How personal loans work
A personal loan is unsecured instalment credit: a fixed amount, a fixed rate, a fixed term, and a payment that never changes. Because there is no collateral, the rate is set almost entirely by your credit profile and income. Terms usually run two to seven years and amounts from $1,000 to $100,000.
The origination fee changes the maths
Fees of 1–8% are deducted before disbursement, so you borrow more than you receive. Request $20,000 with a 4% fee and you get $19,200 but pay interest on $20,000. If you need a specific sum for a specific purpose, gross the request up so the net covers it. And always compare offers on APR rather than the headline interest rate — APR is defined to include the origination fee.
Reasonable uses
- Debt consolidation. Replacing several cards at 22–28% with one loan at 12% saves real money — but only if you stop using the cards. A large share of consolidators run the balances back up within two years.
- A one-off necessary expense. Medical bills, an urgent repair, or a move.
- Home improvement without collateral. More expensive than a HELOC, but your house is not on the line and there is no appraisal.
Uses that usually end badly
Borrowing at 12–30% to invest, to fund a wedding or holiday, or to cover ongoing shortfalls in a monthly budget. If income does not cover expenses, a loan converts a cash-flow problem into a cash-flow problem plus a payment.
Shop rate before you apply
Most online lenders offer a pre-qualification that uses a soft credit pull and does not affect your score. Gather three or four, compare the APR and the fee, then submit a single formal application. Credit unions are consistently competitive and many will lend to members with thinner files than a bank would accept.
Read the prepayment terms
Reputable personal lenders do not charge prepayment penalties, but some do — and some apply interest using methods that make early payoff less valuable than simple amortization would suggest. Confirm that the loan uses simple interest and that you may pay it off at any time without penalty.