How Do Personal Loans Work?

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Our team at Student Loan Hero works hard to find and recommend products and services that we believe are of high quality and will make a positive impact in your life. We sometimes earn a sales commission or advertising fee when recommending various products and services to you. Similar to when you are being sold any product or service, be sure to read the fine print understand what you are buying, and consult a licensed professional if you have any concerns. Student Loan Hero is not a lender or investment advisor. We are not involved in the loan approval or investment process, nor do we make credit or investment related decisions. The rates and terms listed on our website are estimates and are subject to change at any time. Please do your homework and let us know if you have any questions or concerns.

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Most loans are fairly self-explanatory. Usually what they help you finance is right in the name: Home loans are for mortgages when you purchase a home, car loans are for that new ride in the driveway, and student loans are for your education.

But what about other types of loans that aren’t so obvious? If you’ve heard of personal loans, you may wonder, “How do personal loans work?”

It’s not immediately clear what kind of loan this is, and even less obvious is who should use these loans and when.

What is a personal loan?

A personal loan is an unsecured loan. That means you don’t need to put up collateral or a down payment in order to receive funds.

You can apply for a personal loan through many different financial institutions. Traditional banks and credit unions offer them, and so do online financial companies like SoFi and Avant.

It’s smart to shop around if you’re looking for this type of loan since the terms, interest rates, and other fees will vary from business to business.

How do personal loans work?

If you’re wondering “How do personal loans work?” know that they are fairly simple and straightforward. When you apply and receive approval for the loan, you’ll receive the amount of money you requested to borrow in a lump sum.

You pay back that money in installments. The timeframe of those payments is determined by the specific terms of your loan.

The interest rate on your loan is determined by your credit score. The better your score, the more favorable your interest rate will be. A great rate will save you money when you repay the debt because you’ll be required to pay less on interest.

Be sure to look for fixed-rate loans to ensure the interest rate you receive won’t change as you pay off the balance. These details should be in the fine print and included in the terms of your loan. Read all the details and fully understand the loan before signing any paperwork.

If you have questions, don’t be afraid to ask the loan officer for more information on the specific loan you’re looking to apply for.

A few questions you should ask about your personal loan should include:

  • What is the interest rate?
  • What is the APR?
  • What is the origination fee?
  • What is the loan term?
  • Is the interest rate fixed?
  • Is anything else included in this loan?
  • Will I have to pay a fee for prepaying the balance on the loan?
  • What is the late fee for payments?

It’s important to gather all the information you need to feel comfortable about your decision, so don’t be afraid to ask as many questions as you’d like before signing on the dotted line.

When should you avoid a personal loan?

Before we explore when personal loans do make sense, let’s eliminate a couple scenarios.

Unnecessary spending

You should not use personal loans for things like discretionary purchases or splurges. Don’t borrow money to buy things you really want but don’t actually need.

Instead, create a savings plan and pay for your discretionary spending in cash. Anytime you can save up money for a purchase, do so instead of taking out a personal loan to fund the expense.

Rebuilding your credit

While balancing different types of lines of credit can help boost your score, there’s no need to take out a new loan if you still have old debt or balances you’re working to repay. It’s not worth the money you’ll spend in interest.

If you want to boost your credit score, make your current payments on time and in full consistently over time. Don’t open or close multiple credit card accounts at once either.

Big one-off purchases

Using a personal loan to fund a big spend may not be the right way to go. Avoid borrowing money to pay for things like weddings, vacations, or pricey purchases.

While these events and items can be expensive and take you a long time to save up for, it’s well worth it. Paying in cash means you only cover the actual purchase price and you’re not risking any of your financial security when you save up first.

When does a personal loan make sense?

A personal loan can provide borrowers with a lot of advantages. They usually come with lower interest rates than credit cards, which makes borrowing more affordable. However, personal loans do usually carry higher interest rates than secured loans, so always be sure to check the APR.

Ultimately, personal loans are personal because the funds can be used at your discretion.

You can also use a personal loan as a debt consolidation tool. If you have a lot of student loans that you struggle to manage — or even credit card debt on a high-interest card — check out your personal loan options. It may be worth consolidating your debts if it would save you money by providing a lower interest rate.

When you choose to get a personal loan, plan to use that borrowed money responsibly. Don’t borrow more than you can afford so you can avoid paying unnecessary interest. And create a repayment plan ahead of time so you know you can stick to it.

Are there any issues to be aware of?

Now that you know the answer to ”How do personal loans work?” there are some red flags you need to watch out for.

Avoid personal loans that charge fees for prepayment. While it’s nice to have enough time to repay the money you borrowed, you may want to pay your debt off faster to avoid paying more in interest. You’ll lose the savings benefit if your loan servicers charges you for paying ahead of schedule.

If a loan provider requires you to purchase any other kind of product with the personal loan, such as insurance, look to borrow through another company. This isn’t necessary and will only cost you more money.

Personal loans are useful tools, but use with caution

Personal loans can provide you with a cheaper financing option than credit cards. They may also be a good way to consolidate your student debt if you can secure a good interest rate.

Best of all, personal loans require no collateral, and you have a lot of freedom and flexibility in how you use the funds.

