Key insights:
- A personal loan is an installment loan that provides borrowers with a lump sum that they repay over time in fixed monthly payments, typically with interest and fees
- Personal loans are often flexible and can be used for a wide range of expenses, including debt consolidation, home repairs and emergencies
- Approval and loan terms generally depend on factors like credit score, income, payment history and debt-to-income ratio
- Personal loans may be easier to budget for, since many have fixed interest rates and predictable monthly payments
- Borrowers should compare APRs, fees and terms before choosing a lender
A personal loan is an installment loan that lets you borrow a lump sum of money for a range of expenses, such as debt consolidation or home repairs, and then repay it over time. This flexibility makes them useful financial tools. However, it’s important to understand how personal loans work and the full scope of their benefits before applying.
Let’s explore how personal loans work, how to get one, the benefits they offer and how you can use one.
How do personal loans work?
In general, personal loans are unsecured, meaning they don’t require collateral. They also can be secured, meaning they require collateral in case you’re unable to repay. You may be able to borrow up to $100,000, depending on the lender, and repayment terms typically last 1 to 5 years.
Personal loan requirements typically include your creditworthiness and income as the most important qualifying factors. If you’re approved, you receive the funds as a lump sum and repay them in monthly installments with interest. You’re responsible for making monthly payments until the loan, interest and any fees are paid in full.
The monthly payment amount is determined by the loan terms, including the annual percentage rate (APR), which is the interest rate plus any applicable fees. Typically, the payment amount is fixed, meaning it won’t change over the life of the loan.
How do you get a personal loan?
To take out a personal loan, you’ll first need to fill out an application with a bank, credit union or online lender. You may typically apply online, over the phone or in person.
Once you submit your application, the lender considers factors like:
- Credit score
- Payment history
- Debt-to-income ratio (your debt payments compared to your income)
- Income
If you meet the lender’s requirements, the lender will provide a loan offer. An offer includes the amount you can borrow, a repayment schedule that outlines how much you’ll need to pay each month and the loan’s interest rate and term.
If you agree with your offer, you can accept the loan and receive your funds. The timing to receive your loan funds can vary depending on the lender. With Citi® Personal Loans, for example, you can get your funds as soon as the same business day when deposited directly to an existing Citibank account.1
Do personal loans impact your credit?
When you apply for a personal loan, the lender checks your credit score, which adds a hard credit inquiry to your credit report. Hard credit inquiries can have a small, temporary impact on your credit score. That’s why it’s generally recommended to only apply for new credit, such as a personal loan, when you’re ready to borrow.
Some lenders let you pre-qualify for a personal loan to help you better understand your options without adding a hard credit inquiry to your credit report. Pre-qualification can provide insight into whether you’re likely to qualify for a given loan, and if so, what your terms may look like.2
The way you manage your personal loan can also impact your credit score. For example, making on-time payments consistently may help boost your credit score over time, while missing payments may lower it. And adding a personal loan to your credit history can improve your credit mix, which may also help your credit.
Types of personal loans
There are a few varieties of personal loans available. The terms and amount you choose to borrow for a personal loan will affect how much your debt will cost in the long term.
Fixed interest rate vs. variable interest rate loan
While some personal loans may have a variable interest rate, which can change over time, most have a fixed interest rate, meaning it won’t change over the life of the loan. With fixed-interest-rate personal loans, the monthly payment is also fixed, making it easier to fit into your financial plans.
Unsecured personal loan vs. secured personal loan
Most personal loans are unsecured, which means they’re not backed by collateral, such as a house or car. Instead, lenders use your credit score to determine if you qualify or not. Secured personal loans, on the other hand, require collateral but may be easier to qualify for.
An unsecured personal loan is riskier for the lender, so you may have to pay a higher interest rate compared to a secured personal loan.
What are the benefits of a personal loan?
There are a few key benefits of personal loans:
- Flexibility: Personal loans can be used for almost anything. (Typical exceptions include educational and business expenses.)
- Easy to budget for: The interest rate is usually fixed, which means your interest rate and payments remain the same over the life of the loan.
- Convenience: The personal loan application process is generally fast and straightforward. Funds are typically disbursed quickly, too, though the exact timing will depend on the lender.
Downsides of a personal loan
That said, there are also a few drawbacks of personal loans to consider beforehand, such as:
- Eligibility: You may need strong credit to qualify for the lowest interest rates.
- Potential fees: Some lenders charge fees, such as origination fees or pre-payment penalties.
- Potentially costly interest: If you choose a longer repayment term, you could pay more in total interest over time.
What can personal loans be used for?
Personal loans can be used for a variety of expenses, making them flexible and convenient options for different financial situations, including:
- Debt consolidation
- Refinancing an existing loan
- Home repairs and renovations
- Moving costs
- Vehicle repairs
- Wedding expenses
- Emergencies
Deciding on a personal loan
A personal loan may be a good option if you need to finance a large purchase, consolidate debt or have financial flexibility in an emergency. Shopping around is key to finding a personal loan that works for you. Some of the factors you may consider include:
- APR
- Fees
- Terms
- Loan amounts
- Lender reputation
- Funding times
It’s also important to ensure you can afford the payments over the life of the loan. Budgeting for monthly payments may help you protect your credit score and avoid taking on even more debt.
Compare funding options with a Citi® Personal Loan
If a personal loan sounds like the right option for you, Citi offers flexible personal loans to qualified applicants. You can also take advantage of a 0.25% discount on rates when you enroll in automatic payments.
Once approved, many customers with an existing Citibank account can receive their funds within the same business day.
Ready to fund your next project? Explore Citi® Personal Loans today to apply online and find the right option for your needs.
1 Once approved, Citibank can deposit funds directly into an existing Citibank account the same business day, or within 2 business days when deposited to an external bank account, provided the bank account has not been recently opened. In such instances, Citi reserves the right to reject the bank account as the disbursing account for personal loan funds, and you can select another bank account or select to receive a check by mail, which is delivered generally within 5 business days.
2 To check for offers you may qualify for, Citi conducts a soft credit inquiry. If you are presented with an offer and choose to proceed with the application process, Citi will conduct a hard credit inquiry, which may have an impact on your credit score.
This article is for educational purposes. It is not intended to provide legal, investment, or financial advice and is not a substitute for professional advice. It does not indicate the availability of any Citi product or service. For advice about your specific circumstances, you should consult a qualified professional.
