Understanding a Personal Loan

A personal loan allows you to borrow money to pay for personal expenses and then repay those funds over time. Personal loans are a type of installment debt that allows you to obtain a lump sum of funding. For example, you might use a personal loan to cover:

• Moving expenses
• Debt consolidation
• Medical bills
• Wedding expenses
• Home renovations or repairs
• Funeral costs
• Vacation costs
• Unexpected expenses

These loans are different from other installment loans—such as student loans, car loans, and mortgage loans—that are used to fund specific expenses (i.e. education, vehicle purchase, and home purchase). A personal loan is also different from a personal line of credit. The latter is not a lump sum amount; instead, it works like a credit card. You have a credit line that you can spend money against and, as you do so, your available credit is reduced. You can then free up available credit by making a payment toward your credit line.1 With a personal loan, there’s typically a fixed end date by which the loan will be paid off. A personal line of credit, on the other hand, may remain open and available to you indefinitely as long as your account remains in good standing with your lender.