Personal loans are one of the most misunderstood financial products out there. Used correctly they can save you money. Used incorrectly they dig a deeper hole. Here’s what you actually need to know.
What a personal loan is
A personal loan is a fixed amount you borrow from a bank, credit union, or online lender and pay back in fixed monthly installments — usually over 2 to 7 years. Unlike a credit card, the rate is fixed and you know exactly what you’ll pay each month and when it’ll be paid off. You can use one for almost anything: consolidating debt, a large expense, home improvements, or medical bills.
Interest rates by credit score
- Excellent credit (720+): 7–12% APR
- Good credit (660–719): 12–18% APR
- Fair credit (600–659): 18–28% APR
- Poor credit (below 600): 28–36% APR or declined
Always check your rate before applying — most lenders offer pre-qualification with no hard credit inquiry.
When a personal loan makes sense
- Consolidating high-interest credit card debt. If you have $8,000 across cards at 22–25% APR, consolidating into a personal loan at 10% saves significant money and gives you one fixed payment. This works — as long as you don’t run the cards back up after consolidating.
- A genuine one-time emergency. A personal loan at 12% beats putting $5,000 on a credit card at 24%.
- A large purchase where the loan rate beats alternatives. If a personal loan at 9% is cheaper than a retailer’s financing at 18%, the loan is the smarter move.
When a personal loan is a bad idea
- To cover ongoing expenses. A loan doesn’t fix a budget problem — it delays it and adds interest.
- For discretionary spending. Taking on debt for vacations or things you want but don’t need makes your financial position worse.
- When you have poor credit. At 28–36%, a personal loan costs nearly as much as a credit card. Build your credit first.
Where to find the best rates
Check online lenders before going to a bank — they often have lower rates and faster approval. Compare LightStream, SoFi, Marcus by Goldman Sachs, and your own credit union. Always compare at least 3 lenders before accepting anything.
The question to ask first
“Am I solving the actual problem, or just moving money around?” Consolidating debt into a lower-rate loan solves a problem. Paying off cards you’ll immediately max out again doesn’t. The loan is only as good as the behavior that comes with it.