How Personal Loans Work: Getting the Best Interest Rates for Bad Credit and Good Credit
A personal loan is a very flexible form of credit that can be a powerful tool for managing your finances, whether you’re consolidating high-interest debt, funding a home improvement project, or covering an unexpected expense.1 These loans can range from a few hundred dollars to over $100,000 and are available to borrowers with a wide range of credit scores. However, understanding how personal loanswork—from the application process to the final payment—is crucial for your financial well-being. It’s vital to know how a personal loan will affect your monthly budget, credit score, and overall financial health. Before accepting a personal loan offer, you should carefully review the fees, interest rate, and repayment structure to ensure it aligns with your financial goals.
Key Takeaways 🔑
- Personal loans typically range from $1,000 to $50,000.
- The easiest way to get approved is often through an online marketplace like SuperMoney, which pre-approves you with multiple lenders.
- You can get a personal loan even with bad credit, but your interest rate will be higher.2
- Interest rates for a personal loan can be as low as 6% for those with excellent credit.
- Many personal loans can be funded in 24 hours or less, although higher amounts may take a few days.3
- Always read your loan terms carefully, looking out for prepayment fees, late fees, and other charges beyond your regular payment.
- Making on-time payments on a personal loan can significantly boost your credit score.4
What Are Personal Loans and How Do They Work?
A personal loan is a type of installment loan that you borrow from a financial institution—such as a bank, credit union, or online lender—for your personal use.5 Unlike a car loan or mortgage, a personal loan is often unsecured, meaning it doesn’t require collateral.6 The personal loan amount, interest rate, and repayment term are all agreed upon upfront, and you pay back the loan over a fixed period, typically in monthly installments.
The Inner Workings of a Personal Loan
Personal loans usually have a fixed interest rate, a set repayment period (the term), and a fixed monthly payment.7 Before you accept a personal loan offer, the lender is legally required to provide you with a Truth-in-Lending disclosure, often referred to as a “TILA box.” This document is your roadmap to the loan’s costs and terms.
The TILA disclosure includes the Annual Percentage Rate (APR), any finance charges, the amount borrowed, and the amount of your regular monthly payment. The personal loan APR is the most comprehensive measure of the loan’s cost, as it includes both the interest rate and other fees.8Understanding this information upfront allows you to see exactly how the personal loan payment will impact your monthly budget and how long it will take to pay off the debt.
A personal loan is an excellent option for consolidating high-interest credit card debt, as it often has a lower interest rate and a clear end date.9 It provides a structured way to pay down your debt, helping you become debt-free faster.
What Are Personal Loans Used For?
One of the greatest advantages of a personal loan is its versatility. Unlike an auto loan or a home equity loan, a personal loan can be used for almost any purpose.10 Common uses include:
- Debt Consolidation: This is one of the most popular uses for a personal loan. By combining multiple high-interest debts (like credit card balances) into a single personal loan with a lower interest rate, you can simplify your payments and save money on interest.11
- Home Improvement: A personal loan can finance renovations, from a kitchen remodel to a new roof, without requiring you to use your home as collateral.12
- Medical Expenses: Unexpected medical bills can be a significant financial burden.13 A personal loancan provide a lump sum to cover these costs and offer a manageable repayment plan.14
- Wedding or Major Life Events: A personal loan can help you cover the cost of a wedding, a major family event, or a dream vacation.15
- Emergencies: When life throws you a curveball, an emergency personal loan can provide a lifeline to cover urgent expenses like car repairs or an unexpected move.16
While most personal loans have no restrictions on their use, some lenders may ask you to specify the loan’s purpose as part of the application. This can sometimes influence their decision on whether to lend money or how much to offer.
How Much Can I Borrow with a Personal Loan?
The amount you can borrow with a personal loan varies widely, from as little as a few hundred dollars to as much as $100,000.17 Most personal loans, however, fall within the $1,000 to $50,000 range. The amount you can be approved for is determined by a few key factors: your creditworthiness, your income, and whether the loan is secured or unsecured.
These three components are interconnected. For instance, if you have bad credit, even with a good income, a lender will likely offer you a lower personal loan amount to mitigate their risk. A higher interest rate on a personal loan will also increase your monthly payment, which in turn makes it harder to qualify for a larger loan amount over a longer period.
