A Beginners Guide To Personal Loans


Personal loans play a primary role in helping us achieve our financial goals and sort out financial emergencies. 

They can be used for things like debt consolidation, paying off credit cards, medical expenses, as in place of a car loan, as well as other loans.

In fact, there are many good reasons to use a personal loan.

But this doesn’t mean they are right for everyone or every financial situation.

Before you take out a personal loan from credit facilities and online lenders, take time to understand the loan term and interest rate to avoid jumping into financial captivity.

In this guide to personal loans, I highlight the many variations of personal loans and how they work. 


  • Personal loans are a great way to cater to emergency expenses and pay for large expenses.
  • Seek expert guidance before making any financial decisions to avoid costly mistakes with personal loans.
  • Before you take a personal loan, investigate its requirements to avoid prepayment penalties.

Beginners Guide To Personal Loans

Definition Of Personal Loans

beginners guide to personal loans

A personal loan is a financial debt instrument people take out to help pay for large purchases, like home improvements, but can also be used for consolidating credit card debt.

They are typically taken out for a maximum loan term of five years and have a fixed interest rate.

Interest rates vary, but are usually less than credit card interest rates.

The loan amount can vary from a few thousand dollars all the way up to $100,000.

However this loan amount varies by lender.

You can take out a personal loan from a bank, credit union, or other financial institution.

In fact, many online lenders offer a streamlined approach to obtaining a loan.

While they are a good option to consider, they do have some drawbacks.

The biggest are origination fees charged to take out the loan.

Even with this negative, they could make sense for you.

Types Of Personal Loans

The first thing you need to know about personal loans is they are categorized into two broad categories, secured loans and unsecured personal loans.

While both loan types function the same way, there are some differences you need to know about before you apply for a personal loan.

Secured Personal Loans

When you borrow using a secured personal loan, you provide access to your personal property as collateral to the lender.

Access to your property can be through a title deed, like for your house or your car, or other assets you have, like a savings account. 

If you fail to settle your personal loan by the agreed loan payments timeline, the lender will take your collateral to repay the loan.

A secured loan has a low interest rate because of the security offered by the collateral.

The key thing to remember with secured loans is you will lose the collateral you put up if you fail to make the monthly payments.

Unsecured Personal Loans

Unsecured personal loans work the same way as a secured loan, except that you do not offer collateral to the lender.

The amount of loan the credit firm offers you depends purely on your credit score and credit history.

If you have a good credit score, you are eligible for a high loan at a low rate of interest.

Borrowers with a bad credit score are still eligible for a loan but the interest rate is high due to the risk involved.

Understand also that in many cases, the annual percentage rate for this loan will be higher than a secured loan since there is no collateral.

Other Types Of Personal Loans

types of personal loans

There are many sub-categories of personal loans, most of which are unsecured with slightly higher interest rates than those of personal loans.

In fact, many people don’t even realize these are considered to be personal loans.

Here are the more common ones you will come across.

Personal Line Of Credit

A personal line of credit is a kind of personal loan that is more like a credit card.

This is one of the types of unsecured loans that you can access when you have expenses to meet but lack enough money.

You apply for it through a bank or credit union and have access to the credit line when you need it.

In fact, you can just let it sit there and not use it for years.

Therefore, many people will open a credit line when they have good credit so they can get a low interest rate.

Then if they hit a rough patch and end up with poor credit, they don’t have to worry about qualifying for a loan since they already have it.

The catch with a personal credit line is most banks and credit unions will charge you an annual fee to keep it open.

The interest rate on this loan is similar to the credit card interest rate in that it is variable and you pay interest on money borrowed. 

Finally, there is no repayment timelines with a line of credit.

You can take however long you want to repay the debt.

Just know that the longer you take, the more interest you will pay.

Buy Now Pay Later Loan 

Have you ever wanted to make a purchase online but realized you lack enough funds?

Buy now pay later is a personal loan that you can get to buy products.

To purchase a product online using a BNPL loan, your balance is divided into four equal monthly payments.

You pay the initial installment upon purchasing the item and pay the remaining balance each month thereafter. 

Accessing the loan is simple and fast, and approval is usually within minutes.

The biggest advantage to buy now pay later loans is that there is zero interest with it, as long as you don’t miss a monthly payment.

