Eric RosenbergBy Eric Rosenberg, WCI Contributor

A personal loan is a lump sum of money you can borrow from a financial institution, such as a bank, credit union, or online lender. Personal loans can help you finance anything from home renovations to an emergency hospital bill. Many use personal loans to consolidate credit card debt into a single monthly payment with a lower interest rate.

Personal loans are typically paid back in regular installments, though how much the lender charges can vary greatly. If you’re interested in getting a personal loan and want to know what steps you’ll need to take, this article is for you.


What Is a Personal Loan and What Can I Use It For?

A personal loan is a type of loan used for nearly any purpose. Personal loans usually don’t require collateral, so they’re considered unsecured loans. The loan works somewhat like a credit card, which is not attached to a home or vehicle. But like a mortgage or auto loan, they’re typically paid in regular installments of the same amount until the payoff date.

Borrowers take out personal loans for a variety of reasons. They could fund something serious like overdue medical bills, funeral costs, or auto repairs after a car accident. But it could also be something more pleasant, like a vacation, wedding, or home renovation. You can generally use a personal loan to pay for anything. However, there are a few exceptions.

Many lenders will not allow you to use a personal loan to pay for college tuition, mainly because of specific requirements laid out by the federal government. Private student loan lenders must give borrowers a 30-day rumination period and a three-day cancellation window. Rather than worry about these requirements, many lenders simply forbid you from using their money for education.

Lenders may also prohibit using a personal loan for a down payment on a house. Conventional and FHA mortgage lenders typically forbid applicants from taking out an unsecured personal loan to cover down payment costs, as it represents too significant a risk.

Debt consolidation is a popular use for personal loans, and it may be a good idea if the interest rate on the personal loan is lower than your existing debt. Debt consolidation loans save you money in the long run if used correctly.

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How to Apply for a Personal Loan

Once you know what your loan is for, it’s time to apply. Research different lenders to compare personal loan offers. If you’ve been with one bank for a long time, checking loan options with them is often wise, as they may offer you more competitive rates.

Don’t be afraid to turn down loan offers that don’t meet your unique needs. It’s best to shop around for the lowest interest rate and fees. Also, make sure your lender understands how you're intending to use the money. One lender may not allow you to use your loan for a business while another does, so check the loan terms.

To compare loan costs, including interest and fees, use the loan’s annual percentage rate (APR). APR offers a method of comparing loans apples-to-apples, even if they charge different fees or use different interest rate calculation methods.

Consider whether the loan requires collateral and what interest rate you’ll pay. Also, look to see if there is an origination fee. To avoid unnecessarily harming your credit score, compare loans you prequalify for before applying. If you apply for loans that require hard inquiries into your credit, a good practice is to complete your rate shopping within a short window to limit the impact of inquiries on your credit.

When it comes to applying, each lender is different. You may be required to apply in person, provide documentation showing your latest pay stub, explain what you’ll use the money for, and provide proof of residence (among other requirements). It’s important to review the repayment schedule for your loan before accepting it to avoid unpleasant surprises.


What Could Disqualify You from Getting a Personal Loan?

The first thing you should consider when applying for a personal loan is whether you can afford the monthly payment and fees. If you can’t, you probably shouldn’t take out the loan. 

A poor credit history, including your credit report and credit score, may disqualify you from getting a personal loan. A high debt-to-income ratio, meaning a high percentage of your income is required for existing loan payments, or unstable employment history may also disqualify you. Also, if you intend to use your loan for a purpose your lender doesn’t allow, you’ll be disqualified.

Check your credit report and score before applying for a personal loan so you can dispute any negative, inaccurate information. You can get your credit report for free by law through, while apps like Credit Karma and the official Experian app offer free credit scores.

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Do You Need Collateral for a Personal Loan?

Most personal loans are unsecured, meaning you don’t need to put down any collateral. Collateral acts as a form of insurance for the lender. For example, mortgages are secured loans because the property is collateral for your loan. If you don’t make regular payments as agreed, the lender can seize your property.  

Certain personal loans may require collateral, and agreeing to a collateralized loan is one way for people with bad credit to get approved or qualify for better rates. But most of the time, collateral is not required for personal loans.


How to Get a Personal Loan with Bad Credit

Getting a personal loan with bad credit is more challenging, as lenders are less inclined to trust you’ll repay them as agreed. Luckily, there are a few options for people with bad credit looking to take out a personal loan.

how to get a personal loan

If you have someone who agrees to be a co-signer on your loan, it may increase your chances of getting a loan with a reasonable interest rate. However, that loan would also appear on the co-signer's credit report, and they’re legally required to repay the loan if you don’t, so many borrowers have trouble finding a cosigner.

Some lenders specialize in personal loans for applicants with bad credit, though some can be predatory and they are better avoided. Another option is to look for secured personal loans, which require you to offer some form of collateral the lender can take if you don’t make your payments. 

If you’re not pressed for time, it may also be worth pausing your plans to take out a personal loan to focus on building or repairing your credit. Good credit can help you qualify for better interest rates, and it makes approval for a personal loan in the future much more likely.

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How Long Does a Personal Loan Take to Process?

You’ll typically receive the funds within a week after accepting the loan and meeting your lender’s requirements. Online lenders can typically give you your funds faster, and some offer next-day or same-day funding.

If your personal information is readily available, applying for a new personal loan online often takes less than 10 minutes. Applying in person is generally a slower process.


Bottom Line on Personal Loans

Personal loans are not appropriate for everyone, but there are a handful of situations where personal loans are the best option for borrowing funds. While we’re not big fans of borrowing to pay for a wedding or vacation, using a personal loan to get out of credit card debt or reduce your interest rate on other loans can be a savvy financial decision.


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