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A personal loan is an amount of money you can borrow to use for a variety of purposes. For instance, you may use a personal loan to consolidate debt, pay for home renovations, or plan a dream wedding. Personal loans can be offered by banks, credit unions, or online lenders. The money you borrow must be repaid over time, typically with interest. Some lenders may also charge fees for personal loans.

A personal loan allows you to borrow a lump sum of money to pay for a variety of expenses and then repay those funds in regular payments, or installments, over time. For example, you might use a personal loan to cover:

Personal loans are different from other installment loans—such as student loans, car loans, and mortgage loans—that are used to fund specific expenses like education, vehicles, or homes.

A personal loan is also different from a personal line of credit. A line of credit is not a lump sum amount but instead works like a credit card. You have a set credit line that you can spend money against. As you spend, your available credit is reduced. You can then increase available credit by making a payment toward your credit line.

With a personal loan, there’s typically a fixed end date by which the loan will be paid off. A personal line of credit, on the other hand, may remain open and available to you indefinitely as long as your account remains in good standing with your lender.

Personal loans may be secured or unsecured. A secured personal loan is one that requires some type of collateral as a condition of borrowing. For instance, you may secure a personal loan with cash assets, such as a savings account or certificate of deposit (CD), or with a physical asset, such as your car or boat. If you default on the loan, the lender could keep your collateral to satisfy the debt.

An unsecured personal loan requires no collateral to borrow money. Banks, credit unions, and online lenders can offer both secured and unsecured personal loans to qualified borrowers. Banks generally consider the latter to be riskier than the former because there’s no collateral to collect. That can mean paying a higher interest rate for a personal loan.

To get a personal loan, you need to apply to a lender. Again, this can be a bank, credit union, or online personal loan lender.

Generally, you would first complete an application. The lender reviews it and decides whether to approve or deny it. If approved, you’ll be given the loan terms, which you can accept or reject. If you agree to them, the next step is finalizing your loan paperwork.

When that’s done, the lender will fund the loan, which means paying you the proceeds. Depending on the lender, these may arrive through a direct deposit into your bank account or a check. After the loan is funded, you can use the money as you see fit. You then have to begin repaying the loan according to the terms established in your loan agreement.

When considering a personal loan, it’s helpful to understand how much it may cost. The annual percentage rate (APR) on a personal loan represents the annualized cost of repaying the loan based on the interest rate and fees. The APR and loan term can determine how much you pay in interest total over the life of the loan.

For example, assume you get a $10,000 personal loan with an APR of 7.5%. The loan has a repayment term of 24 months. Using those terms, your monthly payment would be $450 and the total interest paid over the life of the loan would be $799.90.

Now assume you borrow the same amount but with different loan terms. Instead of a two-year term, you have three years to repay the loan, and your interest rate is 6% instead of 7.5%. Using those terms, your monthly payment would drop to $304, but your total interest paid would increase to $951.90.

Comparing the numbers this way is important if you want to get the lowest monthly payment possible or pay the least amount of interest for a personal loan. Using a simple online personal loan calculator can help you determine what kind of payment amount and interest rate are the best fit for your budget.

The first place to look for personal loans may be your current bank or credit union. Your personal banker can advise you on what types of personal loans may be available and the borrowing options for which you’re most likely to qualify.

Personal loans can also be found online. Numerous lenders offer personal loans online. You can apply electronically, get a decision in minutes and, in some cases, get funding in as little as 24 to 48 hours after loan approval.

When comparing personal loans online or off, pay close attention to the details. Specifically, consider the following:

It’s also helpful to check the minimum requirements to qualify for a personal loan. Lenders can have different requirements when it comes to the credit score, income, and debt-to-income ratio that are acceptable to be approved for a personal loan. This can help you narrow down the loans that may best fit your credit and financial profile.

Collateralized loan obligations (CLO) are securities that are backed by a pool of loans. In other words, CLOs are repackaged loans that are sold to investors. They are similar to a collateralized mortgage obligation (CMO), except that the underlying instruments are loans instead of mortgages.

With a collateralized loan obligation, debt payments from the underlying loans are pooled together and distributed to investors of various tranches in the CLO. In a CLO, there are several tranches, as illustrated below:

Investors can choose to invest in whichever tranche meets their risk/return profile. The higher rated the tranche, the less risky and lower the return. For example, the AAA debt tranche comes with the lowest default rate and the lowest return. On the other end of the spectrum, the equity tranche offers the highest default rate and the highest return.

The underlying loans of a CLO are majority comprised of first-lien senior-secured bank loans. Other types of loans that can be found in a CLO are second-lien and unsecured debt. Debt payments made on the underlying loans are pooled together and distributed to investors starting at the top of the tranche to the bottom. The fact is illustrated below:

The illustration above explains why the bottom of the tranche is riskiest but generates the highest return. Investors at the bottom of the tranche face the highest risk. If borrowers in a collateralized loan obligation default and are unable to make their debt payments, investors at the bottom of the tranche would be the first to suffer losses. To compensate for such risks, investors at the bottom of the tranche are provided a higher return.

The creation of a collateralized loan obligation can be simplified as follows:

As mentioned above, collateralized loan obligation managers use the capital raised from investors to purchase loans. However, how are such loans sourced?

It is important to note that CLOs are crucial to the loan markets. According to Reuters, CLO managers are the largest buyers of leveraged loans.

Managers purchase loans through a syndication process. For example, a company may be looking for money to expand their operations and approaches a bank for a $100-million loan. The bank approves the $100-million loan, but to reduce risk, breaks the loan to smaller bits and looks for other lenders to help contribute the $100 million (forms a syndicate). Lenders such as the collateralized loan obligation manager purchase the loans. The process is illustrated below:

To an investor, there are several advantages to investing in a CLO:

The higher-ranking tranches in a CLO are over-collateralized in that even if a number of loans default, the higher-ranking tranches would not be affected. In the event of loan defaults, the lower tranches are the first to suffer losses.

The underlying loans of a collateralized loan obligation are floating-rate loans. This, in effect, results in a low duration. Therefore, collateralized loan obligations are subject to risk from changes in interest rates.

CLOs are actively managed and monitored by a loan manager (or loan managers). Although the managers collect management fees, they are usually linked to the performance of the collateralized loan obligation.

Due to CLOs consisting of floating-rate loans, they can be used as a hedge against inflation.

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