If you’re confused about what to know about personal loans, you’re not alone.
First, what is a personal loan? How high or low are the interest rates? What’s involved in taking out a personal loan? Do you need collateral? What about your credit score?
There’s a lot of information on personal loans for you to process. So, to put your mind at ease, we’ve laid it out for you in a simple list.
Here are the top 10 things you need to know about personal loans:
Table of Contents
- What is a personal loan?
- What can a personal loan be used for?
- How do personal loans compare with other options?
- Do I need collateral?
- Can a personal loan save me money?
- Can I apply for a personal loan online?
- Are all personal loans the same?
- Do I need a perfect credit score to qualify?
- How long does the approval process take?
- Can I take out more than one loan?
1. What is a personal loan?
A personal loan is an unsecured installment loan that can be used to consolidate debt or pay for life’s big events. Its features typically include:
- A fixed interest rate
- One set regular monthly payment
- Flexible repayment terms: You can choose to pay back the money you borrow over a term that works for you (usually 36 to 84 months)
- Can be used in a variety of ways, including for major expenses, financial emergencies, and debt consolidation
Personal loan amounts vary from lender to lender. For example, a personal loan from Discover can range from $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.
2. What can a personal loan be used for?
One of the best features of a personal loan is its flexibility. Personal loans are often used to consolidate debt, which is when you combine multiple debts from credit cards, higher-interest loans, and other bills into one monthly payment.
A loan for debt consolidation could help you reach your financial goals faster by reducing the amount you pay in interest and lowering your monthly payment. Plus, with a personal loan from Discover, we can send funds to you or directly to your creditors in as little as one business day after acceptance.
But personal loans can also be ideal when you need cash for other reasons, whether to pay for home improvements, a vacation, or an unplanned expense.
“Discover has been my go to for short term loans,” said one customer in July. “Their process is fast, simple and majority is done online. Rates and terms that are consumer friendly and make it easy to finance projects and needs. I have currently used them twice- highly recommend!”
3. How do personal loans compare with other options?
To choose the best loan option for you, it helps to understand how personal loans work—as well as the difference between secured and unsecured loans. Simply put, secured loans require collateral, while unsecured loans don’t.
Personal loans are typically unsecured, and can be a great way to get the cash you need to consolidate debt or pay for an emergency expense. But you have other choices, too. For example, if you’re a homeowner and need a larger loan amount, you might consider a secured home equity loan or line of credit.
For smaller amounts, you might qualify for a balance transfer credit card with a low introductory APR. If you can pay off the balance before the introductory period ends, a credit card could be a good option. Just beware of the hazards: If you can’t pay off your balance before the interest rate rises or are late with your payments, you could be charged hundreds or thousands in interest.
4. Do I need collateral?
Personal loans are generally unsecured, which means you don’t have to put up collateral like a savings account, CD, or your home or car. Instead, the lender will decide if you qualify based on your credit history and other factors.
5. Can a personal loan save me money?
Many potential borrowers incorrectly assume that personal loans come with high interest rates. The truth is personal loans can have relatively low interest rates. Discover Personal Loans offers rates as low as 6.99%, up to 24.99% APR, based on creditworthiness at time of application.
Many factors are used to determine rates, such as credit history, application information, and the term of the loan. Your relationship with a lender may also affect your rate. For example, just by being a Discover cardmember, you’re likely to be offered an APR at least 1% lower than a similar non-cardmember.
“Discover Personal Loans helped me lock in a low interest rate on a personal loan while enabling me to consolidate my remaining debt. The process was easy. Their staff is friendly and helpful. I strongly recommend this company to people looking for a personal loan.”
6. Can I apply for a personal loan online?
With progress in cybersecurity and internet banking technology, online lenders have become reliable—and safe—sources for loans. In addition, many people enjoy the convenience of an online loan application, which can be completed in minutes.
“Getting the loan was easy, fast and efficient,” noted one Discover Personal Loans customer. “The person I worked with was courteous, knowledgeable, and helpful.”
So, while physical bank branches are still in the business of offering loans, they’re no longer the only option.
7. Are all personal loans the same?
The personal loan industry is expanding, and that’s both good and bad for borrowers. It’s good because borrowers have more options to choose from. It’s bad because unreliable sources for loans can pop up. So, do your research, and pay special attention to the lender’s reputation.
When comparing lenders, also be sure to consider all the details of the loan offer. For example, does the lender charge origination fees, closing costs, or prepayment penalties? Discover Personal Loans doesn’t charge any fees, as long as you pay on time.
8. Do I need a perfect credit score to qualify?
People with a wide range of credit scores get personal loans every day. In fact, 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.
But a good credit score might qualify you for a lower interest rate, because it can be an indication of your ability to pay back the loan.
9. How long does the approval process take?
It’s a good idea to gather all the required information before starting your personal loan application. Once you’ve submitted your application, the process often moves very quickly. With a personal loan from Discover, for example, most people get a decision the same day.
10. Can I take out more than one loan?
Even if you’ve already taken out a loan, you can still apply for another one. In fact, there are personal loans designed to help you pay off other loans. Using a personal loan for debt consolidation can be a smart way to pay off debt by packaging it into one convenient, affordable solution.
What’s the bottom line?
A personal loan is a versatile financial tool that comes with a host of benefits: It’s easy to apply for and manage, and could save you money compared to other borrowing tools.
But taking out a loan is still a big decision, so be deliberate and don’t ask for more cash than you really need—you’ll 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. Estimate My Payments