What is a personal loan?

Need money to make a major purchase? A personal loan might be an option to finance your needs. People use personal loans for all kinds of big expenses, like medical expenses, home repairs, or emergency expenses.

How personal loans work (rates, terms, and fees)

In most cases, you receive the money you borrow in one lump sum and repay it in fixed monthly payments over a set period of time. Many personal loans are unsecured (meaning you don’t put up collateral like a car or a house), but some can be secured.

Borrowing isn’t free. Lenders (like banks, credit unions, or online lenders) charge you for the service of lending money. The amount you borrow is the principal. The extra money you pay back is interest. Some lenders also charge fees, like an origination fee to set up the loan.

How much interest you pay usually comes down to three things:

1. How much you borrow (the principal)
2. The interest rate
3. How long you take to repay the loan (the loan term)

Before you sign, ask the lender to explain all fees and the total cost of the loan — not just the monthly payment.

How to compare personal loan interest rates (and lower your total cost)

Below are two sample personal loans. They’re for the same amount and the same term, but the interest rate is different. Notice how that changes the monthly payment and the total interest you pay.

Interest rate comparison

For this example, let’s consider a loan amount of $10,000 with a 5-year term.

• Loan A: At an interest rate of 5% would have a monthly payment of $188.77 and accumulate $1,236.92 in total interest over five years.
• Loan B: At an interest rate of 15% would have a monthly payment of $237.90 and accumulate $4,271.08 in total interest over five years.

Note: The final month’s loan payment in both examples may vary from the regular monthly payment.

When you’re comparing personal loans, don’t just look at the monthly payment. Shop around for a lower rate, and compare the total cost over the full term. In general, a shorter term can mean you pay less total interest (but your monthly payment may be higher).

In this example, getting a 5% rate instead of 15% saves the borrower more than $3,000 in interest over five years.

Cosigning a personal loan: Risks, responsibilities, and what to consider

A cosigner, or co-borrower, shares equal responsibility for repaying a personal loan. As a cosigner, you may be pursued for payment, have missed payments reported on your credit, or face legal action. Cosigning can impact your credit and ability to get other loans.

You might cosign for someone else, like a child or friend. Before doing so, consider:

• Cosigning only if you can afford to repay; otherwise, you risk losing collateral, legal action, or damaging your credit score.
• Cosigning affects your credit, as the loan counts as your obligation.
• Asking the lender for an estimate of your potential obligation and negotiating if possible.
• Requesting written notice if the borrower misses a payment.
• Keep copies of loan documents.
• Checking your state’s laws for cosigner protections.

Personal loan denied? Common reasons lenders decline applications (and next steps)

A denial can be frustrating, but it’s also a chance to learn what lenders look for. Common issues can include income, credit history, or errors on the application. Here are some typical reasons and practical next steps.

Common reasons loans are denied

• Insufficient income
• Poor credit or late payments
• No credit history
• Small down payment
• High existing debt balance
• Too many new or recently closed accounts
• Missing paperwork or application errors