However, remember that if you do take out a loan, you put yourself in debt until you repay the balance. That could jeopardize your financial security if a financial emergency comes up while you still carry the loan.

Before borrowing money this way, make sure you truly need to take out a loan at all. If so, be responsible. Borrow only what you need and know ahead of time how you’ll pay back that money.

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Student Loan Hero Advertiser Disclosure

Our team at Student Loan Hero works hard to find and recommend products and services that we believe are of high quality and will make a positive impact in your life. We sometimes earn a sales commission or advertising fee when recommending various products and services to you. Similar to when you are being sold any product or service, be sure to read the fine print understand what you are buying, and consult a licensed professional if you have any concerns. Student Loan Hero is not a lender or investment advisor. We are not involved in the loan approval or investment process, nor do we make credit or investment related decisions. The rates and terms listed on our website are estimates and are subject to change at any time. Please do your homework and let us know if you have any questions or concerns.

Advertiser Disclosure

Student Loan Hero Advertiser Disclosure

Our team at Student Loan Hero works hard to find and recommend products and services that we believe are of high quality and will make a positive impact in your life. We sometimes earn a sales commission or advertising fee when recommending various products and services to you. Similar to when you are being sold any product or service, be sure to read the fine print understand what you are buying, and consult a licensed professional if you have any concerns. Student Loan Hero is not a lender or investment advisor. We are not involved in the loan approval or investment process, nor do we make credit or investment related decisions. The rates and terms listed on our website are estimates and are subject to change at any time. Please do your homework and let us know if you have any questions or concerns.

RATES (APR)loan amount
5.74% – 16.99%1 $5,000 to $100,000
7.54% – 35.99% $1,000 to $50,000
7.99% – 35.89%* $1,000 to $50,000
56.00% – 199.00%2 $500 to $4,000
5.99% – 24.99%3 $5,000 to $35,000
5.99% – 29.99%4 $7,500 to $40,000
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1 Includes AutoPay discount. Important Disclosures for SoFi.

SoFi Disclosures

  1. Fixed rates from 5.990% APR to 16.990% APR (with AutoPay). Variable rates from 5.74% APR to 14.70% APR (with AutoPay). SoFi rate ranges are current as of March 18, 2019 and are subject to change without notice. Not all rates and amounts available in all states. See Personal Loan eligibility details. Not all applicants qualify for the lowest rate. If approved for a loan, to qualify for the lowest rate, you must have a responsible financial history and meet other conditions. Your actual rate will be within the range of rates listed above and will depend on a variety of factors, including evaluation of your credit worthiness, years of professional experience, income and other factors. See APR examples and terms. Interest rates on variable rate loans are capped at 14.95%. Lowest variable rate of 5.72% APR assumes current 1-month LIBOR rate of 2.49% plus 4.28% margin minus 0.25% AutoPay discount. For the SoFi variable rate loan, the 1-month LIBOR index will adjust monthly and the loan payment will be re-amortized and may change monthly. APRs for variable rate loans may increase after origination if the LIBOR index increases. The SoFi 0.25% AutoPay interest rate reduction requires you to agree to make monthly principal and interest payments by an automatic monthly deduction from a savings or checking account. The benefit will discontinue and be lost for periods in which you do not pay by automatic deduction from a savings or checking account.
  2. To check the rates and terms you qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull.
    See Consumer Licenses.
  3. Minimum Credit Score: Not all applicants who meet SoFi’s minimum credit score requirements are approved for a personal loan. In addition to meeting SoFi’s minimum eligibility criteria, applicants must also meet other credit and underwriting requirements to qualify.
  4. SoFi Personal Loans are not available to residents of MS. Maximum interest rate on loans for residents of AK and WY is 9.99% APR, for residents of IL with loans over $40,000 is 8.99% APR, for residents of TX is 9.99% APR on terms greater than 5 years, for residents of CO, CT, HI, VA, SC is 11.99% APR, and for residents of ME is 12.24% APR. Personal loans not available to residents of MI who already have a student loan with SoFi. Personal Loans minimum loan amount is $5,000. Residents of AZ, MA, and NH have a minimum loan amount of $10,001. Residents of KY have a minimum loan amount of $15,001. Residents of PA have a minimum loan amount of $25,001. Variable rates not available to residents of AK, TX, VA, WY, or for residents of IL for loans greater than $40,000.
  5. Terms and Conditions Apply: SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. To qualify, a borrower must be a U.S. citizen or permanent resident in an eligible state and meet SoFi’s underwriting requirements. Not all borrowers receive the lowest rate. To qualify for the lowest rate, you must have a responsible financial history and meet other conditions. If approved, your actual rate will be within the range of rates listed above and will depend on a variety of factors, including term of loan, a responsible financial history, years of experience, income and other factors. Rates and Terms are subject to change at anytime without notice and are subject to state restrictions. SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income Based Repayment or Income Contingent Repayment or PAYE. Licensed by the Department of Business Oversight under the California Financing Law License No. 6054612. SoFi loans are originated by SoFi Lending Corp., NMLS # 1121636. (www.nmlsconsumeraccess.org)
2 Important Disclosures for Opploans.

