10 questions to ask before applying for a personal loan

Select’s editorial team works independently to review financial products and write articles that we think our readers will find useful. We earn commission from affiliate partners on many offers, but not all offers on Select are from affiliate partners.

Personal loans can be an affordable alternative to credit cards and help you finance life’s big purchases while saving on interest.

Increasingly, personal loans are gaining in popularity, with an estimated 20.2 million borrowers in the United States according to online loan marketplace Lending Tree.

It’s essential that you have a clear repayment plan, whether you’re looking to take out a personal loan to consolidate debt, finance a home renovation, finance your next big trip or pay for a move abroad.

Below, Select offers you 10 questions to ask yourself to be well prepared for a new personal loan.

1. How much do I need?

The first step in choosing a personal loan is knowing how much you need. The smallest personal loans start at around $500, but most lenders offer a minimum of $1,000 to $2,000. If you need less than $500, it may be easier to save some extra money up front or borrow money from a friend or family member if you are in the need.

For borrowers looking for smaller loans, PenFed, a federal credit union, offers a wide range of personal loan options, and customers can borrow as little as $600 or up to $35,000.

2. Do I want to pay my creditors directly or receive money in my bank account?

When you take out a personal loan, the money is usually paid directly into your checking account. But if you’re using a debt consolidation loan, some lenders offer the option of sending the funds directly to your other creditors and bypassing your bank account altogether.

If you prefer a hands-on approach or are using the money for something other than paying off an existing debt, transfer the funds to your checking account.

A Marcus by Goldman Sachs personal loan can be a good choice if you are looking for a no-fee personal loan to finance debt consolidation. Marcus lets you send money to up to 10 creditors, then deposits any additional money you borrow directly into your linked bank account.

3. How long do I have to repay?

You will need to start repaying the loan company in monthly installments within 30 days. Most lenders offer repayment terms between six months and seven years. Your interest rate and your monthly payment will both be affected by the term of the loan you choose.

4. How much will I pay in interest?

Your interest rate depends on a number of factors, including your credit score, the amount of the loan, and your term (how long you will repay the loan). Interest rates can be as low as 3.49% and as high as 29.99% or more. Generally, you get the lowest interest rate when you have good or excellent credit and choose the shortest possible repayment term.

According to the most recent data from the Fed, the average 24-month APR for personal loans is 9.39%. This is often well below the average credit card APR, which is why many consumers use loans to refinance credit card debt.

The APR of a personal loan is most often fixed, which means that it remains the same for the duration of the loan.

5. Can I afford the monthly payment?

When you apply for a personal loan, you have the flexibility to choose the repayment plan that best suits your income level and cash flow. Lenders sometimes offer an incentive to use autopay, reducing your APR by 0.25% or 0.50%.

Some people prefer to make their monthly payments as low as possible, so they choose to repay their loan over several months or years. Others prefer to pay off their loan as quickly as possible, so they choose the highest monthly payment.

The choice of a low monthly payment and a long repayment term often comes with the highest interest rates. It might not look like it because your monthly payments are much smaller, but you end up paying more for the loan over its lifetime.

As a general rule, borrowers should aim to spend no more than 35% to 43% on debt, including mortgages, car loans and personal loan repayments. So if your monthly net salary is $4,000, for example, you should ideally keep all of your debt at $1,720 or less each month.

Mortgage lenders in particular have been known to refuse loans to people with a debt-to-income ratio above 43%, but personal lenders tend to be a bit more lenient, especially if you have good credit and proof. of income. If you think you can temporarily manage higher payments in order to save a lot on interest, you may be able to stretch this ratio a bit to accept a higher monthly payment.

It’s harder to get approved with a debt ratio above 40%, and stretching yourself too much can lead to cash flow problems. You should only do this on a temporary basis and if you have some sort of safety net, such as a partner’s income or an emergency fund.

6. Does the personal loan have fees?

Personal lenders may charge registration or origination fees, but most charge no fees other than interest.

