A personal loan is an installment loan that is not backed by any collateral (like a house or car). It differs from a mortgage or car loan in that the lender cannot directly seize your assets if you fail to pay back the loan. Your credit score still will be damaged if you default, though.
Your credit history will directly affect the interest rate you are offered. While some lenders have no minimum credit score, that does not mean they don’t check your credit report. They use other information from the report to gauge the risk you won’t repay.
Not all lenders will approve a loan for borrowers with credit scores under 620, but many do. Expect rates toward the higher end of the range — that is, up to 36% — if your credit is damaged. You may have seen lenders that offer loans with no credit check at all, but they will levy interest rates of 300% or more, as will a payday lender.
Pros of personal loans:
Consolidation for your credit cards and other debts. A personal loan can be used to consolidate high-interest credit card debt to lower interest payments and accelerate debt payoff.
Improved credit score. You may improve your credit score by moving revolving credit card debt to an installment loan, because you lower your credit utilization ratio.
Cons of personal loans:
Higher interest rates than secured loans and (some) credit cards. If you have good credit and can pay off the debt in 12-18 months, you can likely get a credit card that has 0% interest on balance transfers for a year or longer. Alternatively, if you are a homeowner, home equity loans often have lower interest rates than personal loans.
Extended application process. The approval process for a loan can last a few days and may require more information than that needed to get a credit card.
Personal loans work best as part of a longer-term plan to improve your finances.
If you have good credit and an existing banking relationship, it’s worth checking out the offerings from your current provider or local credit union. Be sure to consider multiple options to find a good rate. Almost all lenders will require you to be 18 or older and a legal U.S. resident, with a verifiable bank account and not in bankruptcy or foreclosure.
Check out our choices for:
Best debt consolidation loans
Best personal loans for good credit
Best bad credit loans
Additional NerdWallet articles on personal loans: