Loans

What Is a Personal Loan?

A personal loan is money borrowed from a bank, credit union, or online lender in a lump sum. The best loan rates are typically reserved for customers with the highest credit scores. You'll normally make set monthly payments until you've paid back the debt.

While other loan types are used to pay for specific purchases, like a home or vehicle, the best unsecured personal loans can be used for a variety of purposes. For example, you can use personal loans to finance home improvements, cover the cost of an engagement ring, or pay for medical expenses.

What Is a Debt-Consolidation Loan?

A debt consolidation loan is a loan used to pay off other debt. Usually, a debt consolidation loan has a lower interest rate than other debt (like credit card debt). You can also use it to pay off multiple debts -- for example, multiple credit cards or loans. Then, you have only one debt payment to remember instead of several. 

When is a personal loan a good option?

Personal loans are a good idea when you have a clear purpose in mind. For example, the top personal loans can provide you with the funds you need to repair or remodel your home, cover an emergency expense, or consolidate debt. As with any debt, personal loans are not a good option if you're not sure how you'll pay the money back, or you're borrowing for something you don't actually need.

If you need the proceeds from your personal loan quickly, look for a loan with streamlined approval. This will limit the time you have to wait for funds to be deposited into your bank account. If you run into a financial roadblock, a personal loan can help you over it, even when you need the cash fast.

What are the benefits of using a personal loan for debt consolidation?

A debt consolidation loan can save you money and time. Here are three other main benefits:

What should I look for in a personal loan?

There's a wide range of personal loan options available, and that's why it's so important to know how to identify the loan that will benefit you the most. Whether you enjoy excellent credit or are specifically looking for a loan for borrowers with poor credit, at their core, the best personal loans have three things in common. 

Low interest rate

The lower the interest rate, the more money you save in total.

Let's say you need to borrow $20,000 to replace the roof of your house, and you're planning on getting a loan with a 5-year term. You're considering two options: Lender A and Lender B. Below, we've summarized these two imaginary lenders and how their interest rates would impact the cost of your loan. As you can see, even a small percentage change can result in significant savings.

Lender A

Lender B

The higher interest rate will only cost you an extra $13 per month, but that small difference amounts to $780 over the life of the loan. For more information, check out our guide to good interest rates for personal loans.

Loan terms that work for you

A loan term is the period of time you have to repay the loan. The longer the loan term, the lower your monthly payment -- but the more you'll pay in interest overall. Look for your personal loan term sweet spot. The shortest term with the most affordable payment is your personal loan sweet spot.

Low fees

The best personal loan rates mean little if they are coupled with expensive fees. The best personal loan lenders won't charge an origination fee (or a very low origination fee) and keep other expenses -- like prepayment and late fees -- to a minimum.

For example, many lenders charge origination fees to cover the cost of processing and distributing your loan. Origination fees range from 1% to 8% of the amount you borrow. Using the scenario above, if you borrow $20,000 to replace a roof, that means you could pay between $200 and $1,600 in origination fees alone.

What should I look for in a debt consolidation loan?

The reason to look at personal loans for debt consolidation is to see if one would benefit your financial situation. Here's what you should look for:

A competitive interest rate and APR

To start, look for a good loan interest rate. Ideally, this should be below the interest rate of your existing debt.

But the interest rate is not the only cost you'll pay: There are other fees associated with loans. Also, the repayment term can affect how much interest you pay even more than the interest rate itself. To get a better picture of how much one loan costs compared to other loans, look at the loans' annual percentage rates (APRs).

A repayment term that works for you

The faster you pay off your loan, the more money you'll save in interest fees. But a short loan term (the amount of time you have to pay off the loan) also means high monthly payments. If you don't have much room in your budget, a longer repayment term might work better for you. Check our guide to the pros and cons of longer repayment terms for more information.

Low or no fees

An origination fee is an upfront cost that lenders charge you for processing and distributing your loan. These can range from 1% to 8%. Say you take out a loan for $10,000. That means you may pay anywhere from $100 to $800 in origination fees. The best debt consolidation loans charge little or no origination fees. You can also check with your lender to learn if the fee is negotiable.

Also, some lenders charge you a fee if you decide to pay a loan off early. Look for a lender who does not charge prepayment penalties. That way, you can pay the loan off faster if you want to.

What are the drawbacks of debt consolidation loans?

Most financial decisions, including personal loans for debt consolidation, have pros and cons. Here are some drawbacks of personal loans for debt consolidation.

Temptation to go into more credit card debt. If you use your loan to pay off your credit cards, you may be tempted to use those cards again, leaving you with a consolidation loan and credit card debt.

Not reading the fine print. The wrong loan can end up costing you money in interest or fees. Make sure you understand all the costs involved and don't inadvertently put yourself in a worse situation. A high origination fee, late payment fees, and prepayment penalty will each take money out of your pocket.

