The RAVE Guide To Personal Loans

RAVE’s comprehensive plan for getting a personal loan when you need it.

Guide to personal loans

In situations of a financial crisis or an emergency, a personal loan can help. It’s a resource that many use to cover minor to major expenses such as home renovations, tuition, car repairs, and more. Personal loans don’t require collateral because they are unsecured. That causes higher interest rates than a secured loan, but there are also advantages to borrowing a personal loan. 

This guide to personal loans will answer many of the questions that borrowers have before applying. In addition, we’ll give you a comprehensive breakdown of the critical factors to consider when searching for a reliable lender. We’ll also explain how a personal loan affects your finances.

Please continue reading if you would like more information on how to get a personal loan.

How Does a Personal Loan Work?

In a nutshell, if you fill out an application to get a personal loan, you’re requesting a specific amount of money that you’ll pay off every month until your balance is paid in full. In addition, personal loans usually come with fixed interest rates, which vary depending on your financial history. 

Your loan agreement contains terms and conditions that are contingent on your financial situation. Loans get offered in various amounts, from as low as around $1000 to as high as $50,000 or more. The amount you can borrow also depends on the loan lender. The loan repayment period can be as short as one year or as long as five years. In some situations, you can stretch out your payments for even longer. 

It’s important to understand that loans are a form of unsecured debt. Therefore, you don’t have to use your car or home as collateral assets. For this reason, your interest rate will be higher, like it is with auto and mortgage loans. 

If you want to get a better idea of how much you’re going to pay for a personal loan, pay attention to the APR or annual percentage rate. This amount includes various costs in addition to your interest rate, such as an origination fee. The origination fee is the processing fee that ranges from one to eight percent of the total loan amount. Some loan companies do not charge a loan processing fee at all. 

Pros and cons of personal loans

Advantages of a Personal Loan

There are significant advantages to borrowing by applying for a personal loan despite the high interest rates. Consider the following ways that a personal loan can assist you:

Faster Processing Times

There’s not a lot of extensive paperwork associated with personal loans. If your credit history is good, many banks will grant your request for a personal loan instantly, especially if you’re already a customer of the institution. You can obtain most original loans in under ten minutes.


You’re not required to use the amount of money that you borrow in any particular way. That makes a personal loan more flexible than other loans with specific purposes, such as education, mortgage, and auto loans. The flexibility of a personal loan also makes it the ideal choice for unexpected expenses.

Build or Repair Your Credit

Building your credit over a short time frame is another excellent opportunity offered with a personal loan. Expand your portfolio and even increase your credit score and limit by making payments on time every month. Properly managing your loan balances can do wonders for your overall credit.

Disadvantages of a Personal Loan

As you may have expected, there are a few drawbacks to taking out a personal loan. For example, if you’re not managing your finances properly, you could experience the following shortcomings to requesting a personal loan:

High Interest Rates

There are other options for loans that may be more beneficial if you have a good credit history. As mentioned, since personal loans aren’t backed by collateral assets, the interest rates are higher. A home equity loan or even a line of credit might be your preferred choice in these instances. The interest rates are most likely lower with these forms of borrowing. 

May Cause Overspending

Since you can use personal loans for any reason, you might potentially borrow more money than you can repay, and the temptation to splurge can be great. This ties into irresponsible borrowing, when individuals request more cash than they actually need. Remember, you must pay your loan back every month, so don’t enter an agreement that you can’t uphold.

Damaged Credit

If for any reason, you do not repay your loan promptly, you can seriously damage your credit. Of course, there are situations when lenders offer leniency if you face a financial crisis, like getting laid off or a major medical bill. However, you can still damage your credit if you’re unable to repay the loan.  

What Are Some Common Reasons to Request a Personal Loan?

uses for personal loans

Whether you’re trying to take your dream vacation, fix some things around the house, pay off medical bills, or finance your wedding, a personal loan is a feasible solution. Here are the most common reasons that people choose to pursue a personal loan:

Debt Consolidation

If you find that you’re having a hard time repaying multiple types of debt, consider requesting a personal loan so that you can streamline your payments. This option typically comes with a lower interest rate overall since you’re combining everything into one. The only better choice might be a credit card with a 0 percent balance transfer fee if you qualify.

