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How Do Personal Loans Work?

August 27, 2019 by Emma Gordon

person looking through their wallet wondering, "how do personal loans work?"

As far as financial needs go, needing more money is a relatively common one. After all, who hasn’t wished they had a few more dollars lining their pockets? A fuller billfold means you can take on unexpected bills, necessary repairs, and financial emergencies with greater confidence.

When your wallet’s empty, a personal loan may be there to help, but it’s not always immediately clear when or how you should use these financial products. There’s a lot to know about personal loans before you’re ready to borrow, and it may be overwhelming.                 

That’s perfectly normal — which is why we’re here to help you have a better understanding of this process.

Previously on our blog, we’ve answered the question “what is a personal loan?” Today, we’re answering the question, “how do personal loans work?”, so you know more about what awaits you should you ever need to borrow cash from MoneyKey.

Finding the right loan…

Unsecured, secured, personal lines of credit, car loans, student loans, mortgages — and more. The world of personal loans is a diverse one.

At first, the magnitude of your choice can be overwhelming, but having a large selection to choose from is a blessing in disguise.

The personal loan you end up taking should match your needs as closely as possible. The trick is to research your options before you send off an application, to make sure the loan will:

  1. give you the amount that you need for your emergency;
  2. have manageable terms, rates, and fees you can meet without endangering the rest of your budget.

The more you do your research with these two thoughts in mind, the more likely you’ll find one with terms and conditions that fit. Take care to look for a loan through traditional financial institutions, like a bank or credit union, as well as alternative lending options like online lenders to compare what’s available.

person using their laptop

… and the right lender

Before you check out a new restaurant, you likely take a look at Google Reviews to see what other people have to say about it. When you’re looking to buy a set of affordable noise-canceling headphones, you look at the reviews to see if they can actually silence background noises like they claim. As a savvy consumer in the 21st century, this is a normal part of your shopping experience, so it should be easy to apply the same strategy when shopping around for a loan.

Part of answering the question “how do personal loans work?” is knowing how a lender operates. In addition to comparing the rates, terms, and conditions of each product before you apply, you’ll want to do the appropriate amount of research on your loan provider. You need to confirm your lender has all the makings of a company that has your back.

Whether it’s a mainstream bank or an alternative lender, any legitimate financial organization will have an established online presence. This makes it easy to check what other borrowers have to say about their experience, giving you a good look at how a company treats their customers.

smiley faces on a chalk board

At the time this article was published, MoneyKey boasts an 8.8 out of 10 rating on TrustPilot, a popular consumer review website. Although our service averages a “great” rating, roughly three-quarters of our customers (76 percent) have given us an “excellent rating” for how quick and easy we make the experience, as well as our five-star customer service.

Are you eligible?

Once you find a loan and lender that ticks all your boxes, you have to check if you do the same for your lender. After all, getting a loan is a transaction that involves both borrowing and lending; it has to work for both sides. You may be ready to borrow, but is your lender ready to lend?

To see if you meet their criteria as a borrower, you need to know what a lender expects from their customers. Most lenders have requirements that borrowers must meet before they can qualify.

Mainstream banks often have a minimum requirement for your credit score before they’re willing to lend you any cash. Online lenders may look at your score as well, but they also look at your income and employment history to determine your eligibility and ability to repay a loan.

This system helps those people who are often locked out of traditional borrowing due to low and thin credit. Whereas a traditional financial institution may cut off any prospective borrower with a sub-prime score, an alternative lender may not.

checking off boxes

Other requirements needed before you qualify differ from lender to lender, but here at MoneyKey, you must:

  • Be of legal age to contract in your state
  • Be a US citizen or permanent resident
  • Be a resident in the state where our product is offered
  • Have an active bank account
  • Have a regular source of income
  • Have a valid contact number and an active email address

This list is an example of the basic eligibility criteria set out by some lenders. If you have all of the basics, you can move onto the application process.

Do you have what it takes to apply?

This step is a little more complex than the basic eligibility, but it shouldn’t be seen as an obstacle preventing you from getting the cash you need.

Lenders use the application process to understand your needs and your financial standing. In other words, it’s a way for a lender to see if they match your priorities from above:

  • Can they give you the amount you need?
  • Do you have the financial capability to pay back the principal (the amount you owe) plus interest and fees by their scheduled due date/dates?

Typically, you’ll have to submit both contact and financial information in an application to prove that:

  • you live in a state where the lender is licensed, as state regulations often affect loan limits
  • you can repay what you intend to borrow by term

Sometimes, proving these things may involve a lot of work on your end. Not all lenders are committed to simplifying the borrowing experience by creating a convenient online application. Mainstream banks may ask their borrowers to jump through hoops to prove they’re creditworthy, filling out endless pages of financial information before they’re approved.

Applying doesn’t have to be hard

person filling out application on a tablet

As an alternative to complicated mainstream borrowing, we’ve streamlined our application to make it as simple as possible. You’ll need to provide basic information to show things like proof of income and your Social Security Number (SSN).

As a result, it takes only a few minutes to fill out the initial application if you have this information handy. From there, our Customer Care team will verify this information if you meet our requirements as part of our fast-tracked approval system.

While some lenders may take a few days or even weeks to approve you, our system promises a quicker turnaround. If you get approved, you’ll generally get a cash loan by the next business day.

That’s because we understand our customers typically need cash advances for help with unexpected and urgent expenses — things like necessary auto repairs or prescription medicine that can’t wait.

Personal loans – how much can I borrow?

If you’ve ever typed “how much can I borrow personal loan” into an Internet search and hoped you’d get lucky, know that there isn’t a stock answer for every borrower.

