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Rateology Explains: Personal Loans

What is a personal loan?

A personal loan is a type of unsecured loan that can be used for any purpose. While some lenders will request to know what purpose the loan is for, as long as you’ve borrowed for a responsible and legal reason, you can utilize it however you would like. This is money that is usually borrowed from a bank, credit union, or online lender, and is paid back in monthly installments. A personal loan is usually used to expensive finance purchases or consolidate debt.

Unsecured Loan - a loan that is issued and supported only by the borrower's creditworthiness, rather than by any type of collateral

Typical Rates of a Personal Loan

Rates for a personal loan depend on a many factors including income, credit score, and loan amount. Depending on the financial institution you’re borrowing from, rates can range from 7% to 36% APR. Most personal loans are usually paid off in 2-5 years.

The APR, or interest rate, that you receive on your loan will be primarily based on your credit score. The higher your score, the lower your interest rate will be.

APR - APR, or annual percentage rate, is the annual rate charged for borrowing money. The lower the APR (also called interest rate) the more you save.

Unsecured vs Secured Loan

Since a personal loan is an unsecured loan, that means it is not backed by any collateral. A secured loan is usually backed by an object of value (such as your car or house). These loans are usually much cheaper, as the collateral serves as an insurance. However, with a secured loan you run the risk of forfeiting your collateral if you default on your payments.

Secured Loan - A secured loan, is a loan in which the borrower pledges some asset as collateral for the loan, which then becomes a secured debt owed to the creditor who gives the loan.

Benefits and Uses of a Personal Loan

As mentioned above, a personal loan can be used for anything and everything. This is includes financing home improvement, auto repair, travel, and medical expenses, to name a few. Another useful function of personal loans is that they can be used for debt consolidation. You can save thousands of dollars by utilizing a personal loan as a form of debt consolidation. To learn more about the cost of minimum payments vs debt consolidation, visit Rateology’s Minimum Payment Calculator.

Debt Consolidation - Debt consolidation means taking out a new loan to pay off a number of liabilities and consumer debts, generally unsecured ones. In effect, multiple debts are combined into a single, larger piece of debt, usually with more favorable payoff terms: a lower interest rate, lower monthly payment or both.

Compare Personal Loans

Now that you have a better understanding of the purpose and uses of personal loans, you can shop and compare personal loans on Rateology.com

About Amanda Easter

Amanda Easter is the Head of Web Development at Dunkin & Associates and specializes in topics on budgeting and financial technology. She is based in College Station, TX.

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