Home Improvement Expenses

People that need to make significant repairs to their homes and don’t have enough equity often choose personal loans to finance the renovations.

Credit Card Refinancing

Since personal loans typically have lower rates of interest than credit cards, they’re a viable option for credit card refinancing. Just be sure that you’ll actually be saving money after the personal loan’s origination fee, monthly installments, and interest rate. 

Car Financing

You could purchase a new car with a personal loan, but note that you might be better off trying to qualify for a car loan. It will probably come with lower interest and fewer fees. That is because car loans utilize the car itself as collateral. 

Major Purchases

If you’re making a big purchase, the personal loan may not cost as much with the interest rate as a credit card would. So always consider if you truly need the purchase or if it’s better to wait and pay cash for it.

Medical Expenses

Consider taking out a personal loan to prevent your medical bills from entering collections. But check first—there is a chance that your medical provider will let you make a repayment arrangement without charging interest.

Small Business Financing

Need money to start up a small business? If you haven’t started to earn money, a personal loan can help you get you up and running. The only caveat is that you still have to repay the loan even if your business isn’t successful. 

10 Important Questions To Ask Before You Take Out a Personal Loan

Here is a list of questions to ask yourself and the lender before getting a loan:


How Much Cash Should I Borrow?

The lowest and highest amount of money that you can borrow gets determined by the lender. They will look at your credit portfolio and determine how much money they are willing to let you borrow. 

Consider why you need the money. If you want to purchase something you don’t necessarily need, try saving money for that purchase using a high-interest savings account. 

If you’re consolidating your debt or trying to cover a large unexpected expense, you could certainly consider a personal loan. However, be sure that you only borrow exactly what you need, as personal loans become more costly as time progresses. 

How Long Does it Take to Get The Money?

Before you decide on which loan product you want to apply for, ask the lender how long it’ll take to receive the funds. This answer does depend on how much you borrow and how long the application takes, but overall, the paperwork will typically get processed within two to three days. 

How Do I Find Out My Current Credit Score?

The numbers on your credit score will have a significant impact on whether or not your loan request gets approved. The reasoning behind this is because your credit history provides insight into your capacity to repay personal loans. 

Though there are multiple credit score models, most range from 300-850. The higher your credit score is, the better chance you have to get a reasonable interest rate on your loan. For example, a score of 500 is considered “fair” credit but may come with higher rates because of the risk the lender is assuming.

What Documents Do I Need to Borrow a Loan?

The process of applying for a loan requires that you verify your identity, give a copy of your social security number, show proof of income, and declare the reason for borrowing the loan. 

We’ll provide more specific examples of the documents later in this guide. The lender will determine if you need to provide any additional information after they review your paperwork.

How Does Loan Repayment Work?

Your monthly budget will be impacted once you’ve been approved for and have accepted a personal loan, so we can’t stress enough how important it is not to sign up for more than you can handle.

The loan repayment term depends on how much you borrowed and how high the interest rate is. So get a comprehensive understanding of not only how much you have to pay each month, but the due date for each payment and when your payments first start. 

You should also consult with the loan lender regarding fees for late payments and penalties for early payoff.

What is the Interest Rate Going to Be on the Loan?

Your interest rate depends on how high or low your credit score is, your monthly income, and a few other factors. If the interest rate is too high, it can impact whether you decide to accept a personal loan. 

On average, personal loans carry interest rates starting at 11.49%. However, the rates can get as high as 25%, so you should ask your lender for all information regarding this figure to be sure. 

Almost all banking institutions will offer you fixed-interest rates, but some will ask if you want an interest rate that reduces the balance. This choice drastically affects your EMI during the repayment term. 

The account of your interest gets coupled with your monthly payments. Before you sign the loan agreement, ask the lender how the interest rate will affect the borrowing cost. 

Note: The EMI is the Equated Monthly Installment, and this is how much you’ll pay each month on your loan balance. The EMI gets used to pay both the interest that the personal loan accrues, as well as the principal loan amount. This amount is fixed, meaning it will not change during the repayment term.

Be sure that you’re aware of how high of a payment you can handle from month to month. Calculate your EMI beforehand so that you don’t end up in a situation where you cannot make your payments on time. 

An online personal loan EMI calculator can help avoid penalties and give you a better idea of how much you can expect to pay every month. 

