When life comes along with unexpected expenses, a personal loan can provide much-needed cash. It can also help borrowers manage high credit card debt by consolidating balances to lower overall interest rates and monthly payments. But it’s important to understand how personal loans work before taking one out.
A personal loan is an unsecured type of credit, which means the lender does not have any legal rights to take your property or income if you fail to make a payment. This makes it easier to qualify for than other types of credit, such as home equity lines or auto loans. Borrowers typically need to have a good credit score, a solid repayment history and steady income to qualify.
Many lenders offer personal loans for borrowers with fair and bad credit, though these may come at higher interest rates. Some lenders prioritize alternative data, such as education and employment history, when assessing applicants. Borrowers with stable income and a good record of on-time payments tend to get the best rates.
Before you receive a personal loan, you’ll need to complete a formal application and submit documents verifying your identity and income. Once approved, your lender will send the funds to you. They may deposit the funds directly into your bank account or send you a check. You will then start making regular monthly payments on the amount you owe, according to the terms set out in your loan agreement. Be aware that late or missed payments can impact your credit scores and lead to collections activities by the lender or a third-party collector.