The Ultimate Guide to Personal Loans

The Ultimate Guide to Personal Loans
Fiona Staff2/5/2021

It’s fairly certain to say that at some point in life, nearly every person will have borrowed money through one form or another. Technically, everyone who owns and uses a credit card is doing just that. If we’re talking about the more conventional definition of borrowing, however, whether it’s for a college education, car, or home, taking out a loan is basically a financial rite of passage. 

While loans with specific use cases (e.g., a student loan, home mortgage, or auto loan) are common and often unavoidable, they aren’t the only ways to borrow money from a certified lender. Everyone has heard of the term “personal loan.” The act of lending itself predates money, back to even ancient times, but it wasn’t until the 21st century (1920 to be exact) when US banks formally started giving out personal loans to consumers. 

What has become of personal loans in the past 100 years? A whole lot, actually. So much so that personal loans are now the fastest-growing consumer lending product in the US. A big industry shift facilitated the so-called “personal loan boom” of the 21st century and, like with most things in modern society, it involved the internet. 

Interested in a loan to consolidate debt or fund a big purchase? With Fiona, you can get matched with personalized loan offers from top providers, fast and easy.

The Evolution of Peer-to-Peer Online Lending

They may not have caused too big a stir at the time, but two events during the 1980s paved the way for the modern-day personal loan. First, in 1985, a mortgage lender called Rock Financial (now Quicken Loans) created the first online loan application and review system. Four years later in 1989, the FICO score was introduced, which revolutionized the way lenders assessed loan applicants based on their credit history. 

It took a while for the technology to really catch up with the concept, but in 2006, Prosper became the first online lender to offer peer-to-peer (p2p) lending for consumers. What is p2p lending, you may ask? In a nutshell, p2p lending is a form of “crowd lending,” in which individual investors, not banks, fund loans. With no need for banks, credit unions, or other traditional financial institutions, platforms like Prosper were able to offer personal loans to consumers through a seamless online process. The platforms didn’t involve a trip to the local bank or lending agency, which often have strict lending criteria and policies, in addition to mountains of paperwork and waiting periods. Instead, they began offering safe and secure personal loans via the use of p2p lending. 

What Can Personal Loans Do For You? 

Now that we got that history lesson out of the way, you might be wondering why it’s beneficial to apply for a personal loan in the first place. The truth is, there are multiple reasons to apply for a personal loan. Think of it as a financial swiss army knife, or a jack of all trades. 

For starters, a personal loan is a great way to fund a big purchase, with loan amounts often as high as $250,000. What kind of purchase? It can be a (link: /learn/articles/using-a-personal-loan-to-pay-for-a-wedding text: wedding), a (link: /learn/articles/a-personal-loan-could-fund-your-home-improvement-costs text: home improvement project), the (link: /learn/articles/planning-for-a-baby-with-a-personal-loan text: birth of a new baby), you name it. That’s the beauty of a personal loan, it’s not tied to a specific purchase, like a home or car. In addition to that, while mortgages and auto loans are forms of secured debt, in which the assets themselves serve as collateral for the loans, an unsecured personal loan is a type of debt that is not tied to any personal asset. Once approved by the loan provider, you’ll get funds in your bank account sometimes as soon as next business day, and you can use it at your own discretion. 

Using a personal loan to fund a big expense also allows the borrower to establish repayment options that match their financial status and budget. While many consumers turn to credit cards for buying high-ticket items, doing so leaves them vulnerable to compounding, high-interest rates. Personal loans typically offer lower APRs (annual percentage rates) than credit cards, and fixed rates as opposed to variable rates. That means that the APR on your personal loan will not change over the course of your repayment period, nor will the size of your monthly payment, which (link: /learn/articles/how-are-personal-loan-repayments-structured text: provides a lot of transparency) during the application process and predictability during your repayment process.

In addition to fixed interest rates, personal loans also have flexible terms, with regard to how long a borrower has to pay back their balance. While credit card debt is due in full every month (i.e., billing cycle) to prevent interest charges, personal loans come with predetermined repayment periods and fixed monthly installments, which typically range from 24 to 84 months (two to seven years). 

