from obtaining a personal loan, you'll need to explain why you need the money you're borrowing.

The most common reason to take out a personal loan is to consolidate debt. Fast funding turn times make personal loans a good choice for emergency expenses. Gives you a predictable monthly payment to finance home improvements, wedding expenses or other large purchases.

Explain why you need the money and how it will be used. When discussing repayment terms, be specific about the amount of money you need, when you need it, and how you plan to repay it. If you're requesting a loan, consider discussing interest rates, repayment schedules, and any penalties or fees for late payments.

You can use a personal loan to pay for almost anything. Common uses include debt consolidation, home improvement projects and emergencies. Annie Millerbernd is an assistant assigning editor and NerdWallet authority on personal loans.

How do personal bank loans work? ›

You receive the loan as a lump sum and can use the money for almost any reason. You pay it back in fixed monthly installments. Banks typically offer loans from $1,000 to $50,000, with repayment terms of two to seven years. Personal loan annual percentage rates generally range from 6% to 36%.

Simple interest is the interest charge on borrowing that's calculated using an original principal amount only and an interest rate that never changes. It does not involve compounding, where borrowers end up paying interest on principal and interest that grows over multiple payment periods.

Lenders will look at factors like your credit score, income, debt-to-income (DTI) ratio, and collateral to determine your eligibility for a personal loan. Different lenders will have different requirements for approving personal loans. Some lenders may be willing to work with applicants who have lower credit scores.

A personal loan with a single, fixed-rate monthly payment is easier to manage than several credit cards with different interest rates, payment due dates and other variables. Borrowers who qualify for a personal loan with a lower interest rate than their credit cards can streamline their monthly payments and save money.

Example of a Personal Loan

For example, assume you get a $10,000 personal loan with an APR of 7.5%. The loan has a repayment term of 24 months. Using those terms, your monthly payment would be $450 and the total interest paid over the life of the loan would be $799.90.

A personal loan is normally a fixed cost, fixed period loan of money to purchase any item the customer wants – including vehicles. Personal loan agreements can be regulated, exempt or unregulated. This depends on the customer, amount borrowed and purpose of lending.

Tip: A stable income, high credit score and low DTI ratio increase the odds you'll be approved for a personal loan. However, some personal loan lenders will consider other criteria, such as your educational background or employment history, when reviewing your application.

The key is to get as specific as possible. For instance, if you need $700 for a car repair, tell your lender that the money is for that reason. You should also map out a repayment plan, like paying them back $70 a month for the next 10 months.