ZelphinaPersonal loans explained: APR, fees and prequalification
A plain-English guide to how personal loans work and what to compare before you accept an offer.
Key points
- A personal loan is a fixed amount you repay in fixed monthly installments over a set term.
- Compare offers by APR, not just the interest rate. APR also includes lender fees such as an origination fee.
- Checking your rate with prequalification usually uses a soft inquiry, which does not affect your credit scores. A full application usually triggers a hard inquiry.
- A lower monthly payment over a longer term can cost more in total interest.
How a personal loan works
With a personal loan, a lender gives you a lump sum that you repay in equal monthly payments over a fixed term, often between one and seven years depending on the lender. Most personal loans are unsecured, which means you do not put up a house or car as collateral. The lender decides whether to approve you, and at what rate, based on factors like your credit history, income and existing debts.
People use personal loans for many reasons: consolidating higher-interest balances, paying for a home repair, covering a medical bill, or spreading out the cost of a large purchase.
Interest rate vs. APR
The interest rate is what the lender charges you to borrow the money. The APR (annual percentage rate) is a broader measure: it combines the interest rate with certain fees charged when the loan is made, such as an origination fee. Because APR captures more of the total cost, it is the better number for comparing two offers side by side. Compare APR to APR, not APR to interest rate.
Costs to look for
| Cost | What it is |
|---|---|
| Origination fee | A one-time fee some lenders charge to process the loan, often taken out of the amount you receive. |
| Late fee | Charged if a payment arrives after the due date. |
| Prepayment penalty | Some lenders charge a fee if you pay the loan off early. Many do not; check the terms. |
| Total interest | The total you pay on top of the amount borrowed. A longer term usually means a smaller payment but more total interest. |
Prequalification and your credit
Many lenders let you check an estimated rate before you apply. This usually uses a soft inquiry, which does not affect your credit scores. When you submit a full application, the lender typically makes a hard inquiry, which can lower your scores a little because scoring models consider how recently and how often you apply for credit. An estimated rate is not an approval: the final rate and amount are set by the lender after the full application.
Questions to ask before you accept
- What is the APR, and what fees are included in it?
- What will my monthly payment be, and what will I pay in total over the full term?
- Is there a prepayment penalty?
- When will the money arrive, and is any fee deducted from it?
- Can I comfortably afford the payment if my income changes?
Ready to look at personal loan offers?
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