Opploans Disclosures

Direct Deposit required for payroll.

Opploans currently operates in these states:

  1. To qualify, a borrower must (i) be a U.S. citizen or permanent resident; (ii) reside in a state where OppLoans operates; (iii) have direct deposit; (iv) meet income requirements; (v) be 18 years of age (19 in Alabama); and, (vi) meet verification standards.
  2. This information is current as of October 10, 2017 and is subject to change. Opportunity Financial, LLC lends or arranges loans in the following states: Alabama, California, Delaware, Florida, Idaho, Illinois, Kansas, Maryland, Missouri, Nevada, New Mexico, Ohio, South Carolina, Tennessee, Texas, Utah, Virginia, and Wisconsin. We do not lend or arrange loans in all states. Opportunity Financial offers line of credit products in: Kansas, Tennessee and Virginia. Please note: This is an expensive form of credit. This service is not intended to provide a solution for longer-term credit or other financial needs. Loans made or arranged by Opportunity Financial are designed to help you meet your short-term borrowing needs. Loan amounts may vary and are dependent upon qualification criteria and state law. Refer to Loan Cost & Terms at www.opploans.com for additional details. Complete disclosures of APR, fees and payment terms are provided within the transaction documents, such as the Loan Agreement. First-time Opportunity Financial customers typically qualify for an installment loan of $1,000 to $5,000 with an APR from 59% to 199%. For example, a $1,000 loan made or arranged by Opportunity Financial with 12 bi-weekly payments of $130 has a 199% APR. After the 12th successful payment, the loan would be paid in full.
  3. Applications processed and approved before 7:30 p.m. ET Monday-Friday are typically funded the next business day. In some cases, we may not be able to verify your application information and may ask you to provide certain documents. Some customers applying for a loan may be required to submit additional documentation due to state law and qualification criteria.
  4. Lower APRs and longer terms when compared to a typical payday lending product. According to the Consumer Federation of America, a non-profit consumer advocacy group, payday loans range in size from $100 to $1,000, depending on state legal maximums and carry an average APR of 400% and an average loan term of two weeks. The maximum APR for a loan offered by OppLoans is 199% and loan sizes range from $1,000-$5,000 with a typical term of six months dependent on the state law.
  5. As of October 17, 2017. Ratings on third-party websites may periodically change; please check the third-party websites for up-to-date reviews and ratings. Google+ Rating: 4.8 out of 5 based on 1,824 reviews. Facebook Rating: 4.7 out of 5 based on 270 reviews.
3 Includes AutoPay discount. Important Disclosures for Payoff.

Payoff Disclosures

  1. All loans are subject to credit review and approval. Your actual rate depends upon credit score, loan amount, loan term, credit usage and history. Currently loans are not offered in: MA, MS, NE, NV, OH, and WV.
4 Important Disclosures for FreedomPlus.

FreedomPlus Disclosures

  1. All loans available through FreedomPlus.com are made by Cross River Bank, a New Jersey State Chartered Commercial Bank, Member FDIC, Equal Housing Lender. All loan and rate terms are subject to eligibility restrictions, application review, credit score, loan amount, loan term, lender approval, and credit usage and history. Eligibility for a loan is not guaranteed. Loans are not available to residents of all states – please call a FreedomPlus representative for further details. The following limitations, in addition to others, shall apply: FreedomPlus does not arrange loans in: (i) Arizona under $10,500; (ii) Massachusetts under $6,500, (iii) Ohio under $5,500, and (iv) Georgia under $3,500. Repayment periods range from 24 to 60 months. The range of APRs on loans made available through FreedomPlus is 5.99% to a maximum of 29.99%. APR. The APR calculation includes all applicable fees, including the loan origination fee. For Example, a four year $20,000 loan with an interest rate of 15.49% and corresponding APR of 18.34% would have an estimated monthly payment of $561.60 and a total cost payable of $7,948.13. To qualify for a 5.99% APR loan, a borrower will need excellent credit on a loan for an amount less than $12,000.00, and with a term equal to 24 months. Adding a co-borrower with sufficient income; using at least eighty-five percent (85%) of the loan proceeds to directly pay off qualifying existing debt; or showing proof of sufficient retirement savings, could help you also qualify for the lowest rate available.
* Important Disclosures for Upgrade Bank.

Upgrade Bank Disclosures

* Your loan terms are not guaranteed and are subject to our verification and review process. You may be asked to provide additional documents to enable us to verify your income and your identity. This rate includes an Autopay APR reduction of 0.5%. By enrolling in Autopay your payments will be automatically deducted from you bank account. Selecting Autopay is optional. Annual Percentage Rate is inclusive of a loan origination fee, which is deducted from the loan proceeds. Late payments or subsequent charges and fees may increase the cost of your fixed rate loan. All loans made by WebBank, member FDIC. Please refer to Upgrade’s Terms of Use and Borrower Agreement for all terms, conditions and requirements.

** Accept your loan offer and your funds will be sent to your bank via ACH within one (1) business day of clearing necessary verifications. Availability of the funds is dependent on how quickly your bank processes this transaction. From the time of approval, funds should be available within four (4) business days.