How Does Personal Loan Work | What is a Personal Loan

If you need quick cash for an unexpected expense or emergency, to pay for a wedding, or to repair or renovate your home, a personal loan could be a great way to cover your costs.

There are many options available, and you can usually get funded in a matter of days. Personal loans are accessible to people with varying financial situations, including those with excellent credit and less-than-perfect credit.

Given the many options available, figuring out how personal loan work can be a daunting task.

In this article, we will be discussing how personal loan work to make borrowing easier for you. Let’s get started! Read What Do You Need For A Personal Loan?

Business loans are loans that provide business owners with financing either as a lump-sum payment or credit line.

In exchange for this funding, you agree to repay the money you borrowed over time, in addition to interest and fees. Depending on the type of business loan, your lender may require daily, weekly, or monthly payments until fully repaid.

Moreover, business loans can either be secured or unsecured. Secured loans require collateral. Collateral is something of value the lender can repossess if you fail to repay back the loan.

Examples of things that can be used as collateral include; real estate, equipment, cash or investments. See Pros and Cons of Personal Loans.

Unsecured loans, however, do not require collateral. Instead, you typically have to sign a personal guarantee agreeing to accept personal liability if the business doesn’t repay its debt as promised.

How a personal loan works

In order to be ready to apply for a personal loan, you will need to have your paperwork in order. This includes:

  • Recent pay stubs: You will need to show that you have a job with a steady income so that you can pay back a loan. You might also need recent tax returns if you have recently changed jobs or don’t have access to your pay stubs.

Personal information: A lender is going to ask about where you live, how much you want to borrow, what you’re planning to use the money for, and other details.

You might need to provide your driver’s license, Social Security number, passport, and possibly some utility bills that have your name and address on them.

Financial accounts: To get money into your account, you will need to share your bank account information. This may also be where you make payments from each month when you begin your loan repayment.

You will also want to check your credit score and history before completing a full application. This allows you to be aware of what lenders will see and can also help you narrow down options. See How Long You Have To Wait To Get A Personal Loan

If you have excellent credit, you’ll have an easier time qualifying for a personal loan with a low interest rate and fewer fees. But a fair or bad credit score may limit your options.

The Application Process

Some lenders will let you pre-qualify for a loan before submitting an actual application. Pre-qualification is when you input some credit and financial details and your potential lender lets you know if you might be eligible for a loan based on that information. This is not a hard credit pull, and your credit score and history aren’t impacted.

Interest rates vary by lender and creditworthiness. The higher your credit score, the more likely you are to be eligible for the lowest interest rate offered.

The lower your score, the harder it will be for you to qualify for a loan, and even if you do, you could end up with an interest rate on the higher end of what is offered.

There is no universal standard for credit requirements across all lenders. There is also no standard for repayment terms or the amount you can borrow.

Try to compare lenders based on your needs along with your likelihood to be eligible. If you need to borrow a small sum of money (or a very large sum), make sure your potential lender offers that amount before completing an application.

Once you have all your documents and details in order, completing an application can still take a little bit of time. Afterward, however, you should find out within a few moments if you’ve been approved for a personal loan.

Receiving a Personal Loan

Once you’re approved for your loan and have accepted it, you will input some banking details to get your lump-sum deposit.

Different lenders have different funding times, which are also affected by when you complete your application. Some will deposit funds into your account within a day, while others might take a couple of days to get to you.

Paying Back a Personal Loan

Many lenders give you the option to set up autopay and, in some cases, offer an interest rate discount for doing so. Autopay lets you set it and forget it so you never miss a loan payment.

Payment history is the biggest factor when your credit score is calculated, and falling behind on loan payments can negatively impact your score. So setting up autopay, or even just a calendar reminder, so you’re always paying on time is incredibly important.

Your loan terms, interest rate, and how much you borrowed all determine your monthly payment. You can use a calculator to see which variables fit best into your budget.

Many lenders don’t have prepayment penalties, so you likely won’t have to worry about getting charged a fee if you pay off your loan early.

Preparing for a Personal Loan

Things that make personal loans what they are:

Interest rates: Personal loans charge borrowers a fixed APR, or annual percentage rate, on top of the principal loan amount.

This  annual percentage rate can vary depending on creditworthiness, income and other factors. The personal loan interest rate determines how much interest borrowers pay over the life of the loan.

Monthly payment: Personal loans come with a fixed monthly payment that you willl make for the life of the loan, calculated by adding up the principal and the interest.

You can typically secure a lower monthly payment if you agree to pay off your loan over a longer stretch of time.

Repayment terms: Repayment timelines differ for personal loans, but consumers are often able to choose repayment terms between one and seven years. However, some lenders may offer terms of up to 12 years on larger personal loans.

Origination fees: Some personal loans charge an initial origination fee on top of the original amount of your loan. While origination fees vary, it’s common to see origination fees as high as 10% of your loan amount.


Getting a personal loan is a good avenue for solving emergency occurrences but knowing how its processes work will be of great advantage, that’s why we took our time to explain how it works in this article and we believe you found it useful. You can click and type in the comment box to get more information on this topic.

Leave a Reply

Your email address will not be published. Required fields are marked *