How do personal loans work?

A personal loan can be a great tool for a variety of financial situations. You can consolidate debt or pay for planned expenses like home improvements, college tuition, or a wedding. It also can be useful if you're caught by unanticipated expenses, like medical treatments, a large tax bill, or funeral services.

Let's dive into personal loans to determine if it's the right financing for you.

What are personal loans?

You may be familiar with loans that are backed by some sort of collateral. Collateral is something that the borrower pledges in order to secure the loan (and something that could be lost if the borrower fails to make loan payments). For example, with a home loan, the home is the collateral. With a car loan, the car is the collateral.

Most personal loans are unsecured. That means you don't have to pledge any property for the loan. Instead, the lender looks at your creditworthiness and current financial situation to determine if you qualify, and to set the terms of the loan.

Usually, the loan itself is an installment loan, which means you receive a lump sum of money upfront and then repay it with monthly payments over the life of the loan, usually between two to seven years.

What will lenders want to know?

At the most basic level, lenders want to know the likelihood that you will repay the loan on time each month. Lenders review your credit history and credit score, plus your income, other debts, your savings and investments, and more.

What are the interest rates like with personal loans?

This is where credit score comes into play. A higher credit score may increase the likelihood of loan approval and may help you qualify for a lower rate, which means you pay less for the loan in the long run.

In general, personal loan interest rates can be lower than credit cards, but it depends on your credit score and the other factors that lenders review when evaluating your situation.

Can I afford a personal loan?

Use our calculator to estimate how much you’ll pay back over the life of your loan using various monthly payments and interest rates.

Crunch the numbers

Related Content

You are now leaving First Federal Bank of Kansas City


Our website/mobile terms, privacy and security policies do not extend to the website or app accessed through this link, and First Federal is not responsible for the content on any third-party website or app. Click "Yes" to leave our website.