How Do Personal Loans Work? A Beginner's Guide

Have you ever faced an unexpected expense or wanted to finance a big purchase without maxing out your credit card? A personal loan may be the solution. But how do personal loans work?

In this beginner’s guide, we’ll break down everything you need to know about personal loans—how they function, the steps involved, and how to decide if one is right for you.

What is a personal loan?

A personal loan allows you to borrow a fixed amount of money and repay it over a set period, usually in monthly installments. Unlike credit cards, which are revolving credit, personal loans provide a lump sum upfront.

Most personal loans are unsecured, meaning you don’t need to put up collateral. However, there are secured personal loans that do require collateral, often offering lower interest rates in return. At MIT Federal Credit Union, personal loans are unsecured, meaning you won’t need to use your car or home as security.

Why should you get a personal loan?

• Debt Consolidation – One of the most common uses is to combine multiple high-interest debts into a single loan. If you qualify for a personal loan with a lower interest rate than your existing debts, you could save money on interest payments and pay off debt faster. To learn more, read our blog post about debt consolidation.
• Major Purchases or Expenses – If you’re turning into a new chapter of life, a personal loan can make your dreams come true sooner than without it. Whether it’s a home improvement project, wedding, honeymoon, or financing adoption or IVF treatments, a personal loan can get you where you want to be.
• Unexpected Expenses – In the case of an emergency, a lump-sum loan can cover major expenses that would otherwise rack up high interest. This could include medical bills, car repairs, or urgent travel needs.

How do personal loans work?

If you’ve decided a personal loan is right for you, you might be wondering, “So, how do personal loans work?” Here are the four simple steps involved in taking out a personal loan.

1. Apply – First, you’ll complete an application with the lender of your choice whether that be a traditional bank, credit union, online lender, or peer-to-peer lending platform. At MIT Federal Credit Union, you can apply online in minutes. MIT FCU offers a variety of loan types including a Share Secured Loan, Credit Builder Loan, Rental Assistance Loan, and Fuel Assistance Loan.
2. Get Approved – Next, the lender will consider several factors that determine your eligibility including your creditworthiness and financial stability. They will evaluate your credit score, credit history, income, debt-to-income-ratio, and employment history. Adding a co-signer with good credit can improve your approval chances if you need a boost.
3. Receive Funds – Once approved, the loan amount will be deposited into your bank account. Personal loans can be used for almost anything, unlike some loans with specific purposes (e.g., student loans or mortgages). Avoid using Personal loans for luxury splurges. Instead, it’s best to use them for expenses that improve your financial situation or wellbeing.'
4. Repay in Installments – Lastly, you’ll repay the loan in monthly payments over the loan term. Keep in mind that missing payments can hurt your credit score, and that some lenders will charge origination or prepayment fees. At MIT FCU, your Personal loan won’t come with processing or service fees or a pre-payment penalty. This means that you have the option to pay off your loan early.

What to keep in mind about Personal Loans

Get started with a Personal Loan from MIT Federal Credit Union

As a credit union, MIT FCU is a not-for-profit cooperative that gives back to its members with great savings rates and lower loan rates. Wherever you are on your financial journey, our team is here to meet you where you are. Explore our personal loan options and take the next step on your journey today!