Most lending companies have a maximum loan amount they’re willing to lend to customers. Although there may be some exceptions, this limit is typically set by the lending laws in your state, as well as the kind of loan you’re applying for — after all, a mortgage is much larger than a payday loan.

Whether you qualify for the full amount depends on your financial profile, as well as your ability to repay any money you borrow. This means, depending on your finances, you may be approved for a loan that’s smaller than your initial request.

How long are personal loans?

clock on a wall

The timeframe of your loan depends on what kind of loan you’ve been approved for. While some products may have terms that last decades (think a mortgage or a particularly tenacious student loan), others have a comparatively short repayment schedule.

Those with the shortest terms typically include:  

Installment loans: Typically, you’ll pay the principal, interest, and fees in installments scheduled over several weeks. These payments coincide with multiple pay dates, giving you more time to repay an installment loan than a payday cash advance.

Payday loans: Generally, you have to repay the entirety of your loan, including interest and fees, by your next pay date. Due to its brief timeframe, a payday loan works best as a bridge until your next payday. If you have any questions about why you would take out this kind of loan, we’re here to help you understand the difference between installment and payday loans. Our post profiles both loan types to help you decide which one would work best for you.

Line of credit: As an open-ended borrowing option, a personal line of credit functions similarly to a credit card, in that you’re provided with revolving credit. You only need to start paying once you withdraw from your available credit, and you may pay the minimum monthly balance if you can’t pay it off in full. However, we encourage our borrowers to pay off as much as they can as soon as they can. Once you pay it off to a zero balance, you can withdraw money up to your available credit limit without submitting a new application.

What can I use a personal loan for?

Whether you end up with an installment loan, payday loan, or personal line of credit, these are examples of short-term cash flow solutions. They’re meant to bridge the gap between paychecks, so you can take on essential repairs or payments when your savings fall short.

In a nutshell, they’re designed to help you face unexpected and non-recurring bills you wouldn’t be able to pay by yourself.

On the flip side, installment loans and payday loans aren’t meant for chronic financial issues, debt consolidation, or buying a large, unnecessary purchase upfront.

A responsible use for your personal loan:

Imagine you live on a strict budget with very little savings set aside. You just got a new job that requires a strict uniform, including non-slip shoes that cost $100. You won’t have the money for these shoes until you start working, but you can’t start working until you have the uniform.

5 and 10 dollar bills

A personal loan may help you out in this situation, letting you take on an essential purchase you can’t postpone. You’ll then pay it back with your first paycheck.

A not so great use for your personal loan:

It’s been a long, cold winter where you live, and you’re left to jealously scroll through pictures of sunny beaches on your Instagram feed from the confines of your home. After seeing everyone else’s vacation photos, the fear of missing out convinces you that you deserve a little holiday of your own. But without enough savings to cover your flights, you decide to take out a loan to finance your trip.

Although it’s tempting to treat yourself, you shouldn’t use a personal loan to do so. It’s better for your finances if you postpone a vacation and save up for it later. The same goes for financing an extravagant wedding, upgrading your cell phone, or buying season tickets for your favorite football team.

If you can’t pay for these non-essential experiences or items, look to your finances for an answer. You may be able to cut out unnecessary spending in your budget to increase your savings for fun activities.

How many personal loans can you have?

The answer depends on the type of loan you want and where you’re getting it. Having a diverse portfolio of credit can actually be a good thing. This contributes towards your overall credit mix, one of five categories used by FICO when determining your score.

If a credit bureau sees you have a healthy mix of a mortgage, student loan, installment loan, and credit cards, and they’re all in good standing, this reflects well on your ability to repay what you owe.

That being said, most lenders will limit how much they’re willing to lend to a single customer at one time. Here at MoneyKey, we encourage our customers to pay off any existing cash loan they may have before they apply for another one.

Is it the right time to borrow?

Now that you have all the facts, you’ll be in a better position to answer the last question you need to ask before you apply for a personal loan: is it the right time to borrow?

If you were thinking of a personal loan as a way to finance your next shopping spree, maybe not. But it might be a practical option if you need help paying an unexpected and costly surcharge on a bill you can’t pay on your own.

There are a lot of legitimate reasons why you may need a little extra help taking on a bill or repair, but it doesn’t mean you should snap up the first offer you find. Take a moment to compare the options you have, so you can find one that helps you cover your expense with terms and rates you can manage. And if you ever have any questions, get in touch with us here at MoneyKey for more information on online loans.


We’ve helped over 250,000 customers.Let us help you!

Not all applications are approved; duration of approval process may vary.

* If your loan is approved before 9:00 PM ET from Monday through Thursday, or before 6:30 PM ET Sunday, the funds will typically be deposited into your bank account the next business day, otherwise, your funds will be deposited into your bank account in two (2) business days. The date and time funds are made available to you are subject to your bank's policies.

Product availability varies by state. To see loan products offered in your state of residence, please visit our Rates and Terms page. MoneyKey – TX, Inc. is licensed as a Credit Access Business (CAB), License No. 16641-62815, by the Office of the Consumer Credit Commissioner and registered as a Credit Services Organization (CSO), Registration No. 20110150, by the State of Texas. All loans for which MoneyKey acts as a CSO and/or CAB are funded by an unaffiliated third-party lender and serviced by MoneyKey.

In the State of California, MoneyKey – CA, Inc. is licensed by the Department of Business Oversight pursuant to California Finance Lenders Law License No. 60DBO43590 and California Deferred Deposit Transaction Law License No.1004516.

Reviews and any ratings referenced are based on TrustPilot reviews. Images are for illustrative purposes only. Reviews reflect individuals’ opinions and may not be illustrative of all individual experiences with MoneyKey.

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