Are There Any Hidden Fees?

Many personal loans include origination fees. Origination fees account for a percentage of the loan amount. Some banks refer to these fees as closing costs. Be sure to factor these fees in when deciding whether or not a loan is worth it.

Is a Short or Long Repayment Term Better?

When taking out a personal loan, it is crucial to consider the term of the loan. If you don’t mind a larger monthly payment, choosing a shorter timeline may be fine. However, keep in mind that taking out a loan with a long repayment timeline will afford you smaller monthly payments.

Is This Lender Reliable?

Popular banking institutions usually adhere to federal laws and regulations. However, keep in mind that not every lender is reliable, and some lenders intend to scam you. When shopping for a personal loan, beware of the following warning signs of predatory lenders:

  • There are hidden costs and unclear fees
  • The process to sign up is full of pressure
  • No-credit-check loans

Does the Personal Loan Require a Co-signer?

Some lenders will allow a co-signer on a loan in cases where an applicant is having difficulty getting approved for the loan by themselves. Co-signers agree to be responsible for the loan repayment if somehow you are unable to make the payments on the loan. 

Additionally, some banks will allow for co-applicants. When dealing with co-applicants, both parties are equally responsible for the loan.


If you’re feeling pressure from the lender to apply for a loan, if the fees aren’t spelled out in your contract, or if the lender makes promises that sound preposterously too good to be true, you may very well be dealing with a predatory lender.

What You Should Know Before Applying: Additional Factors to Consider

Although personal loans are a valuable tool to help with financial needs, they can land you in debt and all of the trouble associated with being delinquent on a loan if not appropriately handled. Below we’ve listed three more critical factors that you should consider before applying for any type of personal loan.

Total Cost Assessment

Aside from interest, there are other costs associated with personal loans. Those costs include penalties, prepayment charges, and processing fees that you should take into consideration. Assessing these costs beforehand will enable you to manage your loan better.

Fixed Interest Rate: With this interest rate, you must pay a fixed amount of interest on the principal amount for the entirety of the loan. The EMIs get calculated based on tenure, principal, and interest rate. With this setup, you will be paying a fixed amount of interest until your final EMI on the principal amount. That is regardless of the amount you’ve paid off already.

Reducing Balance Interest Rate: This method requires that a part of the EMI goes towards the repayment of the principal loan amount. In other words, as you repay the loan over time, your principal amount and liability become lower in turn. 

Therefore the interest is calculated on the principal amount remaining, which decreases with every monthly payment. Using this approach, you have to pay less to repay the loan. Therefore, when compared to a flat interest rate loan, your EMI amount will be lower.

Active Loans

This factor has everything to do with your credit history and how good your credit happens to be. The number of active loans that you have will impact your ability to repay your loan. Moreover, banks usually check the number of active loans and the amount of debt that you currently have before granting a personal loan.

For example, if you have multiple outstanding loans such as a car loan, home loan, or education loan, it is wise to avoid applying for a personal loan. This is especially true if you are already having difficulty making payments. If your personal loan does get approved, it might only serve to worsen your financial burden. 

Usually, banks do not consider applicants who have multiple outstanding loans as prime candidates for personal loans. As a result, they’re liable to reject your application altogether.

Borrow Responsibly

Be sure that you can afford the monthly payments. Your monthly payment will consist of three essential components. Being aware of these things is a great way to make sure that you can afford the monthly payments:

Interest rate: refers to how much it costs you to borrow your loan

Loan balance: refers to the amount of your loan.

Repayment term: refers to how long it will take you to repay your loan. 

How to Apply For a Personal Loan

How to Apply For a Personal Loan

While applying for a personal loan is a simple process, getting the loan application approved may prove to be more challenging to accomplish. According to the bank’s protocol, you will have to submit documents such as recent salary slips, KYC (know your customer) documents, proof of income or employment, etc. 

After all of the required documents have been submitted, a credit history check gets performed. This information helps the lender to determine your ability to repay the loan and check the number of active loans that you currently have.

Documentation for a Personal Loan

Here are the documents you’ll need to apply:

Loan Application

To begin the lending process, lenders require potential borrowers to complete and submit a loan application. Because each lender has its own loan application, the specific requirements may vary.

However, most loans boil down to providing basic information such as how much you want to borrow and the purpose for the loan.

