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What is a Personal Loan?

Aug 16, 2019
By Mariclare Cranston, Content Specialist

A personal loan is a great option when you need to make a larger purchase, but don’t want to rack up high interest rate credit card debt. It can also be used as an effective means of paying off debt. It’s important to understand the ins and outs of personal loans, though, before you start down the application path.

What are Secured vs. Unsecured Loans?

Personal loans are typically unsecured, meaning that the financial institution will not hold anything as collateral that they can collect if you do not pay. Car loans, for example, are secured loans because the car is used as collateral to reduce the financial institution’s risk in the event the loan is not repaid.

So what does this mean for you? Essentially, it can be more difficult to qualify for a personal loan. Because the financial institution has no collateral securing the loan, to reduce their risk they may have stricter borrowing criteria in order to be approved for a personal loan.

What are the Rates and Terms for Personal Loans?

Personal loans typically have a fixed rate and term, both of which help you plan not only your monthly payments but when you will pay the loan off. A fixed rate means you will have the same interest rate for the life of the loan, making your monthly payment the same each month. Rates on personal loans tend to be slightly higher than rates on, for example, a car loan. This is because the loan is unsecured. The term, on the other hand, is the length of the loan. For example, if your personal loan has a 36-month term, that means that you will pay the loan off in 36 months provided you don’t miss any payments.

A fixed interest rate means you will have the same interest rate for the life of the loan. This helps you budget as your monthly payment won't fluctuate, provided you don't accrue late fees. 

Interest rates can vary widely based on various factors including your credit score and debt-to-income ratio. Most lenders will advertise their lowest rate, but often this rate is available only to the most qualified consumers. Lenders typically have rate tiers, so when researching your lender options, be sure to understand what rate you’re likely to have based on your credit score prior to applying.

How do I Qualify for a Personal Loan?

Lenders will often look, at the very least, at your credit score and your debt-to-income ratio (DTI) before deciding to lend to you. Your credit score is a mathematical analysis of how likely you are to repay your loan on time. Your score factors in things like how many loans or credit cards you have, how well you pay your bills on time, how much of your available credit you’ve used and how old your oldest credit or loan account is. All of these factors are weighted and combined to assign you a score. It is very important to have a good understanding of what your credit score is before you begin the process of applying for a personal loan. If you score isn’t high enough, there are steps you can take to work on improving it. Watch our brief video to help you understand more about your credit score.


DTI measures how much debt you currently have relative to your income. A DTI that is too high suggests you may be spread too financially thin to be able to make the payments on your personal loan. Even if you have a good credit score, a high DTI can cause some lenders to deny your application. Using a monthly budget tool is a great way to manage your finances and keep your debt at a manageable level. You can download our free budget tool here.

What Are Personal Loans Used For?

One of the most appealing things about a personal loan is that you can use the funds for just about anything. Whether you want to pay off some debt, finance a home project, or even take a dream vacation, a personal loan provides you with the money you need to get it done. Some lenders will make stipulations if the funds are to be used for debt consolidation and require that the funds go directly to the institutions or card holders that you want to pay. Beyond that, though, the funds you receive from your personal loan are for you to use at your discretion.

If you’re considering a personal loan for debt consolidation, watch our video below explaining how that process works.

How Much Can I Borrow?

The maximum amount you can borrow with a personal loan depends on the lender as each has its own specifications. At MHV, for example, you can borrow any amount from $500 to $25,000. While it may be tempting to borrow more than you need for a little extra spending money, keep in mind you’re paying back every dollar you borrow – with interest.

Estimate Your Monthly Payment with Our Personal Loan Calculator

What Should I Avoid When Looking for a Personal Loan?

Origination or Application Fees: Some lenders will charge an origination or application fee, which is an amount you pay the lender for them to fund your loan. There are many lenders that do not charge these fees.

Early Repayment Penalty: Lenders will sometimes charge a fee if you repay your loan before the term is up. Look for lenders that don’t include this fee.

Precomputed Interest: This method of computing interest will have you paying more interest if you pay your loan off early because it applies more interest in the earlier months of your loan. Look for interest computed using the simple interest method.


How Do I Apply for a Personal Loan?

Applying for a personal loan at most financial institutions is quick and easy. Many lenders, including MHV, even have online applications allowing you to complete the process from your phone, tablet or desktop. Lenders will often ask for certain documentation, including paystubs, tax information and the purpose of the loan. It’s a good idea to contact your financial institution to see if there are any requirements prior to starting the application process.

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