personal loan
An unsecured loan provided to an individual based on creditworthiness, typically used for debt consolidation, major purchases, or unexpected expenses.
Example
“The personal loan from his credit union offered 8% APR — much cheaper than the 24% on his credit card.”
Memory Tip
PERSONAL loan = unsecured borrowing for personal needs. Your credit score determines the rate.
Why It Matters
Personal loans are important because they offer a flexible way to access funds quickly without putting assets at risk like a secured loan would require. Understanding personal loans helps individuals make informed decisions about borrowing, comparing interest rates, and evaluating whether consolidating debt or financing a purchase makes financial sense.
Common Misconception
Many people believe that personal loans always have lower interest rates than credit cards, but this is not always true. While personal loans can offer better rates for those with good credit, individuals with poor creditworthiness may actually face higher interest rates on a personal loan than on some credit card offers.
In Practice
Sarah has three credit cards with balances totaling 15,000 dollars at 18-22 percent interest rates. She applies for a personal loan for 15,000 dollars and receives approval at 10 percent interest with a 5-year term, resulting in monthly payments of about 318 dollars and significant interest savings compared to minimum payments on her credit cards.
Etymology
PERSONAL (individual, not business) LOAN. A LOAN for PERSONAL use, based on personal credit.
Common Misspellings
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Related Terms
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