A personal loan is money borrowed from a bank, credit union, or online lender that you repay in equal monthly installments, usually over two to seven years.

Personal loans are generally unsecured, which means they do not require collateral. Instead, lenders consider your credit profile, income, and debts during the loan approval process. If you fail to repay the loan, your credit may take a hit.

• It is the cheapest form of financing.

• It is used for something that has the potential to increase your financial situation, such as consolidating debt or improving your home.

In contrast, a personal loan used for discretionary expenses, such as a holidays, can be expensive. NerdWallet recommends using non-essential savings to avoid finance charges.

If you are borrowing for medical or emergency expenses, consider cheaper alternatives first, like community assistance or payment plans.

A NerdWallet Poll released in November 2021 found that nearly 3 in 10 Americans (29%) took out a personal loan in the past 12 months, borrowing about $385 billion.

The average loan amount was $5,210, according to the survey, and the three most common uses of a personal loan by respondents were:

• Debt consolidation. Of the 550 people surveyed, 40% used a personal loan to consolidate their debts. Debt Consolidation combines your debt into one loan, ideally with a lower interest rate that reduces your total debt and helps you pay it off faster.

• Big events. The survey found that 39% of recent personal borrowers used a loan to manage the cost of a big event, which could include a wedding or vacation.

• Emergency expenses. According to the survey, 35% of respondents used a personal loan to cover an emergency.

Personal loan interest rates vary by lender, and the rate you receive depends on factors such as your credit score, income, and debt-to-equity ratio.

Borrowers with high credit scores typically receive lower rates, around 11% to 15%, while those with low credit scores can get an APR of around 25%. Here’s what personal loan interest rates look like, on average:

Source: Average rates are based on aggregated, anonymized bid data from prequalified users in NerdWallet’s Lender Marketplace from January 1, 2022 to July 31, 2022. Rates are estimates only and are not specific to any lender. The lowest credit scores — typically below 500 FICO — are unlikely to qualify. The information in this table only applies to lenders with an APR of less than 36%.

Some lenders charge assembly costs to cover loan processing fees. Lenders deduct fees from the loan proceeds or include them in the balance. This one-time upfront fee is included in the loan annual percentage rateso take that into account when comparing costs between lenders.

Other fees to watch out for include late fees, insufficient funds fees, and prepayment fees, which are penalties for prepaying your loan.

You can get a personal loan from online lenders, banks, and credit unions. The best option depends on where you can get the rate, terms and features that match your financial situation.

For example, if a quick and convenient loan application is important to you, consider a online lender. On the other hand, if lower rates and in-person support are important, a bank loan or credit union loan might be the best option.

Depending on your financial situation and the purpose of the loan, a personal loan may be the right decision or one that you should avoid.

Lower starting APR than credit cards. For consumers with strong credit, personal loans generally have lower APRs than credit cards. While some credit cards offer 0% interest during an introductory period, rates are generally higher after the period ends.

Fixed rates and monthly payments. Personal loans have fixed rates and monthly payments over a fixed term, so you always know what you owe and for how long. Other financing options like home equity lines of credit have variable rates which can mean fluctuating monthly payments.

Flexible loan amounts. Depending on the lender and your creditworthiness, you may have access to personal loans from $1,000 to $100,000. This range meets a wide variety of expenses, from small emergencies to large home improvement projects.

No guarantees. Unlike home equity loans which require you to secure the loan with your home, unsecured personal loans do not require collateral. You may damage your credit if you can’t repay, but you won’t lose any assets.

Maximum APRs can be high. If you have a low credit score, personal loan APRs may be higher than credit card APRs.

Possible costs. Borrowers may have to pay fees – such as origination or late fees – in addition to their loan repayments.

Increase in debt. Taking out a personal loan adds debt to your budget, so it’s important to consider the additional obligation and feel comfortable paying it off.

Here are the things to consider when shopping around and comparing personal loans.

Flexible credit check. Most online lenders allow you to check your estimated interest rate by performing a soft credit check during pre-qualification. It will not affect your credit score, so it pays to take the steps to pre-qualify for a loan from several lenders and compare rates and loan features.

Annual percentage rates. Since APRs include interest rates and fees, they provide an apples-to-apples cost comparison for borrowers choosing between personal loan offers. Use our personal loan calculator to see estimated rates and payments based on credit scores.

Repayment Terms. Having a wide variety of repayment term options gives you the option of getting a shorter term and paying less interest or a longer term and having a low monthly payment. Depending on your budget, one may make more sense financially than the other.

Amount of the loan. Depending on the amount of money you need, one lender might be more attractive than another. Some lenders offer small to medium loans, like $2,000 to $40,000, while others offer loans up to $100,000. Figuring out how much you need in advance will help you compare and decide.

Special features. You can benefit from features such as automatic payment rate discounts, unemployment protection or financial coaching. See if the lender you’re considering offers any benefits that could help you achieve your financial goals.

You can pre-qualify on NerdWallet and view rates from lenders who partner with us. Pre-qualification triggers a soft credit check, which does not impact your score.

After comparing the offers and selecting a loan with the lowest rate and payments adapted to your budget, you apply for the loan.

The loan application may require additional personal information, including employment status and educational history. You may also need to authorize the lender to pull your credit reports and verify your income.

Your first loan payment is usually due within 30 days of loan approval and funding.