How Do Personal Loans Work (And Don’t Work)

Every one of us needs some extra cash at one point or another. Whether you are looking to work towards your financial goals or take care of a financial emergency, taking out a loan can come in handy. However, to make the most of the money you have borrowed, it is important to start by applying for the right loan.

With the numerous lenders that borrowers can access today, online personal loan shopping can be confusing. The good news is that consumers can identify reliable lenders by researching third parties that are not involved in the lending business. We not only make it easier for borrowers to find a lender but also seek to educate them about personal loans.

Personal Loan Basics

Simply put, a personal loan is a fixed amount of money, with a fixed interest rate and a fixed repayment term, given by a lender to an individual. Personal loans can either be secured or unsecured, with secured loans requiring borrowers to provide collateral to back up the loan. The terms of a personal loan will differ from one lender to another, with personal loans providing a longer repayment period.

When shopping for a personal loan, it is important for borrowers to understand the purpose for which they are taking out the loan. There are different types of personal loans depending on the use to which the money will be put. These include automobile loans, emergency cash loans, loans for medical bills, travel loans, debt consolidation loan, and wedding loans, among others.

Elements of a Personal Loan

While personal loans will generally involve smaller installments, the interest paid at the end of the repayment period will be higher than that paid on a shorter-term loan of an equal amount. Here are some elements of a personal loan to help you make an informed decision.

  • Principal – this is the amount of money you borrow. The lender will calculate the interest to be paid based on the principal you owe. Most lenders have floors and caps on how much they can lend as personal loans.
  • Interest rate – calculated as a percentage of the loan amount, interest is the amount you will pay on top of the principal. Most personal loans have fixed interest rates.
  • APR – The APR is the sum of the interest rate and other fees you have to pay to borrow the loan. In short, this is the total cost of borrowing money.
  • Term length – This is the period borrowers have to pay back the money. Personal loans have a fixed term, meaning that all monthly installments are the same.
  • Prepayment penalties – some loans will charge borrowers penalties in case they pay back before the agreed-upon term. It is important to check whether a loan has prepayment penalties before applying.
  • Other fees – whether you are taking out short-term or long-term personal loans, you should read the fine print to establish whether the lender charges other fees. These include origination fees and service charges.

Where to Shop for Personal Loans

While a personal loan is rarely a long-term solution, knowing where to shop forthe  loans can help you make the most of the money you borrow. As a general rule, personal loans will attract more interest. We help borrowers to compare terms from different lenders before finding a suitable lender. Work with us to make your personal loan search easy and convenient.

How Much to Borrow

The decision over how much money to borrow is one of the most important considerations borrowers struggle with before applying for long-term personal loans. The loan amount will affect how much you pay in interest, the number of monthly installments, the term of the loan as well as other fees involved. In addition to making this decision, it is important to remember that other factors determine how much one can borrow.

  • Income – just as income is one of the factors that help to determine whether borrowers qualify for a personal loan, it also influences how much you can borrow. Whether you wish to get a personal loan online or apply with traditional lenders, your income and job stability will be important factors to consider. The information will allow the lender to come up with a payment plan that is manageable for your income level.
  • Credit history – most lenders will give you money depending on how much of a risk you are. Since this information is derived from your credit score and history, past borrowing and repayment history will play a crucial role. Borrowers with a good credit history are in a better position to borrow higher loan amounts. However, the lender will advise on the most appropriate loan amount for each borrower.
  • Homeownership status – although most personal loans are unsecured, borrowers can choose to go for secured loans to access larger loan amounts. By securing their loan against their house, Homeowners can borrow a larger amount of money.

The amount is up to you and the lender

In the long run, borrowers will want to access loan amounts that will allow them to meet their financial needs. As a third party that makes it easy for consumers to find lenders, you can count on us for a hassle-free personal loan shopping experience. Whenever you are looking for the best long -term personal installment loan for your needs, we will be ready to help you find the right products.

What to Know Before Applying for a Personal Loan

If used correctly, personal loans can be a great way to advance life goals. However, consumers have to familiarize themselves with the basics of personal loan to make the right decisions. Here are a few things borrowers should know before getting a personal loan.

  • Credit score – the quality of your credit score plays an important role in determining if you qualify for a personal loan. The score helps lenders to decide how much of a risk a borrower is. This means that while a fair to good score will make it easier for you to access the amount you wish to borrow, a poor credit score can prevent a borrower from getting a loan altogether.
  • Income when you borrow is a factor – since most personal loans are unsecured, income matters when it comes to borrowing the loans. Borrowers who earn more are more likely to secure a personal loan from banks and other lenders. Some lenders will not give out loans to borrowers whose income is below a certain amount.
  • Interest rates and fees – some of the most important factors you should be mindful of when applying for a personal loan are interest rates and fees. These two factors will directly affect the loan amount and monthly payments.
  • Know how much you can afford to pay – even when you qualify for a loan, it would be important to do your calculations to determine whether you can afford to pay it back. The personal loan should not be more of a problem than the issue you wanted to handle.

