What Is a Personal Loan?

Learn more about personal loans

Personal finance can be a confusing topic, and it can be difficult to understand what you need to know about personal loans when applying. We’ve broken down the key things you need to know about personal loans before you apply.

Personal loans benefits

A personal loan can be a great option for easily getting funds to support your financial needs. A personal loan is a responsibility and one that needs attention and management. There is a risk of defaulting and hurting your financial profile. But paying on time, or even paying the loan off early, can help improve your financial profile.

There are two core types of personal loans

What is an unsecured loan?

An unsecured loan is not protected by collateral, like a car or a house, meaning you don’t have to put up collateral to secure funds. It can allow you to borrow money for various reasons, like to consolidate debt or pay for a wedding. The applicant’s overall credit profile, and not any collateral, plays a role in unsecured loan decisions.

Examples of unsecured loans include student loans, credit cards and personal loans. For more details about unsecured loans and to understand the advantages and disadvantages, read more here.

What is a secured loan?

A secured loan requires you to offer an asset as collateral, often times equal to, or more than, the amount you’re requesting. Note that you could lose your collateral if you default on your loan. The most commonly used assets are borrowers’ homes and cars, but a wide range of other valuables can be used, including cash deposits.

Examples of secured loans include mortgages, auto loans, and home equity loans and credit lines. For more details about secured loans and to understand the advantages and disadvantages, read more here.

Understand the rates and terms

Interest rates

It can be tempting to ask for more cash than you really need, but there is a cost to borrow money — it’s called interest. Getting a personal loan with a low, fixed rate can help you accomplish your financial goals.

A good credit score could get you a better rate because it can be an indication of your ability to pay back the loan. Bad credit, however, can make the ability to get a loan a little tougher.

Discover Personal Loans offers rates as low as 5.99% up to 24.99% APR, based on creditworthiness at the time of application. Our lowest rates are available to consumers with the best credit. Many factors are used to determine rates, such as credit history, application information and the term of the loan.

Length of loan

Personal loans are designed to help borrowers consolidate and pay off debts in a clear timeframe that works for their budget. For example, with Discover Personal Loans, you could only need between 36 and 84 months to pay off your loan and be debt-free, depending on your interest rate and the size of your monthly payment. Talk with your lender to find a repayment schedule that works best for you.

Pay attention to lenders and fees

Pay close attention to whether a lender charges origination fees or closing costs, or if there are pre-payment penalties.  A personal loan doesn’t always come with these. In fact, as long as you pay on time, there are no additional fees when you get a loan with Discover Personal Loans. And be sure to look at the lenders’ reputations.

You can have multiple loans

If you’ve already taken out a loan, this does not exclude you from applying for another loan. In fact, there are personal loans designed to help you pay off other loans. Using a personal loan for debt consolidation is a strategic way of combining debts into a more convenient and affordable solution.