Flexible loan terms allow borrowers to choose the option that works best for their specific situation. If someone prefers to pay back their loan quicker and save on total interest, they can choose a shorter term with larger monthly payments. However, if a consumer wants to lower their monthly due to fit their budget, they can stretch out their loan repayment plan for up to seven years, and at the same fixed rate.  

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How Personal Loans Can Help You Get Out of Debt

So far, we’ve talked about personal loans for funding big expenses, which is likely what many consumers assume is their intended use. However, personal loans are even more popular for refinancing and/or consolidating debt, most commonly credit card debt. How does this work? It’s actually pretty straightforward. 

For consumers struggling with mounting high-interest debt, a personal loan is a great opportunity to pay off the debt and then repay the balance with a potentially lower interest rate and more preferable terms. A personal loan can be used to simply refinance debt (e.g., obtain a lower interest rate for the debt from one credit card) or consolidate multiple debts while also lowering your net APR. 

Debt consolidation is beneficial for consumers struggling to juggle multiple monthly bills, as it combines all those debts into one simple monthly payment. Consolidating debt can provide great peace of mind for stressed-out consumers,  while also helping them manage consistent monthly budgets. 

Debt elimination through consolidation is particularly helpful during a recession or time of economic downturn, as it's vital for freeing up cash flow in an event where your income may drop, while your necessary expenses may increase. For small business owners struggling through a recession, (link: /learn/articles/are-you-a-small-business-owner-worried-about-a-recession-consider-a-personal text: personal loans are another lending avenue) in comparison to business and government loans. The added benefit of personal loans is they are not restrictive in how they can be used, while also being easier and faster to obtain, in most cases. 

Boosting Your Creditworthiness With a Personal Loan

When it comes to lending, your credit score/history contribute to a pretty fascinating “chicken or egg” conundrum. Why is that exactly? Well, to be eligible for the best rates on certain credit products (loans, credit cards), you need good to great credit. To boost your creditworthiness, however, you need to establish good habits, like paying your bills on time and in full. 

That’s where a personal loan comes in. While a good credit score will determine what rate you get, personal loan offers are available to consumers all across the credit spectrum. And for (link: /learn/articles/how-personal-loans-can-help-borrowers-with-poor-credit text: borrowers with bad credit), not only do personal loans provide an avenue for funds when other doors may be closed, but they can also serve as a great tool for (link: /learn/articles/how-a-personal-loan-can-help-raise-your-credit-score text: boosting your credit score) through timely payments. This is particularly helpful for consumers struggling to pay off high-interest credit card debt, which can negatively impact a credit score, whereas finding the right personal loan offer can result in realistic, manageable monthly payment options. 

Since building good credit is so important to your creditworthiness, personal loans are an attractive option for younger generations, like millennials and (link: /learn/articles/why-gen-z-gravitates-toward-fintech text: Gen Z), who may not have established credit histories due to their age. And since younger generations tend to be more tech savvy and digitally immersed when compared to their predecessors, online personal loans are more popular among both age groups compared to traditional bank lending options. 

Curious what personal loans can do for you? No matter if you are Gen Z or a boomer, Fiona can match you with personalized loan offers that meet your needs and creditworthiness. 


Bottom Line

By now, you should have a good idea of how online personal loans came to be, how they work, and what their benefits are across a number of different use cases. The only question that remains is, what is the best avenue for finding digital personal loan options that meet your needs and your creditworthiness? 

The answer is Fiona, the leading search, comparison, and recommendation engine for personalized loan offers. Instead of researching multiple lenders in person or online, with Fiona, consumers can get matched with personalized loan offers from a network of top providers, all on one convenient site. The process is fast and easy, only requiring a few simple questions before getting matched with offers in less than 60 seconds. 

Best of all, consumers can get pre-approved offers through Fiona with only a soft pull of their credit — with zero impact to their credit score. People who use Fiona may become eligible for their funds as soon as the next business day if approved, without having to go through any hoops or hurdles. 

So now that you’ve consumed “The Ultimate Guide to Personal Loans,” what is there left to do? Try Fiona today, and see what personalized loan offers await you.

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