What is a personal loan: an uncomplicated guide

At times, we may experience financial difficulties. In such cases, can a personal loan be ideal? But what exactly is a personal loan? Read on to find out!


Learn more about what to consider when taking on a personal loan

Learn all about what a personal loan is! Source: Adobe Stock.

One of the solutions available on the market for those who are quick with personal money is leasing. And you can do that with a personal loan. So comes the question: what is a personal loan?

This alternative guarantees a financial breath for those who need it and offers simpler access than other services. In addition, it allows good negotiations with better payment terms.

rocket on growing coins and piggy bank

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Some people want to improve their financial situation to get out of debt and take back control of their budget. And also to fulfill a dream like buying a high-value good, traveling, or studying.

Is this your case? So you need to understand better personal loans and what the benefits are. And you will find all this in today’s article. So, read on and find out!

How does a personal loan work?

Personal loan. Calculator, dollar bills and pen.
Find out how a personal loan works! Source: Adobe Stock.

A personal loan is a certain amount of money granted by a bank or financial institution. However, its biggest differential is the freedom of its use. That means you don’t have to say how you’re going to spend that money.

In exchange for this service, the institution charges monthly interest, which varies according to the negotiation signed in the contract and the company’s policy.

Other details can interfere with this amount, such as the customer’s credit analysis and the amount borrowed. All of this can generate a rate readjustment.

In a personal loan, the institution lends the money to an individual with valid identity documents in the country.

As it is not necessary to communicate the use of this amount, it is sufficient to negotiate contractual obligations, such as the number of installments and interest percentages.

After collecting the necessary documentation, the institution will carry out a credit analysis of the applicant in order to know if he is able to pay off the debt.

At this stage, debts, consumption habits, and other public records are analyzed. If everything is ok, approval will be very quick. Check out the pros and cons.


  • It does not need to justify the purpose or objective of the loan;
  • Low rates for those with good credit scores;
  • Approval and quick release for those who have a good score;
  • Allows use for different purposes.


  • You need a good credit score to get better loans and lower rates;
  • Payments may be tighter if your credit score is low;
  • Affects current credit score.
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What can you buy with a personal loan?

There are several reasons that can lead you to apply for this type of credit. For example, getting married, completing your studies, or traveling. Check out!

1) Studies

You are in order to improve your knowledge to stand out. So don’t wait too long and go ahead. It is possible to apply for a loan to pay for a quality undergraduate or graduate degree, for example.

2) Trips

A personal loan to travel can help you control your finances and make your trip cheaper. After all, paying in installments can double the price of the trip. Paying cash using the loan can help you get a discount.

3) Birthday and wedding parties

Birthday and wedding parties can cost a lot more than we can afford. Therefore, the loan can help pay for the organization of the party. Check out what you can cover with the personal loan:

  • Salon rental;
  • Buffet;
  • Decoration;
  • Song;
  • Drinks;
  • Invitations;
  • Sweet and savory;
  • Ceremonies;
  • Clothes of the bride and groom;
  • Wife’s day;
  • Honeymoon.

4) Redecorate the property

Are you looking to redecorate the environment and look of your home? This requires dedication and investments.

You will need a good amount to buy new furniture and decorative objects. With the personal loan, your dream will be one step away from reality.

5) Medical treatment

If you or someone close to you needs a doctor urgently and can’t afford it, taking out a personal loan can help. Thus, you pay the emergency in cash and keep the monthly fees to pay off.

What is a reasonable interest rate for a personal loan?

The interest rate on your loan will be determined based on your credit score. After all, this score is what will tell the creditor how likely you are to pay off what you owe over time.

The reasonable APR rates that exist in the market can vary between 6% and 36%, depending on the credit score.

In this sense, the best option is the one with the lowest APR rate for your credit score. That is, research several options before hiring one.

Other fees you have to pay attention to

In addition to the interest rate, you can find other fees built into the personal loan. One of them is the origination fee, which you pay as if it were a subscription to gain access.

A late payment fee may also be charged to some creditors. Therefore, it is essential to always read the regulation and fees before hiring.

Does getting a personal loan impact your credit score?

report credit score banking borrowing application risk form
See if a personal loan application can affect your credit score! Source: Adobe Stock.

Applying for and having a personal loan approved can have consequences on your credit score. If you make payments on time, you tend to maintain the same level.

However, if you are late on some payments, your score may drop over time. In addition, after applying, your score will fluctuate by about 5 points lower due to the need for credit.

How to choose the best personal loan for your finances?

Before making any decision, research the conditions in several places, both banks and finance companies. Don’t get carried away by the habit of signing contracts with larger banking companies just by name.

This attitude can prevent you from negotiating lower rates, which makes a huge difference.

Also, you need to tread carefully, especially on the internet. That’s because there are numerous unproven ads that can be a fraud.

However, research some options and analyze your goal, how much you want to borrow, and what the interest rates are.

Run some simulations and see what works best for you. Take a look at reviews from other customers as well.

How to apply for a personal loan?

To apply for a personal loan, you must be over 18 years of age and a legally registered citizen. It is essential to have access to your personal and financial data to be provided at the time of registration.

The process can be done online, and approval can be very quick if your credit is good. Evaluate what is best for you and then apply according to your goal.

Moreover, you should learn about the different types of personal loans available in the market before you apply for one. So, check out our post below to find out!

Wedding Loan memo and two piggy banks.

Different types of loans available

Are you in need of money? A loan can be the immediate solution you need. Learn about the main types of loan you can take out.

About the author  /  Sabrina Paes

Content Writer, Copywriter, and Ghostwriter. Content marketing professional with 5 years of experience. Specialist in investment, finance, and technology niche. MBA in Marketing at the University of São Paulo, Brazil. Content Writer by Rock Content, and University of California (UCDAVIS).

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