Credit Score and Personal Loan Approval
Your creditworthiness is a major factor in determining both the amount and the interest rate of a personal loan. The table below offers a general idea of what to expect based on your credit score.
| Credit Score | Personal Loan Outlook |
| Good credit(700+)18 | You can likely qualify for the best interest rates and the highest loan amounts that your income can support.19 |
| Fair credit(620-699) | You will qualify for some personal loans, but the amount may be limited, and the interest rate will be higher. |
| Poor credit(under 620) | You may only qualify for secured loans at a high rate. Securing a traditional, unsecured personal loan can be very difficult. |
| No credit score | Lenders may be hesitant to approve you. Your best bet may be a secured loan or a personal loan from a lender specializing in borrowers with no credit history. |
Disclaimer: Underwriting standards vary by lender. The only way to know for sure what you qualify for is to apply.
What Is a Good APR for a Personal Loan?
When you’re seeking a personal loan, a “good” APR is the lowest one your financial situation allows. This is why shopping around is so important. Applying to multiple companies through a marketplace is the most effective way to ensure you’re getting a competitive rate for the personal loan you need.
Here’s a rough guide to what a good APR looks like for a personal loan in today’s market:
- For borrowers with good credit: An APR of 12% or lower is considered excellent for a personal loan. If you have a credit score of 700 or higher and a stable income, you may be able to secure a rate even lower than this, especially on larger loan amounts.
- For borrowers with fair credit: An APR of 18% or lower is a solid rate for a personal loan. While this is higher than what those with good credit will pay, it can still be a good option, particularly for debt consolidation.
- For borrowers with bad credit: An APR of 25% is a decent rate for a personal loan if you have poor credit. However, some lenders may charge rates as high as 36% or more. Be aware that an unsecured personal loan for bad credit will almost always come with a high interest rate to offset the lender’s risk.20 If you have bad credit, your best option may be a secured personal loan with a lower interest rate.
Secured vs. Unsecured Personal Loans
Understanding the difference between secured and unsecured personal loans is crucial. This distinction impacts your interest rate, approval odds, and risk.
Unsecured Personal Loans
An unsecured personal loan is a personal loan that does not require collateral.21 In other words, the loan is not guaranteed by an asset like a car or a house.22 If you default on an unsecured personal loan, the lender can’t repossess your assets. However, they can take legal action to recover the money owed.
- Advantages: The main advantage is that you don’t risk losing your assets. This is especially beneficial for borrowers who don’t have an asset to use as collateral, such as a car with a clear title or a home with equity.
- Disadvantages: Unsecured personal loans require more rigorous underwriting because the lender takes on a higher risk. This means they are harder to qualify for, and the interest rates are generally higher compared to secured loans.
Secured Personal Loans
A secured personal loan is a personal loan that requires you to pledge an asset as collateral.23 If you fail to make payments, the lender has the right to seize the collateral to cover the outstanding balance.24
- Advantages: Lenders are more willing to approve secured personal loans and offer higher loan amounts and lower interest rates because their risk is minimized.25 This makes them a more viable option for people with bad credit who may not qualify for an unsecured personal loan.
- Disadvantages: The biggest con is the risk of losing your asset. If you default on a secured personal loan, the lending company can seize your collateral, which could leave you in a worse financial position than before.26
How to Get Approved for a Personal Loan
Getting a personal loan has never been easier, thanks to the proliferation of online lenders. However, approval is not guaranteed. Every lender has its own unique underwriting process. Some cater exclusively to borrowers with excellent credit, while others specialize in providing personal loans for people with bad credit.27
Finding a Personal Loan for Bad Credit
It is possible to get a personal loan with bad credit, but you should be prepared for higher interest rates. Lenders who offer personal loans to borrowers with bad credit charge a premium to offset the increased risk of default.28 It’s essential to shop around and compare offers to ensure you’re getting the most favorable terms possible.
Finding a Personal Loan with Good Credit
If you have good or excellent credit, you have a wide range of options for a personal loan. You can secure a personal loan from traditional banks, credit unions, or online lenders.29 The best way to get a low-interest personal loan with good credit is to compare offers from multiple lenders to find the one with the most competitive APR.