What Should My Income Be?

It is clear that income is one of the important factors that determine your ability to get a personal loan. However, most borrowers ask just how much income they need to get a personal loan. This is because ensuring that you meet the lender’s requirements will go a long way in helping to increase the chances of getting your loan approved.

Generally, there is no set income requirement for any borrower to get a personal loan. While the average income figure is in the region of $ 15,000 to $ 20,000 a year, each lender will have different requirements. At the same time, lenders will also take into consideration other factors besides income. The amount that a borrower wishes to borrow will also be factored in. For borrowers who wish to borrow smaller amounts, lenders may not necessarily require that they earn a certain amount of money in a given period.

Although most personal loans do not require that collateral be put up before the loan can be approved, lenders should remember that taking out a loan comes with a degree of financial commitment. Borrowers will have to pay back the principal and interest at some point. This is why every borrower must carefully take into account their income and timeframe to pay off the loan to establish whether they will be able to service the loan without straining. Such planning before taking out personal loans will ensure that you are not overwhelmed by the process.

The Personal Loan Application Process

Applying for personal loans is a fairly easy process. However, borrowers must invest both time and thought to find the right product for their needs. Here is how borrowers should go about the process.

Compare your options

The fact that terms vary widely from one lender to the other makes it important to compare options before taking out a personal loan. While doing this, borrowers should figure out the type of personal loan they would like to apply for. Some of the factors to consider when comparing options include interest rates, fees, loan terms, and repayment terms. We help borrowers to find reliable lenders for a convenient experience.

Check the eligibility criteria

Once you have identified a suitable lender, you should go ahead to check the eligibility criteria. This will help you to avoid the disappointment and frustration associated with rejections. Checking the basic eligibility criteria will also prevent you from wasting time applying for a loan you do not qualify for. While basic requirements vary by lender, some common points include credit score, income, employment, residence, and age.

Complete the application

Today, most lenders have made it possible for borrowers to get personal loan online. Make sure you provide the correct information when completing the application. You should also submit documents such as your government-issued ID, proof of income, financial documents, and Social Security Number.

Wait for approval and receive your loan funds

After submitting your application, the lender will underwrite the application before providing feedback. Most personal loans go through the pre-approval, and full approval stages before the borrower can receive their loan funds.

Once you get a personal loan online, you should always remember that you have a responsibility to pay back the loan plus the accrued interest. Make sure you choose a repayment plan that you are comfortable with. Once you make the final payment, you should make sure that the lender closes your loan.

Common Reasons Personal Loans are Rejected

While applying for a personal loan is usually easy, the hard part is the approval process. Once a loan application has been rejected, it is natural for borrowers to feel frustrated. This is why it is necessary for borrowers to familiarize themselves with common reasons for personal loan rejection to avoid common mistakes and know how to deal with the rejections.

An error on your credit report

Lenders will reject applications for long-term personal loans when there is an error in the borrower’s credit report. Mostly, lenders will detect and realize these errors early on during the application process. The good news is that you can have genuine errors corrected if you take appropriate measures. If you believe the error was a mistake, you can write to the credit bureau in charge.

You carry too much debt

Even as you shop around for a personal loan, it is important to remember that your income-to-debt ratio will determine whether you qualify for the loan. If you are to avoid the frustration that comes with rejection and save time, you should pay off current debts or maintain them at manageable levels. The amount of debt you carry reflects on your financial discipline, planning, and habits.

Unstable employment

Most lenders will be cautious when lending to borrowers who change jobs frequently. While everyone understands that companies layoff staff and people change jobs from time to time, constantly changing jobs can be considered employment instability. Since this will have a direct impact on your income, lenders will reject applications where borrowers have an unstable employment history.

7 Common Reasons Personal Loans Are Rejected

Insufficient income

The amount of money you make from your income generating activity will determine your ability to repay the money you intend to borrow. Similarly, how much you earn will affect your income-to-debt ratio, an important consideration when approving loans. In addition to avoiding excessive spending habits, borrowers can consider getting a side hustle to boost their income.

Low credit score

Your credit score is an indication of your borrowing habits and financial behavior in the past. A low credit score is a sign that you are a high risk borrower, a factor that could lead to your loan being rejected. To increase the chances of your loan being approved, you should consider improving your credit score. This will require that you pay off your credit card loans and bills in good time.

Many personal loan applications with rejections

In case there are many rejections on previous applications, this could lead to another rejection. Since one of the most common reasons for rejections is poor credit, borrowers should strive to improve their credit score to break this cycle.

Pros and Cons of Personal Loans

It is critical to understand that all personal loans have their benefits and downsides. However, the downsides should not discourage borrowers from taking out the loans, provided they put the money into good use.


