Personal loan

An installment loan, usually unsecured, that provides a lump sum repaid in fixed monthly payments over a set term.

What it means

Personal loans come from banks, credit unions and online lenders and can be used for almost any purpose. Most are unsecured, so approval and rate depend mainly on credit score, income and debt-to-income ratio. Terms commonly run from one to seven years, and many lenders charge an origination fee taken out of the loan amount.

Because payments are fixed, the loan is fully paid off on a known date, unlike a credit card balance. Rates for borrowers with strong credit are often well below typical credit card rates, while borrowers with weak credit may face rates that make the loan expensive.

Formula

M = P × r(1 + r)^n / ((1 + r)^n − 1)

M = monthly payment (principal and interest)
P = amount borrowed
r = annual interest rate ÷ 12
n = total number of monthly payments

Example

Suppose someone borrows $10,000 at an illustrative 12% APR for 3 years. The payment is about $332.14 a month, and total interest is about $1,957.

How it’s used

Consolidating credit card debt
Paying for a major repair or medical bill
Funding a planned expense without using home equity

Strengths and weaknesses

Strengths

Fixed payment and payoff date
Usually no collateral required
Often cheaper than carrying a credit card balance

Weaknesses

High rates for weaker credit
Origination fees can reduce the cash received
Adds a new monthly obligation

Good to know

Prequalification with a soft inquiry lets borrowers compare offers without affecting their credit score.

Educational information only, not financial, tax or legal advice. Rules, limits and rates change; check the IRS, your lender or plan, or a qualified professional before acting.