What Is a Personal Loan?

The type of borrowing most people know best is credit cards, which are a form of revolving debt. They give you access to a pool of cash that you can dip into as needed. You can take as long as you like to pay off this debt, as long as you meet the minimum payment each month, and the interest rate is likely to vary over time.

Personal loans are completely different. They’re a type of installment loan, in which you borrow money from a bank or other lender and pay it back in regular monthly payments over a fixed period of time. The term for most personal loans is between two and five years, but it can be as little as one year or as long as seven. The interest rate is usually fixed over the entire life of the loan.

There are two main types of personal loans:

• Secured Personal Loans. With a secured loan, you offer the bank something of value as collateral, such as your house, car, or the cash in a CD or savings account. If you’re unable to make your payments, the bank can seize your collateral to pay off the loan.

• Unsecured Personal Loans. Most personal loans are unsecured – not backed by any sort of collateral. Instead, the bank looks at your financial history to decide whether you qualify for the loan. Because these loans are riskier for the bank, they tend to come with higher interest rates.