Here are some things to know about personal loans, from determining the type of loan you need to filling out a personal loan application.
Article: 6 minutes
Updated: July 10, 2026 Published: September 6, 2022
By: USAA Reviewed by: Editorial contributors
Life doesn’t always go according to plan, and even the most disciplined financial habits can be disrupted by unexpected expenses. When your savings aren’t enough, understanding how personal loans work can help you navigate financial surprises while staying on track with your long-term goals.
"Life is what happens to us when we're making other plans."
We've all heard some version of that famous statement, the meaning of which is simple: Stuff happens.
In the world of personal finance, we can be disciplined about maintaining our budget and our spending habits, building our savings and tracking our investments. And there's always a chance that something could happen, something expensive enough that we need an assist to help keep our current finances and our financial futures safe.
In these instances, when an emergency fund isn't available or won't suffice, a personal loan might be the solution.
A personal loan is money you borrow from either a bank or other financial institution, such as a credit union, or from a private lending company. Many times, people use these loans to cover unexpected expenses that they would struggle to afford on their own. Other times, it's used for more fun items like improvements to a home. Anyone want a pool?
In short, the lender agrees to provide the money, and the borrower agrees to pay it back, with interest, through installments over the life of the loan.
The annual percentage rate, or APR, on a personal loan is the interest rate the borrower pays in addition to the principal amount of the loan. It can vary based on market conditions and the borrower's creditworthiness as determined by the lender.
A borrower with a poor credit score, for example, may be seen as a bigger risk in the lender's eyes and be given a higher APR as a result. A borrower with excellent credit may receive a lower interest rate. Each lender has its own criteria for determining how to assign interest rates. A credit score may be just one of many factors.
Personal loans can be unsecured or secured.
An unsecured loan means there's no collateral attached that may be taken by the lender if the borrower is unable to make payments. These are riskier loans for the lender, so APRs might be higher, along with the qualifications to apply.
A secured loan, on the other hand, is backed by collateral, like property or savings accounts, for example, that the lender can take possession of if the borrower defaults on the loan. This is less risky for the lender, so the loan might be easier to get, and the corresponding APR might be lower, too.
Fixed-rate loans have a set APR, so the amount owed each month will be the same for the life of the loan. In contrast, the APR and interest amount owed change on variable-rate loans. You may start paying the loan back with a low APR, and then after a few months that rate increases, along with the payment owed. With a variable-rate loan, you'll want to make sure you can afford to cover those increasing payments without risking default and losing collateral.
When you apply for the loan with a creditworthy person who agrees to take responsibility for paying it back if you're unable to do it but who doesn't have access to the money, you have a co-signer. Young adults who are getting their start after college and who don't have much of a credit history might ask their parents to co-sign a loan to help them out, for example.
When you have a co-borrower, it's essentially the same except that both signers have access to the money. With either of these types, the lender will review all signers' or borrowers' information to determine the APR and other loan terms.
First and foremost, you need to know why you want or need the loan. Common uses for personal loans are to pay for expenses, such as medical bills, new appliances or home renovations and repairs.
Another use is debt consolidation. A personal loan may have a lower interest rate than the rate on other types of loans or a credit card. If that's the case, it might make sense to use the lower-rate personal loan to pay off the high-rate debts. Before doing this, be sure to see the loan terms and conditions of those debts to try to avoid any penalties, like prepayment penalties, for example.
If a personal loan still sounds like the right option, the next step might be prequalification, if your lender does that. For this step, you'll likely provide details such as your name, contact information, income and the amount you want to borrow.
The lender will take that info and do a soft credit inquiry, which won't affect your credit score, to see if you fit their criteria. It’s important to note that not all lenders follow this step, so ask what their process is. If they don’t, the inquiry to see if you qualify for the loan might be a hard inquiry.
If you prequalify, you may receive a letter with estimates about the loan and terms. Remember: A prequalification isn't a guaranteed approval. If you're shopping around with different lenders, here are some good questions to answer as it can help you best compare loan options:
Once you get your answers, you'll feel more confident as you apply for the loan. Also, don't forget the important step of analyzing your budget. This gives you confidence that you'll be able to pay the loan back and you can handle the associated risks. Now it's time to apply.
Many lenders provide easy online applications for personal loans. Before you start, gather the information and documents you may need. Different lenders have different requirements for the application. Common examples include:
With your personal loan, you're ready to handle whatever it is that life has thrown your way. And by taking the time to research and plan, you'll know that you've done your best to protect your overall budget and other financial goals.
The USAA Advice Center provides general advice, tools and resources to guide your journey. Content may mention products, features or services that USAA Federal Savings Bank does not offer. The information contained is provided for informational purposes only and is not intended to represent any endorsement, expressed or implied, by USAA or any affiliates. All information provided is subject to change without notice.