A personal loan is money borrowed from a bank, credit union, or online lender that you pay back in fixed monthly payments, or installments, typically over two to seven years.
Though it’s usually best to dip into your savings or emergency fund to cover unexpected expenses, personal loans can be a good option for non-discretionary purposes, like debt consolidation.
How do personal loans work?
Most personal loans are unsecured, meaning they’re not backed by collateral. Lenders decide whether to give you an unsecured loan based on factors such as your credit score, credit history, and free cash flow.
If you don’t qualify for an unsecured loan, you may be offered a secured or co-signed loan. Secured loans are backed by an asset like your home or car, and the lender can repossess your property if you default. Co-signed loans include an additional applicant with a strong credit profile who will help guarantee the loan; they are responsible for missed payments.