If you have been looking into borrowing options, you may be wondering how do personal loans work. Maybe you have questions such as: What is a personal loan? What’s involved in taking out a personal loan? Do I need collateral? What about my credit score?
There’s a lot to learn to make an informed financial decision. To help put your mind at ease, we’ve created a simple list of what to know about personal loans.
Table of contents
2. What can a personal loan be used for?
3. How do personal loans compare with other options?
5. Can a personal loan save me money?
6. Can I apply for a personal loan online?
7. Are all personal loans the same?
8. Do I need a perfect credit score to get approval?
9. How long does the approval process take?
10. How many personal loans can you have?
1. What is a personal loan?
A personal loan is an unsecured installment loan that can be used to consolidate debt or pay for major expenses. Its features typically include:
- A fixed interest rate and a fixed repayment term
- One set regular monthly payment
2. What can a personal loan be used for?
One of the best features of a personal loan may be its flexibility. Personal loans can be used to consolidate and pay off debt, or to help pay for major expenses.
Using a personal loan to consolidate debt means you pay off multiple debts from credit cards, higher-interest loans, or other bills using funds from a personal loan, and then make one monthly payment to pay off the loan. A loan for debt consolidation could help you reach your financial goals faster by reducing the amount you pay in interest, which could lower the amount you pay each month.
Personal loans can also be ideal when you need cash for other reasons, whether it’s to pay for a home improvement project, an event, a vacation, or an unplanned expense.
For example, when planning a wedding, you may need extra cash to cover costs such as buying a ring, reserving a reception venue, or booking a florist, caterer, and DJ. Or perhaps you want to remodel your basement, upgrade kitchen appliances, or make your house more energy-efficient. A personal loan could help you pay for those types of home improvements.
3. How do personal loans compare with other options?
To choose the best loan option for you, it helps to understand that personal loans can differ in amount, necessary collateral, and repayment from other loans.
Personal loan amounts vary from lender to lender. For example, with a personal loan from Discover®, you can borrow between $2,500 to $40,000. The amount you qualify for will depend on your credit health, which can give creditors confidence that you’ll repay the loan on time. Personal loans can also have no collateral required compared to other options and may have lower APRs than credit cards.
A credit card can be a way to borrow smaller amounts than a personal loan, to pay for things you need. You might qualify for a credit card with a balance transfer offer that features a low introductory annual percentage rate (APR). If you can pay off the balance before the introductory period ends, a credit card could be a good option that can save you money. Just beware of the hazards: if you can’t pay off your balance before the interest rate rises or if you are late with your payments, you could be charged hundreds or thousands of dollars in interest.
What are other options for borrowing?
Keep in mind that you have other choices too. For example, if you’re a homeowner and need a larger loan amount, you might consider a home equity loan or home equity line of credit (HELOC). These are secured loans which require you to use an asset like your home, car, savings, or investments as collateral. This collateral provides the bank with the security necessary to allow you to borrow larger amounts.
4. Do I need collateral?
Whether or not you need collateral depends on the kind of loan you apply for.
With an unsecured personal loan, you don’t have to put up collateral, like a savings account, CD, your home, or car. Instead, the lender will decide if you qualify based on your credit history and other factors.
Secured loans, typically used for larger loan amounts, over $40,000 for example, do require an asset as collateral. These types of loans may be used for borrowers with limited or poor credit history.
5. Can a personal loan save me money?
Many potential borrowers assume that personal loans come with high interest rates, when compared with other options. The truth is that personal loans can have relatively low interest rates. At Discover Personal Loans, your APR will be between 7.99% and 24.99% based on creditworthiness at time of application for loan terms of 36–84 months. For example, if you get approved for a $15,000 loan at 11.99% APR for a term of 72 months, you’ll pay just $293 per month.
The rate on a personal loan may be lower and won’t change for the life of the loan—meaning you can pay less interest and pay off your debt sooner.
Many factors are used to determine rates, such as credit history, application information, and the loan’s repayment term. Your relationship with a lender may also affect your rate. For example, the majority of Discover cardmembers get a better interest rate on a personal loan than non-cardmembers.
6. Can I apply for a personal loan online?
Yes. You have a choice between applying online or going to a bank. With progress in cybersecurity and internet banking technology, online lending has become a reliable—and safe—source for loans. In addition, many people enjoy the convenience of an online loan application.
As part of our online process at Discover, we offer an online personal loan calculator that allows you to easily find out your estimated monthly payments and interest rate.
One Discover Personal Loans customer in October 2025 remarked: “It was so easy to check my rates, payments, and apply for the Discover personal loan. It made consolidating a bunch of stuff into one payment super easy! Would 100% recommend to anyone!"
7. Are all personal loans the same?
The personal loan industry is expanding, and that can be a good thing because borrowers have more choices. New types of personal loans have been introduced such as buy now, pay later options for immediate purchases and payday loans. However, choice may also mean unreliable lenders could pop up. That’s why it’s critical to understand the difference between your options. Do your research and pay special attention to the lender’s reputation as well as to the requirements and fine print of any loan you look into.
Loans can also differ in other ways as well. For example, as you compare lenders, you’ll want to see if they charge origination fees, closing costs, or prepayment penalties—like early payoff, which may have fees attached. These fees and charges can increase the total cost of your loan. This means that a loan with a lower interest rate might still cost you more over time if there are additional costs. A Discover personal loan has no fees of any kind.
8. Do I need a perfect credit score to get approval?
People with a wide range of credit scores get personal loans every day. In fact, a credit score isn’t the only thing lenders consider when reviewing a loan application; they also review your income, debt-to-income ratio, and credit history.
A strong credit score might help you obtain a lower interest rate, because it can be an indication of your ability to pay back the loan. Some lenders, like Discover Personal Loans, let you check your rate with a “soft credit pull.”
A soft pull helps you see how much money you might be able to borrow, the interest rate, and the repayment term. Since it’s not attached to an actual application for credit, a soft credit pull won’t impact your credit score. A “hard credit pull” is linked to an application that will be visible to other creditors on your credit report and could affect your credit.
9. How long does the approval process take?
Approval for a personal loan may occur the same day your application is sent, or it may take up to three days, depending on your choice of lender. Your funds are typically sent within three business days or more. At Discover, funds can be sent as soon as the next business day after your acceptance.
To speed up your loan application process, it can help to have all of the documentation ready when you start your application. Once you have the information you need and have submitted your application, the process often moves very quickly. Keep in mind that delays may occur if information is incorrect or missing from your application.
10. How many personal loans can you have?
Even if you have existing loans, you can still apply for another one. In fact, there are personal loans designed for taking out more than one loan.
If you have more than one loan, using a personal loan for debt consolidation could be a smart way to pay off debts by combining them into one convenient, affordable solution.
One Discover customer said in October 2025, “I have been a member of Discover since 1989. I have done debt consolidation loans before and appreciate the customer service and rates that Discover offers.“
What to know about personal loans
A personal loan is a versatile financial tool that comes with a host of benefits. It’s easy to apply for and manage, and it could save you money compared with other borrowing tools.
Taking out a loan is still a big decision, though, so be deliberate and don’t ask for more cash than you really need—you may end up paying more in interest.
Want to learn more about how a personal loan could help you fast-track your financial goals? Our personal loan payment calculator makes it easy to estimate monthly payments based on loan amount and credit score.
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