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Personal Loans 101: What Are They and How to Get One

Often an underutilized asset, a personal loan can provide value when it comes to consolidating — and emerging from — credit card debt.

June 29, 2021

Most people don’t have cash in the bank to finance large purchases at a moment’s notice. That’s why lenders created mortgages, automotive loans, student loans and personal loans — to acquire the thing we need now and pay for it later.

Personal loans are an often underutilized asset, but you don’t have to overlook their value any longer.

Although all loans bring some drawbacks with their benefits, personal loans could help you consolidate credit card debt and eventually emerge from it. Interested in personal loans? We’ll cover everything you need to know.

What is a Personal Loan?

A personal loan is a fixed sum of money that’s borrowed from a lender under the agreement that you’ll pay it back in regular monthly installments over a period. Like automotive and home loans, each personal loan will have a set of terms and conditions, including:

  • Interest rates

  • Minimum payments

  • A repayment timeline

  • Credit score requirements

What are Personal Loans Used For?

In theory, a personal loan could be used for any personal spending; however, it’s ill-advised to use one for discretionary expenses like shopping, travel or wedding planning, for example.

Here are some of the most common uses:

  • Emergencies – Life throws everyone their fair share of curveballs. Whether you have sizable medical bills, home repairs after a natural disaster or simply need to help your family out of a tough situation, a personal loan can bridge the gap between what you have and what you owe.

  • Education expenses – Student loans typically have a lower interest rate than personal loans, but the student loan provider may not grant you the full tuition amount. A personal loan can help you pay the rest of your way if you don’t have other options.

  • Relocation costs – Whether you’re relocating to an entirely new city or just a new home, a personal loan can cover the necessary but costly expenses.

  • Collection agency debt – Using a personal loan to pay off bad debt has its pros and cons: on the one hand, satisfying the debt collector can save your plummeting credit score. On the other, you’ll be taking on new debt to satisfy the old debt, with a potentially high interest rate.

  • Tax debt – Before applying for a personal loan, talk to the IRS about the possibility of creating an installment plan or negotiating your debt repayment. If that doesn’t work, weigh the interest rate of your IRS debt with that of your potential personal loan to see if the math makes sense for you.

  • Debt consolidation – So long as the loan’s interest rate is lower than that of the credit cards you’re paying off, taking out a personal loan to consolidate debt could be a smart move. If you can avoid using your credit cards while you pay your debt down, you’ll end up saving money on interest rates over time.

How Do Personal Loans Work?

In most cases, personal loans are unsecured. What does that mean? Let’s break down the difference between a secured loan and an unsecured loan:

  • Secured loans, such as mortgages, auto loans and many business loans, are backed by some type of collateral. This is anything of value (property, vehicles, financial assets) that the lender can seize if the borrower neglects to pay back the loan on time. There’s less risk involved for lenders, which is why the loan term and rates may be more favorable.

  • Unsecured loans, like credit cards, student loans and personal loans, have no such collateral. There are still penalties for missing payments in the form of interest and other fees, but the lender is granting money at greater risk to themselves. They use your credit score and financial history to determine if you’re eligible for an unsecured loan and under what conditions.

Personal loans can be either fixed-rate or variable-rate, determining whether your recurring payments are the same month-to-month or differ based on the fed funds prime rate.

Is it bad to take out a personal loan?

For a lot of people, personal loans are an unwise financial decision. They may enable unnecessary spending and increased debt without solving the root cause of the problem.

However, in certain instances, they’re either necessary for survival or financially advantageous. It all depends on the personal loan specifics, the debt you’re seeking to pay off, and your overarching financial situation.

As with anything, there are pros and cons.

What is a Benefit of Obtaining a Personal Loan?

Personal loans yield plenty of advantages compared to other ways of getting money or paying off debt.

Here are a few pros to consider:

  • The money can be put toward anything – In some cases, this could be a major con because of the temptation it brings. However, the flexibility of a personal loan grants you the freedom to pay back the most pressing debts or pay for essentials like surgery, home repairs or funeral costs without limitations.

  • Securing better terms than credit cards – Between the lower-than-normal interest rates and the higher-than-standard borrowing limits, you can effectively consolidate your debts and avoid ruining your credit score with a high credit utilization ratio.

  • There’s no collateral necessary – The threat of losing your house or car isn’t looming over your head with a personal loan. You still want to avoid defaulting at all costs, as the consequences are steep, but they’re not as dramatic as forfeiting your home, vehicle or other personal property.

What are the Disadvantages of Personal Loans?

