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What Is A Personal Loan And How Does It Work?

3-minute readNovember 02, 2020

If you need cash fast, then a personal loan can be a good option. Although many Americans turn to personal loans to fund expenses, it is important to understand exactly what a personal loan is before applying. 

We will cover the definition of personal loans and help you decide whether you should consider one. 

What Is A Personal Loan?

A personal loan is an installment loan granted by a financial institution to a borrower. 

The loan terms will outline a fixed timeline that will allow you to repay it over the course of several years. Typically, terms of personal loans range from 2 – 5 years. The APR on these loans varies widely based on the lender and your creditworthiness. However, on most personal loans the APR is fixed for the duration. This alleviates any worries about fluctuating interest rates increasing your monthly payments. 

Once you have been approved for the personal loan, you will receive the funds relatively quickly. Sometimes as soon as the same day! After you have received the loan, you will be expected to make timely monthly payments. 

What Is Meant By ‘Personal Loan’?

A personal loan is just that: personal. Unlike most others (such as a mortgage or auto loan), a personal loan provides more freedom. Everyone’s life is different. With that, your financing needs are also different. This type of loan can help you fund whatever life throws your way. 

Is It A Good Idea To Get A Personal Loan?

A personal loan is a good idea in some situations. If you don’t have an emergency fund on hand, you may find yourself in desperate need of cash. However, it’s important not to panic. Consider all your options before taking out a personal loan. 

First, check on any cash reserves. Do you have any assets that you can liquidate to fund your emergency instead of taking on this debt? If not, you may need to consider a personal loan. 

If you have a high credit score and spotless credit history, obtaining a low-interest rate on a personal loan is very possible. You may find that this is a more affordable option than a high-interest credit card. With a low interest rate, a personal loan can be a solid way to fund your emergency.

On the other hand, a low credit score can hurt your chances of loan approval. In combination with a high debt-to-income ratio, a low credit score can lead to sky-high interest rates on your personal loan offers. In this circumstance, you’ll need to really evaluate whether you can afford the loan. Although it may fund your current needs, it may only provide a stopgap in expenses. Plus, low-credit borrowers may be required to seek out a co-signer or provide collateral for the loan. Unfortunately, this can lead to a less than ideal situation. 

If you are concerned that your low credit score will hurt your personal loan application, work on improving your score. The Rocket HQSM Learning Center is a great resource to learn more about improving your credit score.

What Is A Personal Loan Used For?

Personal loans can be used for a variety of things. Here are some of the most common:

Debt Consolidation

Debt consolidation is a common use of personal loans. If you have multiple debts that are difficult to keep track of, consider rolling your debt into a single personal loan payment. 

Car Expenses

Unfortunately, cars are notorious for breaking down when you least expect it. The hit to your transportation and your budget can be difficult to handle. That’s where a personal loan can help fund the repairs and get you back on the road in no time. 

Home Improvements

Are you hoping to improve the functionality and appearance of your home? A personal loan can help you fund this big expense. 


The big day can come with an equally big price tag. With the average cost of a wedding soaring, you might need some help from a personal loan to fund all the details. 


Many people use personal loans to fund vacations. Although this may be tempting, it is not always the most financially responsible option. 


Although your favorite pet is well worth every penny, sometimes they need more care than your budget allows. That’s where a personal loan can help with any vet visits that are out of your budget. 

Medical Expenses

If you have experienced a major medical emergency, the medical bills are likely pouring in. Unfortunately, medical expenses can be unaffordable even with a healthy emergency fund. A personal loan can help pay those bills while you focus on recovering. 

Small Business

If you are trying to get your small business off the ground, a personal loan may provide the capital you need.

The Bottom Line

There are countless ways for a personal loan to come in handy. Whatever life throws your way, a personal loan can help you stay afloat financially. 

If you are ready to dive into your personal loan application, check out Rocket Loans. The completely online application will allow you to receive your funds on the same day without any hidden fees. Secure your personal loan today!

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