What Is a Personal Loan?

If you've ever searched for ways to cover an unexpected expense or pay off other debt, you've probably come across the term "personal loan." It's a broad category that covers a lot of different products, so it's worth understanding what the term actually means before you start comparing options.

A Simple Definition

A personal loan is generally a loan used for personal, family or household purposes — rather than a loan tied to a specific purchase, like a mortgage for a house or an auto loan for a car. You receive an amount of money upfront, and you repay it over time according to terms set by the lender.

Beyond that basic definition, personal loans can look quite different from one lender to the next. Some are repaid in one lump sum on a set date. Others are repaid through a series of scheduled installment payments over weeks, months or years. The specific structure, amount, APR, fees and repayment term are all determined by the lender that offers the loan.

What Are Personal Loans Typically Used For?

People consider personal loans for a range of reasons, including:

• Covering an unexpected expense, like a car repair or medical bill
• Consolidating other debts into a single payment
• Financing a planned purchase
• Bridging a short-term cash-flow gap

Whether a personal loan makes sense for any particular purpose depends on your individual circumstances, the terms you're offered and whether less expensive alternatives might be available. Our Responsible Lending guide walks through some of those alternatives in more detail.

How Personal Loans Differ From Other Credit Products

It can help to think about how personal loans compare to a few other common forms of credit:

• Credit cards are revolving credit — you can borrow, repay and borrow again up to a limit. A personal loan is typically a fixed amount repaid over a set period.
• Mortgages and auto loans are tied to a specific asset (a home or vehicle) that can serve as collateral. Personal loans are often unsecured, though not always — the specific structure depends on the lender and product.
• Payday loans and other short-term, small-dollar products are sometimes grouped under the "personal loan" umbrella, but they can carry different costs, terms and state-law requirements than longer-term installment loans.

What Affects Whether You're Offered a Loan?

Lenders that consider personal loan requests typically look at a combination of factors, which may include your income, existing debts, credit history and other eligibility criteria specific to that lender. Because these requirements vary by lender, being declined by one doesn't necessarily mean every lender would reach the same conclusion — and being offered a loan by one lender doesn't guarantee the same terms elsewhere.

Next Steps

If you're trying to decide whether a personal loan is the right move, it helps to understand not just what one is, but what it would actually cost and what you'd be agreeing to. Our guide on Personal Loans: What You Should Know Before You Borrow goes into more detail on cost, terms and questions worth asking before accepting an offer.