Personal loans: how they work, what they cost and when to use one
A personal installment loan gives you a lump sum that you repay in fixed monthly installments over a set term; the CFPB notes rates can be fixed or adjustable. Most are unsecured, so the rate depends heavily on your credit and income. Compare offers by APR, which includes origination fees, and by total cost. Many lenders let you check rates with a soft inquiry first.
National average (commercial banks)
National averages, not an offer Benchmarks for education only. Your rate depends on your credit, down payment, loan type, term and lender. All rates, history and methodology.
What affects your offer
- Credit score and history
- Income and debt-to-income ratio
- Loan amount and term
- Whether the loan is secured (for example by savings) or unsecured
Fees to look for
- Origination fee, often deducted from the loan before you receive it, so you get less than you borrow. The APR reflects it.
- Late fees and returned-payment fees.
- Prepayment penalty; many lenders don't charge one, but check.
Common uses and alternatives
People use personal loans for debt consolidation, home repairs or large one-time costs. Before borrowing, compare a credit union loan, a 0% balance-transfer card (check the transfer fee and when the promo ends) and, for home projects, home equity options, which are cheaper but put your home at risk. Avoid payday and car-title loans when possible; they're typically far more expensive.
How to compare offers
- Prequalify with several lenders using soft inquiries where offered.
- Compare APR, monthly payment, term and total repaid.
- Read the loan agreement before you accept.
- Never pay an upfront fee to "guarantee" a loan; that's a classic scam (see avoid loan scams).
Frequently asked questions
Does checking personal loan rates hurt my credit?
Many lenders offer prequalification with a soft inquiry, which doesn't affect your score. Formally applying usually triggers a hard inquiry.
What is an origination fee on a personal loan?
A fee for processing the loan, often taken out of the loan amount. It's included in the APR, so compare APRs.
Is a personal loan better than a credit card?
For a fixed amount repaid over a set time, a personal loan often has a lower APR than a credit card's purchase rate, but it depends on your offers. Compare APR and total cost.
Sources
- CFPB: What is a personal installment loan? (accessed October 29, 2026)
- CFPB: A loan's interest rate vs its APR (accessed October 29, 2026)
- CFPB: What kind of credit inquiry has no effect on my score? (accessed October 29, 2026)
- Federal Reserve: G.19 Consumer Credit (accessed October 29, 2026)