If you want to buy a car, you can take out an auto loan. If you want to buy a house, you'll probably need a mortgage. But what if you want to borrow money for another reason — and you want to steer clear of high-interest credit cards and you don't want to tap into your home's equity?
That's where a personal loan comes in. Personal loans allow you to borrow money for a variety of reasons, often at a lower interest rate than other financing options.
What is a personal loan?
A personal loan is money you borrow from a financial institution that's paid back in monthly installments.1 Like other types of loans, the interest rate is based on your credit score and other eligibility requirements; borrowers with excellent credit tend to receive the lowest interest rates on personal loans.
The big difference between other types of loans and personal loans is that personal loans can be used for almost any purpose. Some of the most common reasons for a personal loan include:2
Consolidating credit card debt
Paying off medical bills
Making home improvements
Handling small business expenses
Paying for a wedding
Personal loans are available from banks, credit unions, and online lenders. Interest rates are usually fixed, though some lenders offer variable rates as well. The duration of a personal loan typically ranges from two to five years. However, the specific terms and conditions will vary by lender.
The big difference between other types of loans and personal loans is that personal loans can be used for almost any purpose.
There are a few different types of personal loans, and each type works a bit differently. Here's what you need to know about your personal loan borrowing options:
1. Secured Personal Loan
A secured personal loan is a personal loan that's backed by collateral.3 This means you put up valuable personal assets that you own, such as a bank account balance, vehicle, or property, which the lender can liquidate for cash if you're unable to pay the loan back. However, funds in a retirement account, such as a 401(k) or IRA, are usually not accepted.
Since secured loans pose less of a risk to the lender thanks to the collateral, it might be easier to qualify for a larger loan amount or lower interest rate.
2. Unsecured Personal Loan
Most personal loans are unsecured, meaning you don't have to offer any collateral to qualify.4 Instead, the lender examines your financial history, including your credit score, income, outstanding debt, and more when evaluating your application.
3. Personal Line of Credit
A personal line of credit works similarly to a personal loan, but it offers a more flexible borrowing arrangement. Rather than receiving your funds in one lump sum, you can borrow against a line of credit and pay it off over a specific term with interest. A personal line of credit can be helpful if your income fluctuates or you have a sudden unexpected expense.5
When is a personal loan the right choice?
Personal loans aren't for everyone. Unlike a credit card, the debt has to be repaid consistently over a relatively short period of time. But also unlike a credit card, the interest rates are often lower, which can make borrowing money much less expensive.6
If you'd like more information about how personal loans work, stop by your local Synovus branch to talk with a banker and see if a personal loan is the right choice for your situation.
This content is general in nature and does not constitute legal, tax, accounting, financial or investment advice. You are encouraged to consult with competent legal, tax, accounting, financial or investment professionals based on your specific circumstances. We do not make any warranties as to accuracy or completeness of this information, do not endorse any third-party companies, products, or services described here, and take no liability for your use of this information.
“What Is a Personal Loan?" Nerdwallet, accessed Dec. 26, 2018.
Matt Tatham, “What Can a Personal Loan Be Used For?" Experian, accessed Dec. 26, 2018.
Casey Bond, “Everything You Need to Know About Collateral Loans," U.S. News & World Report, accessed Dec. 26, 2018.
Amrita Jayakumar, Where to Find Secured Personal Loans," Nerdwallet, accessed Dec. 26, 2018.
Karen Haywood Queen, "Is a personal line of credit right for you?" Creditcards.com, accessed Dec. 26, 2018.
Amrita Jayakumar, Credit Card vs. Personal Loan: Which One Should I Get?" Nerdwallet, accessed Dec. 26, 2018.
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