Personal loans can provide borrowers with a great chance to meet their financial goals. Here are some of the advantages of the loans.

  •  A personal loan can help you make a big purchase and break the large expense into smaller payments over time.
  •  Compared to what you would par for a credit card purchase, personal loans have a significantly lower interest rate.
  •  Personal loans can make for a great way to consolidate a number of high-interest credit card debts into one. You can then pay this easily as a single, lower-interest payment.
  • A personal loan can be an opportunity to improve your credit history. By making on-time payments over some time, you will be able to impact your credit score positively.


For all the positives associated with personal loans, they are not without their disadvantages. Here are some of the cons of personal loans.

  • When not used properly or for the intended purpose, personal loans can increase your debt burden. This could push the borrower into further debt.
  •  If you make late payments or miss payments altogether, this will hurt your credit rating. A poor credit score will make it hard for you to access financing in the future.

In the end, if long-term personal loans make it harder for you to pay your bills, you may want to consider your options. However, finding the best product for your needs by working with us will help you to reduce the chances of finding yourself in such a situation.

When to Get a Personal Loan

Taking out a personal loan can affect your life. This is why borrowers should apply for the loans only when it is absolutely necessary. Below are some situations when you can consider applying for personal loans.

  • When you can pay back promptly – you should take out a personal loan only when you can repay it. Paying all the installments promptly will help to avoid unnecessary stress and headaches.
  • When you need to cover emergency expenses – there are times when you will need to cover some emergency expenses but do not have the money to do this upfront. In such cases, you can take out a personal loan and pay back the borrowed amount over time.
  • When you can use the loan to make money – in case you wish to invest, you can apply for a personal loan to help you take advantage of the opportunity. Once you make money, you will be able to repay the loan comfortably.
  • When you are looking to improve your credit rating – some people use personal loans as an opportunity to improve their credit rating. However, you should be sure that you will not make late payments or miss payments.
  • Long-term personal installment loans have lower installments amounts, making it easier for borrowers to meet their financial obligations. When the regular installments on your loan can lead to financial constraints, you can consider renegotiating the payment term with the lender.

When to Avoid Getting a Personal Loan

Before undertaking personal loan shopping, you should be certain that taking out the loan is necessary. There are a number of alternatives to applying for these loans.

Instead of getting a personal loan for weddings, vacations, or buying a car, you can consider saving up for the expenses. Alternatives, it would help if you can boost your income by looking for a second job or side hustle. You should also avoid taking out personal loans if you ended up over-borrowing. In case you already have numerous debts, you can cut down on your expenses to settle them instead of taking on more debt. Lastly, while these loans can help borrowers to improve their credit score, things do not always work as planned. Renegotiating with lenders and paying off current debts would be a better way to build your credit.

Financial experts recommend that consumers take time to evaluate whether they need long-term personal loans before committing.

What if I Can’t Pay Back a Loan

There are many reasons why borrowers fall back on their payment plans or find themselves unable to pay back their loan. Such a situation can be a source of stress and worry since most lenders will keep sending reminders and warnings at such times.

In case you had forgotten to make the payment, you should try to submit it as soon as you can. However, if you are no longer able to pay back a personal loan, it is natural to be anxious. We recommend that such borrowers take a deep breath and try to calm down. As much as interest on the loan will keep rising, borrowers who are unable to pay can talk to their lender about their financial situation. If you are lucky, you can renegotiate the terms of the loan, changing it to a long-term personal loan that you can repay with more ease.

Personal Loan Fees

One of the benefits of personal loan shopping is that it may help you identify the right loan for your needs. At the same time, you will be able to compare different options, separating lenders based on whether they have additional or hidden charges.

  • Application fee – some lenders will charge an application fee when you take out a personal loan with them. It is important to find lenders who do not charge this fee, since you will end up wasting money if your loan is not approved.
  • Administrative fee – this fee covers the cost of processing paperwork for the loan. You should try to identify lenders who do not charge this fee.
  • Personal loan origination fee – this fee comes out of the loan rather than the borrower’s pocket. It is meant to cover the cost of application and processing, effectively including both the application and administrative fees.
  • Personal loan late payment fee – in the event that you are late on personal loan repayment, you may incur a late payment fee. This fee will vary from lender to lender.
  • Prepayment penalty – there are lenders who will punish you for paying your loan earlier than the agreed-upon time. While shopping for a loan, you should choose lenders who do not charge a prepayment penalty. Once you are familiar with these fees, you will be in a position to make informed choices when taking out personal loans.

Final Words

There is no doubt that, if used properly, personal loans can help you achieve your goals. However, during your personal loan shopping, you should do enough research. We help consumers to not only compare the different options available but also find a reliable lender. Whenever you are looking to get a personal loan online, consider working with us for a great borrowing experience.

Guide To Personal Loans


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