If you do miss a monthly payment, interest can be charged, along with additional fees.

Payday Personal Loans

Payday personal loans are short-term personal loans, normally repayable within a month or less.

The payday loan is small, usually, a fraction of your monthly salary, and has high interest rates.

The amount you owe the lender is deducted from your salary on the next payday. 

Due to high interest and short repayment periods, borrowers often find themselves borrowing again after paying the former loan which keeps them in a cycle of debt.

You should only go for payday loans if you lack an alternative.

Credit Card Advance

pros and cons of credit cards

You can access a small amount of money from your bank using your credit card which is known as a cash advance.

You can also access this money using a convenience check your credit card company sends you in the mail.

The interest rate on a credit card cash advance is higher than the purchase APR on your credit cards.

Though convenient, you should avoid credit card advance debt because of the high rate of interest they attract.

Cash Advance App

A cash advance app loan offers you a personal loan payable from your next paycheck, similar to a payday loan.

To qualify for this loan, you should have a positive credit report and link your bank account to the app.

You should avoid cash apps because many lenders charge high interest within a short time.

Pawn Shop Loans

Unlike most personal loans which are unsecured, pawn shop loans are secured with a very high variable interest rate.

To access this loan, you use your valuables such as electronics and jewelry as collateral for your loan. 

The lenders sell these valuables to pay for the loans if borrowers fail to pay off the debt within the agreed timelines.

A pawn shop loan attracts interests as high as 180% and should only be an option if all the others fail.

Your First Step When Taking a Personal Loan

taking out a loan

Personal loans work differently with every lender.

Because of this, you can’t assume all the quotes you get from multiple lenders are equal simply based on the interest rate.

Unfortunately most people don’t know this and only compare interest rates.

This leads them to a personal loan that might have higher origination fees or other costs.

You need to look at other factors, like if there is an origination fee to get the loan or if there is a prepayment penalty if you decide to pay off the loan early.

Or, what is the fee and process for missed payments.

You also want to review the lender as well.

Some have better reputations that others.

For example, PersonalLoans.com is a great choice.

They offer a wide variety of personal loans to pick from, with competitive interest rates.

They even have a solid rating from the Better Business Bureau.

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Many banks and lenders have a pre-qualification form on their websites which you can fill out using any browser to check the loan amounts you qualify for.

Once they analyze your finances and credit score, they give you feedback on the highest loan you qualify for as well as the different products they offer. 

Finally, check to see if you can get any discounts for linking your checking account or savings accounts so you can make automatic monthly payments.

Some lenders will offer an interest rate deduction for agreeing to this service.

Can I Use A Personal Loan For Anything?

While you can use the funds from a personal loan for anything, you should only take out a personal loan if you truly need to money.

In other words, you shouldn’t go into debt just because you want to take an epic vacation.

Instead, you should work to save money for this goal.

Remember that money from a personal loan is not a grant from your bank but a commitment for you to repay for several months or years in the future. 

The best use of personal loans is for debt consolidation, which will help you to get out of debt faster.

This is because of the lower interest rate they offer compared to credit cards.

However, if you are looking to consolidate a large amount of credit card debt, you might want to think twice.

The reason is because of the short repayment term, your fixed amount you pay each month could be more than you can comfortably afford.

From there, you can look into a personal loan for home improvements or other large expenses.

But before you borrow money using a personal loan, make sure you review your monthly budget so you know for certain you can make on time payments every month.

Is It Hard To Get A Personal Loan from A Bank?

It is relatively easy to get a personal loan from a bank or credit union.

To get a loan, you should visit different banks’ websites and analyze their requirements before seeking advice from the customer care desk. 

The main requirement for most local banks is having a current relationship with them.

This could be a checking account or savings account, or even having loan products with them like auto loans.

Some factors that can make you be disqualified from accessing a bank loan include:

  • High debt to income ratio
  • Low credit score
  • Too much debt
  • Unstable employment history
  • Bad credit history

Final Thoughts

There is a complete beginners guide to personal loans.

Now that you understand what a persona loan and what to look for, you can determine if getting one make financial sense for you.

There are a lot of different loan products out there, and as a result, you should do your homework to make sure you are using the right one.

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