Personal Loans
What to Know Before You Borrow
What Is a Personal Loan?
A personal loan is an extension of credit from a lender that is typically classified as an unsecured loan. Unlike auto loans (which are secured by the vehicle) or mortgages (secured by your home), personal loans are backed only by your promise to repay.
Personal loans differ from credit cards in that they are not revolving lines of credit — they're installment loans with a set repayment period and fixed monthly payments. You borrow a lump sum, and the loan is done once you've paid it back in full.
The two most important factors lenders evaluate are your debt-to-income ratio (DTI) and your credit worthiness. Your DTI is the percentage of your income that goes toward debt obligations. For example, if you earn $10,000 per month and spend $4,000 on mortgage, auto loan, and credit card payments, your DTI is 40%. In general, the less debt you carry, the better your chances of qualifying.
What Qualifies You for a Personal Loan?
Your credit score is the primary gatekeeper. Better terms — lower interest rates, higher loan amounts, and longer repayment periods — go to borrowers with higher scores and cleaner credit histories. Lenders look at timely payment history, credit utilization (this accounts for 30% of your score and is often overlooked), credit mix, and account age.
Beyond credit score, lenders want to see that you've successfully completed repayment of other loans in the past. They use your track record to assess whether you're a good credit risk. You'll typically need to provide pay stubs, proof of employment, and government identification.
Because unsecured personal loans carry more risk for lenders, they usually come with higher interest rates than secured loans. If your credit is strong enough, unsecured is the way to go — no assets at risk. If not, you may need to secure the loan with collateral, which introduces the risk of losing that asset if you default.
Common Uses for Personal Loans
Debt Consolidation
The most popular reason. Consumers use personal loans to combine multiple high-interest credit card balances into one payment at a lower APR. This only makes sense if the new rate is meaningfully lower than what you're currently paying — and if you have the discipline not to run up your cards again.
Medical and Emergency Expenses
Unexpected medical bills, car repairs, or other emergencies sometimes require more cash than savings can cover. A personal loan can be a better alternative to putting large expenses on a credit card at 20%+ APR.
Home Renovations
Personal loans have become increasingly popular for home remodeling — new furniture, appliances, flooring, and other improvements. If you don't want to tap your home equity or don't qualify for a HELOC, a personal loan is an option.
Wedding and Moving Costs
Major life events often carry major price tags. If you need to finance wedding costs or a cross-country move, a personal loan typically offers better rates than credit cards. Just make sure the monthly payment fits comfortably within your budget before borrowing.
When a Personal Loan Doesn't Make Sense
A personal loan should only be considered if it's an improvement on your current situation. If the rate isn't meaningfully better than your existing debt, or if the origination fees eat into your savings, skip it.
Many consumers make the mistake of taking out a personal loan with seemingly good terms, only to discover that the high monthly payments don't fit their budget. Before borrowing, do a thorough income and expense evaluation and make sure you can comfortably afford the payments — not just technically make them.
Ask yourself: does the loan cover the full amount you need? If it doesn't, you'll end up with the personal loan payment plus whatever debt it didn't cover — making your situation worse, not better. And watch for origination fees, which can range from 1-10% of the loan amount and are typically deducted from your funds before you receive them.
Personal loans are also different from revolving credit lines — once you borrow, that's it. They're best for one-time needs, not ongoing expenses. If you need continuous access to credit, a personal loan isn't the right tool.
When Personal Loan Debt Becomes a Problem
Personal loans are unsecured debt, which means if you fall behind on payments, the lender can't repossess anything — but they can send the account to collections, sue you for the balance, and seriously damage your credit. The consequences compound when you're juggling personal loan payments alongside credit card minimums and other obligations.
The good news is that because personal loans are unsecured, they can be included in debt settlement programs. If your personal loan is delinquent or you're struggling to make payments, our debt relief program can negotiate with your creditors to reduce what you owe — often settling for significantly less than the full balance.
If your combined unsecured debts — credit cards, personal loans, and medical bills — are becoming unmanageable, schedule a free consultation to explore your options. There are no upfront fees and no obligation.
Frequently Asked Questions About Personal Loans
What is a personal loan?
A personal loan is an extension of credit from a lender that is typically unsecured — meaning it's not backed by collateral. You receive a lump sum and repay it in fixed monthly installments over a set period, usually 2-7 years.
What credit score do I need for a personal loan?
Most lenders prefer a credit score of 670 or higher for competitive rates. Some online lenders offer loans to borrowers with scores as low as 580, but expect significantly higher interest rates — sometimes 20-36% APR.
What can I use a personal loan for?
Personal loans can be used for almost anything personal — debt consolidation, medical expenses, home renovations, wedding costs, moving expenses, or emergency needs. Some lenders may restrict certain uses, so check before applying.
How is a personal loan different from a credit card?
Personal loans are installment loans with fixed payments and a set end date. Credit cards are revolving lines of credit with variable payments and no defined payoff timeline. Personal loans typically have lower interest rates than credit cards.
Can personal loan debt be settled for less than I owe?
Yes. Personal loans are unsecured debt, which means they can be included in debt settlement programs. If you've fallen behind on payments, creditors may accept a reduced amount — often 40-60% of the balance — rather than risk receiving nothing.
Is it smart to take out a personal loan to pay off credit cards?
It can be if the personal loan has a significantly lower interest rate than your credit cards. However, this only works if you stop accumulating new credit card debt. Many consumers consolidate and then run up their cards again, ending up in a worse position.
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