There's also a unique risk with one type of loan: a secured loan. If you take out a secured loan, you'll need to put up collateral, such as your house or your car. You risk losing that collateral if you miss payments. An unsecured loan won't require collateral. To avoid the risk of losing your home or your car, consider unsecured debt consolidation loans first.

How to get a personal loan

The loan application process is much easier if you prepare in advance. Whether you want to work with a traditional bank, credit union, or peer-to-peer lender, here are the steps to take:

Can I get a debt consolidation loan with bad credit?

Yes, you can get a debt consolidation loan if you have bad credit. Here are a few extra steps you can take to increase your chances of getting approved:

For more information, check out our list of best personal loans for bad credit.

What are the alternatives to personal loans?

The best personal loan lenders can provide a great way to borrow money affordably, but they are not the right choice for everybody. Depending on your circumstances -- for example, if you need money to fund a project or pay an unexpected expense -- you may want to look at other options. Here are two alternatives to personal loans:

Credit cards

A credit card can provide fast cash in an urgent situation. If you qualify for a 0% APR credit card, you have months (sometimes between 12 and 18) to pay the debt off with no interest. Avoid using a credit card with a 0% transfer offer if you're not confident you can pay it off in full before the promotional rate expires. At the end of the promotional period, the interest rate will shoot up to its standard rate.

Secured line of credit 

A secured line of credit can help you snag the best rates for personal loans. Secured loans often charge a lower interest rate because you put something of value up as collateral. It may be anything of value, such as your car, home, boat, or jewelry. A line of credit offers greater flexibility. You can borrow up to your credit limit, depending on what you need, and you'll only pay interest on the amount you borrow.

What are the alternatives to personal loans for debt consolidation?


Personal loans for debt consolidation can be a great way to meet your financial goals, but they're not the only option for paying off debt. Here are some alternatives to a debt consolidation loan:

Balance transfer credit cards

A balance transfer card offers a promotional rate, such as 0% APR for a set time period (typically 12 to 24 months). You apply online, give the new credit card company a list of the balances you want to be transferred, and wait to hear back from them. Transfer fees usually range from 3% and 5% of the balance transferred. But beware: The card's interest rate will rise dramatically as soon as the promotional period expires. You should plan to pay the card off in full before then.

Home equity loans

If you owe less on your home than it's worth, that means you have equity and can borrow against it. If you use a home equity loan for debt consolidation, you'll owe your mortgage lender instead of your other creditors (like credit cards). The interest rate might be lower on a home equity loan than you'd pay on a credit card or personal loan. The danger is that you could lose your home if you miss payments.

401(k) loans

While the best move with a 401(k) plan -- or any other retirement plan -- is to leave it alone and let it grow, some plans do allow for borrowing. You don't have to worry about your credit score when borrowing from your 401(k) because no credit check is required. A 401(k) loan generally lets you borrow 50% of your 401(k) balance or $50,000, whichever is less (with some exceptions). When you take out a 401(k) loan, you pay interest to yourself by putting your interest payments back into your retirement account. However, if you don't pay back the loan within five years, you will owe income tax and a penalty of 10%.

Pre-qualifying for a personal loan

Personal loan pre-qualification or pre-approval allows you to get a sense of what loan terms are available. Most pre-qualification processes use a soft credit check, which won't impact your credit score. If you qualify, lenders will let you know how much you can borrow, the interest rate you will be charged, and how long you'll have to repay the loan. You can use this information to compare personal loans. If you do not qualify, you can learn what you need to do to improve your odds of getting a personal loan.

Is a debt consolidation loan right for you?

Yes, if consolidating means snagging a lower enough interest rate to save money. It's a great way to pay off existing debt.

If you find yourself worrying about how you're going to repay credit debt, a debt consolidation loan can help. From the time a lender approves your consolidation loan, you will know precisely the repayment term and when it's due to be paid off. If you're busy like most people, having one installment loan to pay can simplify your life. Rather than making sure each credit card payment is sent, writing a check for your auto loan, and double-checking that all other bills are covered, you pay a single monthly payment. And if you're a small business owner, a debt consolidation loan can pay off business debt.

FAQs

What is a personal loan?

A personal loan is money you borrow in a lump sum and pay back in regular installments. Unlike an auto loan or a mortgage, a personal loan can be used to pay for a variety of things, such as an engagement ring, home improvements, or a vacation. 

What should I look for in a personal loan? 

The ideal personal loan combines a low interest rate, reasonable repayment terms, and low fees. 

How do I qualify for a personal loan?

The best rates are offered to the most qualified borrowers. Lenders will take your credit score, income, and existing debt into account when determining whether you qualify for a personal loan. Be prepared to provide supporting documentation, like ID and proof of income. Know how much you need to borrow and where you want the funds deposited.