What is a Personal Loan, and When Do You Need One?

Personal loans can be practical and financial solutions for both planned expenses (home renovations, vacations) and the unexpected (surprise medical bills). But, before you apply, it’s important to know how personal loans work and when you should use them. 

Today, we’ll walk you through everything you need to know about personal loans: what they are, how they’re used, the benefits and drawbacks, and how to get the right loan for your needs.

What is a personal loan?

Personal loans are sums offered by banks, credit unions, or online lenders that you repay over a set term, typically with fixed monthly payments.[LA1]  You can typically choose between two types of personal loans: All-Purpose Loans, which are closed-end lump-sum amounts, or Personal Access Lines (PALs), which are open-end lines of credit. 

The amount you can borrow varies widely. You’ll find most lenders offer loans ranging from $1,000 to $50,000 or more, depending on your credit profile and income. Loan terms generally range from 12 to 84 months, and approval is primarily based on creditworthiness.

That said, every lender has their own criteria for approval and they may offer drastically different loan terms compared to their competitors.

Average personal loan interest rates

As of October 2025, the average personal loan interest rate was around 12.25% for borrowers with good to excellent credit (scores above 670). Those with lower credit scores could see rates ranging from 15% to 30% or more.[LA2]  Your interest rate may depend on factors like: 

• The lender
• The loan amount
• The term length
• Your credit score

Since any personal loan you take out could have an interest rate within a wide range, it’s important to shop around. Getting a loan with a credit union has its benefits though. When you obtain a personal loan from a credit union, your interest rate can’t go above 18%, due to regulations passed with the National Credit Union Administration (NCUA), the organization that regulates federal credit unions.

What is a personal loan used for?

One of the biggest appeals of a personal loan is its versatility. Personal loans aren’t limited in terms of what you can use the money for. You can say yes to opportunities or needs that might otherwise be out of reach, such as:

• Debt consolidation. Combine multiple high-interest credit card balances into one lower-rate loan, allowing you to save money on interest.
• Home renovations. Fund home improvement projects without using your home as collateral, like you would with a home equity loan.
• Medical expenses. Settle medical and health-related expenses.
• Life events. Weddings, funerals, or moving to a new city can be funded with personal loans. 
• Vacations. Take that once-in-a-lifetime trip without draining your savings account or putting it on a credit card.
• Emergency expenses. Pay for unexpected car repairs, urgent pet care, or job loss support.

Pros and cons of personal loans

Personal loans may offer convenience and flexibility, but they’re not one-size-fits-all solutions. Understanding the pros and cons can help you determine whether a personal loan is right for you.

Personal loan pros

Payment predictability

Fixed-rate personal loans are consistent, manageable ways to borrow money. Because you make regular payments toward your loan’s principal and the interest rate doesn’t change, you can budget more easily and set up a payment schedule that works for you. 

High borrowing amounts

Compared to credit cards, personal loans also allow you to borrow significantly more money, making them better choices for a variety of projects or needs. They are excellent tools to help you afford big expenses without depleting your savings or requiring you to save cash for years.

Credit-building opportunities

When you repay personal loans on time, they can help improve your credit score by adding to your credit mix and demonstrating consistent, on-time payments. In certain cases, taking out a personal loan from time to time may be a smart financial strategy for broadening your long-term credit options.

Personal loan cons

Each loan adds to your total debt

Even if monthly payments are manageable, every loan you borrow adds to your overall financial obligations and monthly debt. Make sure to assess your existing debt-to-income ratio before taking on more.

Fees and penalties

Many lenders charge application fees, origination fees (typically 1% to 8% of the loan amount), and prepayment penalties that can increase the total cost of borrowing. Always read the fine print to make sure you are comfortable with the terms before proceeding.

Risk of negative credit impact

Missed or late payments on a personal loan can negatively affect your credit score. Additionally, applying for a loan may lead to a hard credit inquiry, which can cause a temporary dip in your score.

How to get a personal loan that works for your needs

To get the best value out of a personal loan, approach the process strategically. Here are a few basic steps to get you started.

Decide how much you need

Start with an estimate of your intended expenses. If you’re consolidating debt, total your existing balances and include any applicable payoff fees. If you’re looking to pay for a vacation, determine your costs or set a budget. Don’t borrow more than necessary. The more you borrow, the more you’ll pay in interest over time.

Also consider your repayment capacity. Your monthly budget should comfortably support the new loan payment alongside your existing expenses. To make this easier, use a loan calculator to help guide your decision.

Find a reputable lender

Look for institutions with transparent terms, reasonable rates, and good customer service. Credit unions often offer competitive rates, flexible eligibility criteria, and faster funding compared to big banks. 

Don’t forget to compare prequalification offers and watch out for lenders who promise guaranteed approval or ask for upfront payments!

Apply for a personal loan, then wait for approval

While the exact qualification requirements for a personal loan vary from offer to offer, some best practices include:

• Paying off your current debts or loans as much as you can.
• Taking small steps to improve your credit score. A credit score of 670 or higher is generally an ideal target to secure a loan with good terms and rates.
• Earning a consistent income so your lender feels confident you can pay back the loan. 

After submitting your application, most lenders respond within a few hours to a few days. Upon approval, you’ll receive your loan agreement. Be sure to review the loan’s annual percentage rate (APR), repayment schedule, and any penalties before accepting.

Expand your opportunities with a personal loan today

When used wisely, personal loans can be powerful tools for improving your financial wellness and flexibility. With a structured repayment plan, a personal loan can help you handle significant life events, tackle emergencies, or invest in your home.