Origination fees are a one-time upfront fee that your lender subtracts from your loan to pay for administration and processing fees. It is usually between 1% and 5%, but is sometimes charged as a flat fee. For example, if you take out a $10,000 loan and there is a 5% origination fee, you will only receive $9,500 and $500 will go to your lender. It’s best to avoid assembly fees if possible.

Check out our top personal loan picks:

Select the list of The 5 best personal loans

7. Do I have a sufficient credit score?

Before you start applying for personal loans, it’s important to know your credit score to make sure you can qualify. Most personal lenders look for applicants with good credit, especially online banks. However, if you have an existing relationship with a bank, you can get approved for a favorable deal if you have a good history of paying bills on time and meeting the terms of your previous loans and accounts.

Sometimes credit unions offer lower interest rates on personal loans and work with borrowers who have fair or average credit scores. But you often have to become a member and sometimes you have to open a savings account before you can qualify for a loan.

For people who don’t have a great credit history, Upstart accepts applicants who either have poor credit history or no credit score at all. You’ll likely pay higher fees and interest rates than if you had a good credit score, so be sure to read the terms and conditions clearly before signing up for the loan.

8. What other choices do I have?

If you’re looking to pay off your debts, balance transfer cards are another option.

With a limited-time promotional 0% APR, a balance transfer card lets you pay no interest for up to 21 months, easily saving you hundreds.

And depending on your situation, you can also transfer more than one credit card balance to the new card (as long as the total doesn’t exceed your credit limit).

Some of the best interest-free credit cards that offer balance transfers are the Citi Simplicity® card, the US Bank Visa® Platinum card, and the Wells Fargo Reflect℠ card.

However, there are a few drawbacks to balance transfer cards, including balance transfer limits (which are often lower than your card’s actual limit) and balance transfer fees (usually 3%), unless you can get a no-cost alternative like the Wings Visa Platinum. Map.

In addition to balance transfers, 0% APR credit cards are also excellent for funding large purchases that you want to pay off over time. Here are our top uninteresting picks balance transfer credit card:

Best for 21 months

Best for 20 months

Best for 18 months

Best for 15 months

9. How soon do I need the funds?

Some personal lenders, like LightStream, deliver funds electronically the same day you are approved; Discover Personal Loans will deliver the funds the next business day. Other lenders need up to 10 business days. If quick access to money is important to your situation, be sure to select lenders with fast delivery.

10. How will a personal loan affect my credit rating?

Personal loans are a form of installment credit, while credit cards are considered revolving credit. Having both types of credit in your profile will strengthen your credit mix.

Having a diverse mix of credits is helpful, but that’s not all. Some say adding a new installment loan, like a car loan or mortgage, can boost your score, but there’s no sense in going into debt (plus interest) unless you really need it.

To maintain a good credit rating, focus on the two most important factors first: on-time payments and credit usage.

While taking out an installment loan on its own is not going to dramatically increase your score, using a personal loan to pay off revolving debt will result in the most noticeable increase in your credit score. Once your cards are paid off, keep your spending below 10% of your available credit and notice the difference it makes.

Select now has a widget where you can enter your personal information and be matched with personal loan offers without damaging your credit score.

At the end of the line

Personal loans are a great alternative to credit cards at 0% APR, but like any financial product, they are more beneficial when you have a plan. Once you’ve answered the questions above, submit an inquiry on the lender’s website or a third-party lending marketplace so you can see your options without hurting your credit score. After seeing what you are prequalified for, only then should you follow through with a thorough investigation.

For Amex EveryDay® Credit Card rates and fees, click here

Information on the The Wings Visa Platinum Card, Amex EveryDay® Credit Card and Capital One Cards were independently collected by Select and were not reviewed or provided by the card issuer prior to publication.

Editorial note: Any opinions, analyses, criticisms or recommendations expressed in this article are those of Select’s editorial staff only and have not been reviewed, endorsed or otherwise endorsed by any third party.