Personal Loan Terms to know
A personal loan is a type of short-term installment loan that you can use for just about anything you need or want. Common uses include paying off high-interest debt like credit cards, consolidating multiple loans into one payment, making home improvements, paying medical bills, or financing a large one-time expense.
Unlike a credit card, a personal loan is for a specific amount of money and is repaid in fixed monthly payments, called installments, for a predetermined number of months. The repayment term varies, depending on the loan it could be as short as 12 months or as long as seven years. When you make the last payment to pay the loan in full, the loan ends and your account is closed. To borrow more money, you’d have to apply for another loan.
Personal loans can be secured or unsecured. For a secured loan, you must put up some personal property as collateral, such as a savings account or certificate of deposit. If you default on the loan, the lender typically has the right to seize your collateral as payment for the loan.
Unsecured personal loans aren’t backed by collateral. Instead, lenders look at your financial history to decide whether you qualify for the loan. Because they’re not secured, unsecured personal loans often come with a higher interest rate than you might get for a secured loan.
Personal loans are available from banks, credit unions, online lenders, and peer-to-peer lending platforms.
Before you apply for a personal loan, you should think about why you want it and evaluate other options. If you’re thinking about using a loan for something you want but don’t need, it’s probably better to save up for it instead of borrowing and paying interest.
If you want to use a personal loan to pay off debt, consider other options as well, like a balance transfer card with a 0% introductory rate. Paying the balance in full before the introductory rate ends means you won’t have to pay any interest on the transferred balance. But failing to pay in full by then could cause you to owe a lot in interest on any remaining balance. You’d have to keep your eye on the introductory time frame to make it worth your while.
The amount of interest and other costs (such as fees) that you pay to borrow a sum of money, expressed as an annual rate. The APR represents the total cost of borrowing money.
An amount that’s deducted automatically from your bank account and paid to your lender as your loan payment. Some lenders offer a rate discount if you agree to set up automatic payments.
Credit reports show information about your use of credit and credit history. The three major consumer credit bureaus — Equifax, Experian and TransUnion — each prepares a credit report that may be used by lenders. They generally include personal information like your payment history, how many credit accounts you have, how much credit you’re using and how long you’ve been using credit. Most reports include your name, social security number, current and former addresses and employer history.
Your credit scores are numerical representations of the information in your credit reports. Depending on the credit-scoring model used, scores typically range from 300 to 850. Lenders typically view credit scores and reports as an indication of how likely (or unlikely) you are to repay debt. Higher scores can indicate to lenders that you probably will make payments on time and repay the loan as agreed.
A service by which a sum of money is electronically deposited into a bank account (without a paper check). If you’re approved for a personal loan, your lender may offer to directly deposit the funds into your bank account.
A form that you’re required to complete via the internet to apply for a loan from a lender. Some lenders allow you to check if you prequalify online, which can give you an idea of whether you have a good chance of getting the loan, and submit loan applications online.