The simple truth is that loans weren’t designed entirely for your benefit — the lender has to make money somehow, and that’s where the major disadvantages come into play:

  • The interest rate may be higher than other options – For borrowers with low credit scores especially, unsecured loans can come with a hefty price tag in the form of interest. A credit card balance transfer may be a better option in some cases.

  • Significant penalty fees – Many personal loans have one-time fees for administrative processing, late fees of $39 or more and even 

     because of the missed income for the lenders.

  • Larger monthly payments – Unlike the minimum payment requirements on credit cards, personal loans require fixed monthly payments of several hundred dollars.

  • Ending up with more debt than when you started – Using personal loans as a means of only works if you stop using your credit cards while repaying your debt. Otherwise, you’ll simply be accumulating debt in two places instead of one.

How to Get a Personal Loan

If you’ve decided that a personal loan is right for you, the process of applying for one is relatively straightforward. You can apply through most banks, credit unions and other financial institutions.

How to apply for a personal loan

Before initiating the application process, you should check your credit score and determine how much you plan to borrow. Once you’ve run the numbers and know what you want, you can take the first step forward:

  • Pre-qualifying for loans and comparing your options – Applying for pre-qualification means the lender makes a soft inquiry into your credit history rather than a hard check, lowering your score. From there, each lender will estimate the rates, loan payment schedule and loan amounts you could qualify for. You can use these projections to determine which option is the best for you. Pre-qualifying can take mere minutes but does require some important information:

    • Details on how you’ll use your personal loan

    • The amount you’d like to borrow

    • Ideal repayment plan, including monthly payments and term length

    • Personally identifying details

    • Social Security Number

  • Choosing a loan and preparing your application – Once you’re satisfied with the terms and rates of your personal loan, you’ll need to gather the necessary documents to submit a formal application, including:

    • Photo identification, like a driver’s license or passport

    • Proof of home address

    • Proof of current employment

    • Financial details, including all assets and debts

    • Education history

    • Social Security Number

  • Submitting the application and receiving disbursement – Personal loans don’t usually take long to approve or disburse. You may even get your money on the very same day or within a few business days. From the day you receive your funding, you’ll have 30 days until your first payment is due.

How to Get a Personal Loan with Bad Credit

A low credit score (usually lower than 629) doesn’t necessarily disqualify you from applying and being approved for a personal loan. However, lenders will likely offer you higher interest rates because of your low creditworthiness. If the fixed rate is too high, a personal loan may no longer be a suitable option for you.

The application process is the same for those with poor or even far from excellent credit scores, though there are additional documents you should bring to your interview to prove you’re a low-risk borrower, despite your credit score.

These include:

  • Proof of stable employment, including tax returns, W-2s, 1099s, employment contracts and pay stubs.

  • Proof of consistent residency in the same house or at least city.

  • Proof of alimony or child support payments, if applicable.

  • Bank records, including checking account, savings account and credit card account statements.

These documents may earn you favorable loan terms during your application process.

Where to Get a Personal Loan

Most traditional banks and credit unions offer personal loans, but which comes with the best terms, rates and conditions?

  • Banks – Most major banks will offer personal loans. These loans will typically come with strict loan terms and more affordable rates for those with higher credit scores.

  • Credit union – Credit unions operate similarly to banks, with one major exception. Individual members typically must meet a social requirement to join. Credit unions may strictly cater to members of the armed forces, a local church or community. Credit unions are known for being flexible and offer personalized loan terms to their members.

  • Third-party accredited lenders – If you have a lower credit score and you can’t find a personal loan through your bank or credit union, you may be able to get an affordable personal loan through a third-party accredited lender. These often come with a higher annual percentage rate (APR) than banks or credit unions.

Be wary of “payday loans.” These loans promise money fast but typically come with APRs in the triple-digits, if not more, according to the FDIC.

Consolidate Your Debt with Tally

Suppose you’re only really interested in a personal loan as a way to pay back debt faster, easier and for less. In that case, you may want to skip traditional lenders altogether and consolidate your credit card debt through Tally.

Tally line of credit* offers competitive APRs and the potential for serious savings. Get out of debt faster and start saving in no time with Tally.

*To get the benefits of a Tally line of credit, you must qualify for and accept a Tally line of credit. Based on your credit history, the APR (which is the same as your interest rate) will be between 7.90% - 29.99% per year. The APR will vary with the market based on the Prime Rate. Lines of credit issued by Cross River Bank or Tally Technologies, Inc. NMLS # 1492782 (, see your credit agreement. Tally loans made pursuant to a California Finance Lenders Law License or other state laws.