Personal Loans: A Complete Guide in 2025

Published on August 18, 2025 by Admin

Personal loans are flexible financial tools you can use for purposes like debt consolidation, home improvements, or emergency expenses. They’re typically unsecured installment loans you repay in fixed monthly payments over one to seven years.

This guide explains what personal loans are, how they work, and the key steps to take before and after applying.

What Is a Personal Loan?

A personal loan is an installment loan with a fixed interest rate. You receive the full loan amount as a lump sum, then repay it in equal monthly payments. The average APR on a two-year personal loan is about 12.32% (Federal Reserve).

Most personal loans are unsecured, meaning you don’t need collateral like your car or home. Approval often depends on your credit score, income, and debt-to-income (DTI) ratio. Because there’s no collateral, lenders take on more risk, which usually means higher interest rates compared to secured loans.

Some lenders also offer secured personal loans, which may help you qualify if your credit is limited. But if you default, the lender can seize the asset you pledged.

Tip: The annual percentage rate (APR) reflects both the interest rate and any fees, such as origination fees. It’s the most accurate measure of your loan’s true cost.

You can use a personal loan for nearly any purpose, including debt consolidation, major purchases, medical bills, or unexpected expenses.

1. Check Your Credit Score

Your credit score is one of the biggest factors lenders consider. It influences not only your approval chances but also the interest rate.

FICO scores range from 300–850:

Many lenders set a minimum credit score, and the best rates usually go to those with scores in the “very good” or “exceptional” ranges.

Before applying, check your score and review lenders’ minimum requirements. Applying for a loan creates a hard inquiry that can temporarily lower your score, so you’ll want to apply only when your chances of approval are good.

2. Decide How Much Money You Need

Next, figure out how much to borrow. Remember:

Example:
Borrowing $10,000 over 3 years at 13% interest: about $337 per month.
Borrowing $15,000 on the same terms: about $506 per month — almost $170 more each month.

A larger loan also means paying more in interest overall. Borrow enough to cover your costs, but keep it manageable for your budget.

3. Research Lenders and Loan Options

You can get a personal loan from:

Each has pros and cons. Banks and credit unions may favor existing customers, while online lenders often have lower overhead, which can mean lower rates or fees. Some online lenders are also more flexible with credit requirements.

When researching, compare:

4. Prequalify with Multiple Lenders

Many lenders let you prequalify using a soft credit check, which doesn’t affect your credit score. You’ll see estimated loan amounts, rates, and terms you might qualify for.

Use this step to shop around and compare offers. Keep in mind:

5. Compare Lenders and Choose the Best Loan

After prequalifying, review offers side by side. Compare:

Don’t just focus on the interest rate; a lender with no fees could end up being cheaper than one with a slightly lower rate but high fees.

6. Apply for a Personal Loan

When ready, complete the lender’s application. Be prepared to provide:

If your credit and income meet requirements, you could be approved quickly—even the same day. In other cases, lenders may take a few days to review additional documents.

What If Your Application Is Denied?

If you’re declined, consider these steps:

Conclusion

A personal loan can be a flexible tool to manage large expenses or consolidate debt — but only if you understand how it works. By checking your credit, deciding how much you truly need, shopping around, and comparing real offers, you can find the loan that fits your budget — and avoid paying more than necessary.