The formating among lenders will vary as well. For example, there are many online lenders, which have an experience that happens entirely online. However, other lenders may need to speak to you about your application over the phone to give you a decision.

Furthermore, many brick-and-mortar banking institutions require that their applicants submit a paper application in person.

Income and Employer Verification

Lenders want to see that you have the means to pay back the debts that you already have in conjunction with the new loan. To achieve this, lenders usually require potential borrowers to provide their employment history and current earnings as an aspect of the application process. 

Forms of income verification for traditional employment often include:

  • Bank statements
  • Returns
  • Paystubs
  • Employer contact information
  • W-2s and 1099s
  • Potential borrowers who are self-employed must use 1099 forms, bank statements, and income tax returns

Proof of Your Identity

Typically lenders will require their applicants to provide at least two forms of government-issued identification to prove that they’re a United States citizen and at least 18 years old. Moreover, taking this precaution reduces the possibility of identity theft. Forms of government-issued identification that are acceptable includes:

  • Passport
  • Driver’s license
  • Other state-issued ID
  • Birth certificate 
  • Certificate of citizenship
  • Military ID

Proof of Residence

Confirming your employment status is not the only thing that lenders are concerned with as it pertains to prospective borrowers; they want to know if you have a stable living condition.

That means providing proof of address, including a copy of your lease or other rental agreement, a recent utility bill, proof of home, auto, or rental insurance which lists your address, or a voter registration card. 

What to Do if You Get Denied?

You may be denied a personal loan for many different reasons. Your credit score may be too low for starters, or possibly your DTI (debt-to-income ratio) is too high. It’s feasible that you asked for more money the lenders thought you were capable of paying back based on factors such as outstanding debts and employment stability.

If your loan application gets denied, there are some actions you can take to improve your chances of getting a loan in the future:

  • Ask for the exact reason that your application got denied
  • Improve your credit score by paying down on your debts
  • Increase the amount of your income
  • Try applying for a smaller loan amount
  • Consider using a co-signer
  • Look over your loans application for inaccuracies or mistakes
  • Compare all lender requirements
  • Check for potential errors in your credit report

Personal Loan Alternatives

In the instance that you get denied a personal loan, or you decide that it isn’t the best option for your situation, here are some helpful alternatives:


HELOC or a home equity line of credit is a revolving line of credit secured by the worth of your home. HELOCs generally have lower interest rates than personal loans. Moreover, you may be able to deduct the interest if you itemize your taxes. Conversely, any interest that gets paid on your personal loan is not tax-deductible.

Credit Cards

Credit cards can be a reasonable alternative to personal loans so long as you pay them monthly; doing so affords you the potential to earn rewards.

Cash-out Refinance

A cash-out refinance lets you take out a new mortgage that’s more than your current one, and you can take a portion of the loan and keep it for yourself as cash. Typically this has a lower interest rate than a personal loan, however with longer terms, so it’s possible to pay more money overall.

Unsecured Personal Loan vs. Secured Personal Loan

Secured personal loans require the borrower to use an asset such as a certificate of deposit (CD) or a vehicle as collateral. If the borrower fails to make the payments, the lender can repossess the asset. As a result, interest rates on secured loans are usually lower than those of unsecured loans.

Final Thoughts: Guide to Personal Loans

Guide to Personal Loans

Let’s face it, financial hardships are never planned, and having a life jacket to help you in times of need can be a godsend. Personal loans can be just what you need when you’re in a financial bind, so long as they are handled responsibly.

Never borrow more money than you’re capable of paying back. That will only serve to place you in an even deeper hole causing your situation to be more desperate than the first. 

Beware of predatory lenders who intend on scamming you. Telltale signs such as hidden or obscure fees and pressure to complete the applications are signs of predatory lenders and something you must watch out for.

Remember, if you wish to qualify for the best loan rate possible, you typically need a high credit score in conjunction with stable employment and living arrangements. These things bode well with lenders who are seeking to loan money to responsible borrowers.


Heather Ryerson

Heather Ryerson is a freelance writer who enjoys creating content across a broad range of industries, including travel, education, cannabis, and more. An iced coffee addict and Maine native, she is happiest when she is fully caffeinated, working near any body of water, and hanging out with the fam.