How Long Does It Take to Get a Personal Loan?
The speed at which you can get a personal loan depends on the lender and the loan amount. Many small dollar personal loans (under $3,000) can be approved and funded in as little as 24 hours. The application process is often entirely online, and funds are deposited directly into your bank account.30 However, larger personal loans may require more extensive underwriting, which can take a few days.
What You’ll Need to Apply for a Personal Loan
Most lenders will require the following to process your personal loan application:
- Proof of Identity: A driver’s license, passport, or state ID.31
- Proof of Income: Pay stubs, tax returns, or bank statements to verify your ability to repay the personal loan.32
- Bank Account Information: Most lenders will deposit the loan proceeds directly into your checking account and set up automatic payments.
- Access to Your Credit Report: Lenders will perform a credit check to evaluate your credit history and score.33
Some lenders may ask for access to your bank account data through a secure third-party service. This provides a more up-to-date and comprehensive picture of your financial situation than a credit report alone, allowing them to make a more informed decision on your personal loan application.
Will a Personal Loan Affect My Credit Score?
Yes, a personal loan can impact your credit score, both positively and negatively.34
The Application Process
When you apply for a personal loan, the lender will perform a credit check. There are two types of credit checks:
- Soft Inquiry: This happens when you get pre-approved or pre-qualified for a personal loan. A soft inquiry does not impact your credit score. This is why using a marketplace to get multiple pre-approvals for a personal loan is an excellent strategy—it allows you to shop around without hurting your credit.
- Hard Inquiry: This happens when you formally apply for and accept a personal loan. A hard inquiry can temporarily lower your credit score by a few points, but the effect is minimal and usually bounces back within a couple of months.35
The Repayment Process
This is where a personal loan can have the most significant impact on your credit score.
- Positive Impact: Making consistent, on-time payments on your personal loan is one of the best ways to build a strong credit history. Payment history is the most important factor in your credit score, so meeting your obligations can significantly boost your score.36
- Negative Impact: Late payments or defaulting on a personal loan will be reported to the credit bureaus and can cause a substantial drop in your credit score.37 This can make it difficult to get future credit.
FAQs About Personal Loans
Is a personal loan a good idea?
A personal loan can be a good idea if you have a clear plan for using the money and can comfortably afford the monthly payments. It’s an excellent tool for debt consolidation or for funding a necessary expense like a car repair. However, if you are struggling with your budget, taking on a new personal loan may add to your stress. Always weigh the pros and cons and explore all your options before taking on new debt.
What is the difference between a personal loan and a line of credit?
A personal loan provides a lump sum of money that is paid off over a fixed period. A line of credit, on the other hand, is a revolving form of credit that allows you to borrow as needed, up to a certain limit.38 A personal loan typically has a fixed interest rate, while a line of credit often has a variable interest rate that can change over time.39
Where can I find the best personal loans online?
One of the best ways to find a personal loan is by using a marketplace website that compares offers from multiple lenders at once. Our marketplace can help you find a personal loan and connect you with lenders who are pre-approving borrowers right now.
[Link to our SuperMoney widget]
What to Watch Out for When Getting a Personal Loan
While a personal loan can be a great financial tool, it’s crucial to be a smart consumer. Here are a few things to watch out for when you’re considering a personal loan:
- Hidden Fees: Beyond the interest rate, a personal loan may come with other fees.40 These can include origination fees (charged when the loan is issued), application fees, or prepayment penalties (charged if you pay off the personal loan early). Always read the fine print.
- Lender Reviews: Don’t just look at a lender’s star rating. Read customer reviews to understand their customer service, transparency, and overall reputation. A reliable lender will be a good partner on your financial journey.
- Monthly Payment: Ensure the monthly payment for your personal loan fits comfortably within your budget. While a longer term may lead to a lower monthly payment, it can also mean paying significantly more in interest over the life of the personal loan.41
- Your Plan: Before you sign the dotted line, have a clear plan for how you’ll pay off the personal loan. This includes understanding the payment schedule and how you’ll make sure you have the money ready each month.
By doing your homework and shopping around, you can secure a personal loan with favorable terms that helps you achieve your financial goals.
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