What a personal loan actually is
A personal loan is money a bank, credit union, or online lender gives you in a lump sum, which you pay back in fixed monthly installments over a set period—usually two to seven years. Unlike a credit card, where you can borrow up to a limit and pay it back gradually, a personal loan gives you one amount upfront and a fixed repayment schedule. The lender charges interest, meaning you pay back more than you borrowed.
Personal loans are unsecured, which means you don't have to put up collateral like a house or car. The lender decides whether to lend based on your credit score, income, and debt history. Interest rates vary widely depending on those factors and the lender—from around 6% to 36% annually, though rates outside that range exist.
Key Takeaways
- Personal loans come from banks, credit unions, and online lenders, each with different approval timelines and interest rates based on your credit score.
- You'll need to provide proof of income, identification, and permission for a credit check before any lender will make an offer.
- Credit unions typically offer lower rates than banks or online lenders, but you must be a member to borrow from them.
- The loan amount, interest rate, and monthly payment depend on your credit score and income; worse credit means higher rates or smaller loan amounts.
- Approval can take anywhere from one business day (online lenders) to two weeks (banks and credit unions), depending on the lender type.
Where to get a personal loan
Three main types of lenders offer personal loans: banks, credit unions, and online lenders. Banks are traditional institutions like Wells Fargo, Chase, or Bank of America. They typically require you to have an existing account with them, offer moderate interest rates, and take one to two weeks to approve and fund a loan. Credit unions are member-owned nonprofits; if you belong to one, they usually offer the lowest rates and fastest approval, sometimes within days. Online lenders like LendingClub, Upstart, or SoFi can approve and fund loans in as little as one business day, but rates vary widely and are often higher than banks or credit unions.
Start by checking with your bank or credit union first, since you already have a relationship there and they may offer member discounts. If you don't have a credit union membership, you can search for one you're may be able to access to join at CO-OP or Alliant Credit Union's locator tools. If you need money quickly and have fair or poor credit, online lenders may be your only fast option, though you'll pay more in interest.
What lenders ask for before they say yes
Every lender will ask for the same basic information: a government-issued ID, proof of income (usually a recent pay stub or tax return), and permission to check your credit. Some lenders also ask for bank statements to verify you can handle the monthly payment. Online lenders often ask these questions through an online form; banks and credit unions usually require you to visit in person or call.
The lender will pull your credit report from one or more of the three major credit bureaus—Equifax, Experian, or TransUnion. This is called a hard inquiry and temporarily lowers your credit score by a few points. If you apply to multiple lenders within a short window (usually two weeks), the inquiries count as one, so don't space out applications over months.
How your credit score affects the loan you get
Your credit score determines whether you get approved at all, what interest rate you'll pay, and how much you can borrow. Scores range from 300 to 850. Most lenders require a score of at least 580 to 620, though some online lenders go lower. The higher your score, the lower your rate.
A score of 750 or above typically gets you rates between 6% and 12%. A score between 650 and 749 usually means rates of 12% to 20%. A score below 650 often results in rates of 20% to 36% or higher, and some lenders won't lend to you at all. The difference matters: on a $5,000 loan over five years, a 6% rate costs you about $1,350 in interest, while a 24% rate costs about $3,300. Before you apply, check your credit score for free at AnnualCreditReport.com or through your bank or credit card company.
The approval and funding timeline
How long approval takes depends on the lender type. Online lenders can approve and fund within one business day—sometimes the same day you apply. Banks typically take three to seven business days for approval, then another two to three days to fund the money into your account. Credit unions fall in between, usually approving within two to five business days.
The lender will contact you with an offer showing the loan amount, interest rate, monthly payment, and total cost. You have the right to review this before accepting. Once you sign, the lender funds the money into your bank account. Some lenders deposit directly; others send a check. Ask when you apply so you know when to expect the money.
Understanding the monthly payment and total cost
Your monthly payment is fixed for the life of the loan—it doesn't change. The payment covers both principal (the money you borrowed) and interest. Early in the loan, most of your payment goes to interest; later, more goes to principal. A loan calculator on the lender's website will show you the exact monthly payment before you commit.
The total cost of the loan is the monthly payment multiplied by the number of months, minus the original amount borrowed. On a $10,000 loan at 12% interest over five years, your monthly payment is about $222, and you'll pay roughly $3,320 in interest. Some lenders let you pay off the loan early without penalty, which saves you interest; others charge a prepayment penalty. Ask about this before you sign.
Alternatives if a personal loan doesn't work
If your credit is too low or you can't afford the monthly payment, other options exist. A credit union might offer a credit-builder loan, which is smaller and designed to help you build credit while borrowing. A co-signer with better credit can help you get approved for a better rate, though they're responsible if you don't pay. A secured loan (backed by collateral like a savings account or car) may have lower rates but puts your asset at risk if you default.
If you need money for a specific purpose like medical bills or home repair, look for programs specific to that need—medical payment plans, home repair grants, or hardship programs from nonprofits. A 211 call (dial 211 or visit 211.org) can connect you to local resources. Borrowing from family or friends, while awkward, costs nothing and has no credit check, though it can strain relationships if you can't repay.
Frequently Asked Questions
What's the difference between a personal loan and a credit card?
A personal loan gives you one lump sum upfront with a fixed repayment schedule and fixed interest rate. A credit card gives you a credit limit you can borrow against repeatedly, with a variable interest rate that changes. Personal loans have lower interest rates but less flexibility; credit cards have higher rates but let you borrow as you need it.
Can I get a personal loan with bad credit?
Yes, but with limits. Online lenders and some credit unions will lend to people with credit scores as low as 580 or 600, but rates will be 24% to 36% or higher. A credit-builder loan or secured loan may be easier to get. Adding a co-signer with better credit improves your chances and may lower your rate.
How much can I borrow?
Personal loans typically range from $1,000 to $50,000, though some lenders go higher. The amount depends on your income, credit score, and existing debt. A lender won't lend you more than they believe you can repay based on your monthly income and other obligations.
What happens if I can't make a payment?
Contact your lender immediately—many offer hardship programs or temporary payment deferrals. Missing a payment damages your credit score and may trigger late fees. If you miss multiple payments, the lender may send the debt to a collection agency or sue you to recover the money.
Should I pay off the loan early?
Paying early saves you interest, but only if the lender doesn't charge a prepayment penalty. Check your loan agreement or ask the lender before you sign. If there's no penalty, paying extra toward principal each month or making a lump-sum payment when you can saves money.