Personal Loan

A personal loan is money borrowed from a bank, credit union or other lender for a wide range of personal purposes, such as home improvements, a vehicle purchase, a wedding, medical expenses or consolidating existing debts. Unlike a mortgage or an auto loan, which are tied to a specific asset, a personal loan is usually unrestricted in how the funds are used once disbursed.

Personal loans can be secured, backed by collateral such as a savings account or vehicle, or unsecured, relying purely on the borrower's creditworthiness and promise to repay. Most personal loans are closed-end loans, repaid through fixed monthly instalments over an agreed term, with a fixed or variable interest rate.

A personal loan is simply a general-purpose lump sum of borrowed money, repaid in regular instalments like clockwork, without the lender needing to know or restrict exactly what the money will be spent on, beyond broad guidelines excluding things like further speculative investing in some jurisdictions. It functions as an all-purpose financial tool, useful whenever a specific-purpose loan, such as a mortgage or auto loan, would not fit the need.

Because an unsecured personal loan relies entirely on the borrower's promise to repay, with no asset the lender can easily seize if things go wrong, lenders rely heavily on a borrower's credit score and income to decide whether to approve the loan and at what interest rate.

• A secured personal loan is backed by collateral, often resulting in a lower interest rate because the lender's risk is reduced.
• An unsecured personal loan relies on the borrower's creditworthiness alone, typically carrying a higher interest rate to compensate the lender for the added risk.

Lenders price personal loans primarily based on a borrower's credit history, income and existing debts, meaning the same lender can offer very different rates to two different borrowers for an identical loan amount and term, depending on how each is assessed for risk.

One especially common use of a personal loan is debt consolidation, where a borrower uses the loan proceeds to pay off several existing higher-interest debts, such as multiple credit cards, replacing them with a single, often lower-interest personal loan with one predictable monthly payment. This can simplify a borrower's finances and reduce total interest costs, provided the new loan's rate is genuinely lower than the rates on the debts it replaces, and provided the borrower does not simply run up new balances on the credit cards that have now been paid off.

Lenders assessing a personal loan application for debt consolidation purposes typically still apply the same underwriting standards as for any other personal loan, focusing on the borrower's income, existing debt levels and credit history.

Most personal loans are structured with a fixed interest rate and a fixed monthly repayment for the life of the loan, giving borrowers predictability that can be useful for budgeting, in contrast to variable-rate products such as many credit cards, where the rate and resulting interest cost can change over time. Because personal loans are typically closed-end and fully amortizing, the entire balance is scheduled to be repaid by a known date, unlike revolving credit, which can be carried indefinitely as long as minimum payments are made.

This predictability is often cited as one of the main advantages of a personal loan over revolving credit card debt for a borrower who already knows the total amount they need and prefers a clear, fixed repayment timeline.

Lenders assessing a personal loan application generally focus heavily on a borrower's existing debt obligations alongside their income, since an unsecured personal loan relies entirely on the borrower's overall capacity and willingness to repay, with no specific asset available to recover value from if repayment fails.

Co-signed personal loans, where a second person guarantees repayment, can sometimes help a borrower with limited credit history qualify or secure a better rate, though the co-signer takes on full legal responsibility if the primary borrower fails to pay.