A personal loan is a form of credit that typically offers a lump sum up front and is paid back with predictable monthly amounts over a specific period of time.
Personal loans can help you make a big purchase or consolidate high-interest debts, like credit cards.
They can also vary widely. Personal loans can be provided for different amounts, large or small, and with differing interest rates, fees and repayment terms.
Most personal loans are a secured type of loan, which require an application process reviewed by a lender. Secured loans also typically require collateral.
Let’s look at how they work and when they make good sense.
Personal loans often carry an interest rate lower than many credit cards, so they can be used to combine card debts into a single, lower-cost monthly payment.
If you use a personal loan to pay off credit cards, you’ll secure the loan and use the lump sum to pay off credit cards with higher interest rates. Going forward, you’ll make one monthly loan payment, instead of payments to multiple cards, juggling due dates and balances. Your loan payment is predictable month after month, and you’ll pay less in interest charges over the life of the loan.
When you use a personal loan as a debt consolidation loan, you can clear your credit cards fast and boost your credit score.
But your behavior with the loan is also part of your credit history.
Another way to use a personal loan is for personal expenses, like home improvements, major medical bills, wedding or funeral costs, or unexpected expenses.
Some lenders restrict how you can use a personal loan. For example, if you’re planning to use a personal loan to pay for college tuition or fees, you may not qualify with some financial institutions. In this example, talk to your lender about available student loans.
Some personal loans are labeled and marketed by their intended use. So a "personal loan" may sometimes be called a "home improvement loan"
Most personal loans are secured with collateral - which is property or an item of value the lender can claim if you don't repay the loan. The most common forms of collateral include your home, your car or a luxury item.
Start with your bank or credit union. See what types of personal loans they offer and compare with the loan terms offered by other lenders .
In addition to lower interest rates, the best personal loans offer low origination fees and low or no prepayment penalties. These terms are another way to compare different loan offers.
The loan application requires reviewing your creditworthiness, with your credit card debt, credit score and debt-to-income ratio reviewed and used to determine the loan amount, the interest rate and other terms.
Personal loans work like most other forms of credit: your behavior with the loan is reported to credit bureaus, like Experian, TransUnion and Equifax. Late payments or partial payments can show up on your credit report.
Unsecured personal loans are also available, but they often require excellent credit and an exceptional credit history in lieu of collateral.
Personal loans fall under the category of "installment loans," which means they're loans for a fixed sum with predictable monthly payments.
Common alternatives include a home equity loan or line of credit and a personal line of credit. The first two use the equity in and value of your home as a collateral and to determine the amount and terms to offer you.
With a line of credit, instead of a loan's lump sum, you'll have access to cash and credit up to a set limit. You can access a lump sum, if that makes sense, or use it like a credit card.
Bright offers a personal loan automatically to all qualified users. We recommend using it to consolidate and pay off high-interest credit card debt.
Bright's personal loans come with competitive rates and terms, and we'll manage your debt pay-offs for you automatically.
If you don't have it yet, download the Bright app and connect your accounts. Bright will study your finances and let you know if a personal loan makes sense for you. Or you can contact Bright and inquire directly.