Jul 23, 2024
If you’ve been looking for a loan, you may be wondering how personal loans differ from other options. 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 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
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 qualify?
9. How long does the approval process take?
10. Can I take out more than one loan?
Possibly 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, or 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 potentially lowering your monthly payment.
Personal loans can also be ideal when you need cash for other reasons, whether it’s to pay for a 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.
To choose the best loan option for you, it helps to understand how personal loans work.
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.
For smaller amounts 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. 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.
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 secured home equity loan or home equity line of credit (HELOC).
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.
Many potential borrowers assume that personal loans come with high interest rates. 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 13.99% APR for a term of 72 months, you'll pay just $309 per month.
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.
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, which can be completed from anywhere with internet access at any time.
So, while physical bank branches are still in the business of offering loans, they’re no longer the only option. 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 Loan customer in April 2024 remarked: “Was able to apply for a personal loan to consolidate my debt quick and easy. i was able to do everything online and everything was straight forward when it came to term length, monthly payments, and interest rate. Discover continues to impress me with their services.”
The personal loan industry is expanding, and that can be both good and bad for borrowers. It’s good because borrowers have more choice. It could be bad because unreliable lenders may pop up. So do your research and pay special attention to the lender’s reputation.
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. 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 as long as you pay on time.
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.
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.
Even if you have existing loans, you can still apply for another one. In fact, there are personal loans designed for this purpose. Using a personal loan for debt consolidation could be a smart way to pay off debts by combining them into one convenient, affordable solution.
“Wanted to consolidate credit card debt, so I went with the Discover personal loan,” a Discover customer said in February 2024. “So quick, easy, and loan interest rate was great!! Saved me a lot of money in card interest and I will have it paid off within no time. Great product!!”
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’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.
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