Personal loans are becoming more popular. LendingTree found that in the fourth quarter of 2024, 24.5 million Americans took out personal loans. That’s up from 23.5 million the year before.
People use loans to consolidate debt, finance a large purchase, or renovate homes. Loans tend to have lower interest rates than credit cards and can be used for almost anything.
Before you borrow, it’s important to consider if it’s the right move. Here are a few questions to help you decide if the loan is manageable.
1. How much money do I need?
Most lenders offer personal loans from $1,000 up to $50,000. A few lenders go as low as $500 or as high as $100,000.
You’ll want to borrow enough for your needs so that you don’t have to apply for another loan if you end up short. While taking out as much as possible is tempting, do not over-borrow. The larger your loan, the more interest you will pay.
2. What is my credit score?
Your credit score is one of the first things lenders look at. It helps them decide if you qualify and how much interest to charge. Most lenders look for applicants with good credit over 690. The higher your score, the more loans you’ll be eligible for with favorable terms.
Know your score before you apply. That way, you can avoid applying for loans for which you don’t qualify.
If you’re concerned about poor credit, consider lenders that offer $2,000 bad credit loans with guaranteed approval. Just be cautious of the terms.
Credit unions tend to have lenient credit requirements and cap the APR on personal loans at 18%. Banks may offer loans with good terms to responsible customers, even if their credit is not perfect.
3. Is a personal loan the best choice for me?
Personal loans are helpful, but they’re not always the best fit.
A credit card is better if you need to borrow on a continuing basis. A card with a 0% intro APR can be a great way to pay off debt or finance a large purchase while saving on interest.
A home equity loan gives you funds for home improvements at a low interest rate. Your property is collateral, so you may face foreclosure if you don’t keep up with payments.
Buy Now Pay Later apps can help you finance purchases interest-free when you’re short on cash.
Cash advance apps can help you access small amounts of money to bridge the gap between paychecks. They rarely charge interest but have other fees.
Explore all of your options and consider the full costs before you borrow.
4. Can I afford the monthly payments?
Before accepting any loan offer, make sure you can afford another bill. The monthly payment should easily fit into your budget. Missing payments can lead to late fees, credit damage, and debt collection.
Your total monthly debt payments should be less than 40% of your income. That includes debt you may already have, such as a mortgage, car loan, or student loans.
Estimate your monthly bill. Then, borrow only what you can afford to repay.
5. How much interest will I pay?
Besides the monthly payments, you’ll need to consider how much the loan will cost overall. A lot of that comes down to the interest rate.
Interest is the cost of borrowing money. The rate you receive varies widely depending on your credit score, lender, loan amount, and term. Lenders charge low-risk borrowers less interest. A higher credit score or applying for a secured loan will net you a lower rate.
The loan term is how long you have to repay the money. Generally speaking, a longer loan term means a higher interest rate and lower monthly payment. A shorter loan term will give you a lower interest rate but higher monthly payments.
Lenders tend to charge more interest on a loan with a longer term since you have more time to default. With a shorter loan term, you’ll pay less interest and be out of debt faster.
Take the loan with the lowest interest rate, whose monthly payments you can afford. A lower rate could save you significant money over the life of the loan.
6. Does the personal loan have fees?
Lenders may charge fees besides interest. Potential fees include:
- Origination fee: A one-time upfront charge for processing and underwriting the loan. It ranges from 1% to 12% of the loan amount.
- Application fee: A flat fee to cover the costs of processing your application.
- Late fee: Only charged if you do not pay by the due date.
- Prepayment penalty: Some lenders charge a fee if you pay the loan off early.
Review the fee structure to avoid surprises and note the total cost of borrowing.
7. How long will I have to repay the loan?
Repayment terms on personal loans can range from six months to seven years. It depends on the loan type and lender. You usually repay in monthly installments starting within 30 days.
8. How soon do I need the money?
Some lenders take days or even weeks to process loan applications. Others offer same-day or next-day funding. If you’re facing an emergency, speed matters. Ask how long approval takes and when you will receive your funds.
9. What happens if I can’t repay my loan?
When you fail to pay by the due date, your lender will charge a late fee. If you’re over 30 days late, they will report you to the credit bureaus. The negative mark will remain on your credit report for up to seven years and can drop your score by 100 points or more. Next, they will sell your account to a collection agency, further damaging your credit.
Call your lender immediately if you’re ever in danger of missing a payment. Ask about hardship programs or payment plans. Being proactive, polite, and honest can go a long way. They may be more willing to work with you.
10. Is the lender legit?
The personal loan space is full of predatory lenders looking to exploit people and scam artists. Thoroughly research your lender before you borrow and read customer reviews. Check for ratings on the Better Business Bureau and look over the Consumer Financial Protection Bureau’s consumer complaint database.
A few red flags to be wary of are:
- Unsolicited offers
- Guaranteed approval with no credit check
- APRs over 36%
- Pressure to act immediately
- Demands for upfront payment
- Excessively short repayment terms (a few weeks to a few months).
Steer clear of these lenders so you don’t become worse off financially.
Final Thoughts
Personal loans are flexible financial tools that can help you out, but they are a form of debt. Only take one out when you have a repayment plan in place. Borrowing without a plan to repay will only lead to trouble.
