Personal Loans

Understand when it’s a good time to get a personal loan, what you need to know before getting a loan, such as interest rates and risks associated with personal loans, and the best lenders to consider.

Personal Loans

woman sits on carpeted floor with laptop considering personal loan options

Personal Loan: What It Is, How It Works, and How to Get One

Frequently Asked Questions

What are the tax consequences of personal loans?

Personal loans are not counted as income and are therefore not subject to federal income tax. Interest on personal loans is not tax deductible as with mortgage loans, however. If personal loans are ever partially or completely discharged or forgiven as part of a personal bankruptcy or a debt restructuring the amount not paid will be considered income and will be subject to federal income tax.

Learn More: Are Personal Loans Tax Deductible?
Do personal loans affect credit scores?

Applying for one or more personal loans can affect your credit score, as lenders must pull your full credit report before approving a loan in order to determine your creditworthiness. A full credit check, also known as a hard pull of your credit, can temporarily lower your credit score by a small amount. How you maintain the status of your personal loan also affects your credit score. If you make payments on time and in full it will help your credit score and if you don’t it will hurt your score.

Learn More: How Personal Loans Affect Your Credit Score
Are there risks associated with personal loans?

As with taking on any type of debt, personal loans can present certain risks - the biggest being not being able to service the debt in the form of making monthly payments. This can lead to damaged credit, having the debt go into collections and potentially having to take drastic steps like declaring personal bankruptcy.

Learn More: 8 Possible Risks of Unsecured Personal Loans
Are credit cards considered a personal loan?

Credit cards are similar to personal loans in that they are extensions of unsecured credit. However, personal loans are generally lump sum loans made by lenders to consumers with a specific repayment term and fixed interest rate. Credit cards are revolving lines of credit with balances that can be paid back over time if not paid in full each month.

Learn More: Personal Loans vs. Credit Cards: What’s the Difference?
What should you know about personal loan interest rates?

Interest rates on personal loans can vary significantly based on the credit score of the borrower as well as income level, amount borrowed and the lender involved. Most personal loans are made at fixed interest rates but variable interest rates that are indexed to the prime rate will likely become more common in a rising rate environment as lenders seek to keep consistent profit margins.

Learn More: Understanding Personal Loan Interest Rates

Find the Best Personal Loan for You

The image features a graphic with the title “Investopedia Best Personal Loans” inside a diamond-shaped white area. Surrounding it are stylized illustrations of coins, sparkles, and a person being lifted by a large magnet-like object, symbolizing financial attraction or solutions. The background is in shades of pink and red, suggesting themes of monetary assistance or credit-related topics.

Best Emergency Loans for Bad Credit for September 2025

Key Terms

Signature Loan—A Popular Type of Unsecured Loan

A signature loan is a personal loan that can be used for any purpose and is offered by lenders to known borrowers with only their signature on the loan document as a form of collateral. Signature loans typically carry higher interest rates vs. loans that require physical collateral since they entail more risk to the lender.

Learn More
Peer-to-Peer (P2P) Lending

Peer-to-Peer (P2P) Lending is a type of social lending that allows borrowers to bypass the traditional financial system for getting loans and borrow directly from other individuals through P2P lending platforms like Prosper or Lending Club, which set the terms and interest rates of the loans based on borrower creditworthiness.

Learn More
Collateralization

Collateralization is the process by which a loan is secured against default by pledging sufficiently valuable assets. If the borrower ever defaulted on a collateralized loan the lender could seize the pledged assets and sell them to recoup the loan loss.

Learn More
Lawsuit Settlement Loan

A lawsuit settlement loan is a type of short term lump sum loan made by a lender to a borrower who expects to receive a reward settlement as part of a class action lawsuit or personal injury lawsuit. Once a legal settlement is made to the borrower the loan is repaid with interest. Lawsuit settlement loans typically have higher interest rates compared to traditional personal loans.

Learn More
Stretch Loan

A stretch loan is a short-term form of borrowing meant to cover a shortfall in income. Stretch loans are similar to payday loans and carry higher interest rates than traditional personal loans that have longer repayment terms.

Learn More
Cash Advance

A cash advance is a very short term loan made through a bank, credit union, credit card issuer or non-traditional financial institution and is often used to cover immediate cash needs resulting from unexpected financial demands such as medical expenses or car repairs.

Learn More
Payday Loan

Payday loans are a form of short term credit that are typically offered by non-traditional consumer finance companies and carry very high interest rates. The principal of payday loans can be a portion or more of the borrowers next paycheck. Payday loan interest rates are determined by the borrowers income but tend to be among the highest rates charged in the financial markets.

Learn More