Consolidate Debt Credit Unions

What Is a Personal Loan?
A personal loan is an amount of money you can borrow to use for a variety of purposes. For instance,
you may use a personal loan to consolidate debt, pay for home renovations, or plan a dream wedding.
Personal loans can be offered by banks, credit unions, or online lenders. The money you borrow must be
repaid over time, typically with interest. Some lenders may also charge fees for personal loans.
KEY TAKEAWAYS
 Personal loans are loans that can cover a number of personal expenses.
 You can find personal loans through banks, credit unions, and online lenders.
 Personal loans can be secured, meaning you need collateral to borrow money, or unsecured,
with no collateral needed.
 Personal loans can vary greatly when it comes to their interest rates, fees, amounts, and
repayment terms.
Understanding a Personal Loan
A personal loan allows you to borrow money to pay for personal expenses and then repay those funds
over time. Personal loans are a type of installment debt that allows you to obtain a lump sum of funding.
For example, you might use a personal loan to cover:
 Moving expenses
 Debt consolidation
 Medical bills
 Wedding expenses
 Home renovations or repairs
 Funeral costs
 Vacation costs
 Unexpected expenses
These loans are different from other installment loans—such as student loans, car loans, and mortgage
loans—that are used to fund specific expenses (i.e. education, vehicle purchase, and home purchase).
Some personal loan lenders restrict the ways in which you can use a personal loan. For example, you
may not be able to get a personal loan to pay for college tuition, fees, or other expenses.
A personal loan is also different from a personal line of credit. The latter is not a lump sum amount;
instead, it works like a credit card. You have a credit line that you can spend money against and, as you
do so, your available credit is reduced. You can then free up available credit by making a payment
toward your credit line.1
With a personal loan, there’s typically a fixed end date by which the loan will be paid off. A personal line
of credit, on the other hand, may remain open and available to you indefinitely as long as your account
remains in good standing with your lender. 2
Types of Personal Loans
Personal loans may be secured or unsecured. A secured personal loan is one that requires some type of
collateral as a condition of borrowing. For instance, you may secure a personal loan with cash assets,
such as a savings account or certificate of deposit (CD), or with a physical asset, such as your car or boat.
If you default on the loan, the lender could keep your collateral to satisfy the debt.
An unsecured personal loan requires no collateral to borrow money. Banks, credit unions, and online
lenders can offer both secured and unsecured personal loans to qualified borrowers. Banks generally
consider the latter to be riskier than the former because there’s no collateral to collect. That can mean
paying a higher interest rate for a personal loan. 3
How a Personal Loan Works
To get a personal loan, you need to apply to a lender. Again, this can be a bank, credit union, or online
personal loan lender.
Generally, you would first complete an application. The lender reviews it and decides whether to
approve or deny it. If approved, you’ll be given the loan terms, which you can accept or reject. If you
agree to them, the next step is finalizing your loan paperwork.
When that’s done, the lender will fund the loan, which means paying you the proceeds. Depending on
the lender, these may arrive through a direct deposit into your bank account or a check. After the loan is
funded, you can use the money as you see fit. You then have to begin repaying the loan according to the
terms established in your loan agreement.
Defaulting on a personal loan could cause significant damage to your credit score. You could also lose
your collateral with a secured loan or risk being sued by your lender to collect the debt.
Example of a Personal Loan
When considering a personal loan, it’s helpful to understand how much it may cost. The annual
percentage rate (APR) on a personal loan represents the annualized cost of repaying the loan based on
the interest rate and fees. The APR and loan term can determine how much you pay in interest total
over the life of the loan.

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Consolidate Debt Credit Unions

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What Is a Personal Loan?

Understanding a Personal Loan

 Home renovations or repairs

Types of Personal Loans

How a Personal Loan Works

Example of a Personal Loan

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