Personal loans first-timer's guide: 7 questions to ask (2024)

Many loans seem self-explanatory based on their titles. It’s clear, for instance, that an auto loan will help you get a car. Or that a student loan goes to fund education. Mortgages finance houses, business loans bankroll business ventures, and so on.

By comparison, the term “personal loan” doesn’t reveal much about how this type of financing can help reach your goals. In fact, you can put the money from a personal loan toward just about anything you wish. And, if the lender is satisfied with your income information, you can often receive the loan funds in your account within a week or less.

If you're looking to explore this option, first ask yourself these questions:

1. How do I know if a personal loan is right for me?

Applying for a personal loan makes the most sense in certain cases. For instance:

• It may be the least expensive form of credit available to you:Make sure you explore every available alternative before you start applying for any kind of loan. Would a 0 percent APR credit card or balance transfer, for example, offer a more sustainable or cheaper choice? (Of course, you'd need to pay off the balance by the time the 0 percent rate expires.)
• You plan to do something that could give you a return on your investment:Home renovation is a popular option for this type of loan. Because home equity lines of credit (HELOCs) and home equity loans can also be good options for funding a home remodel, make sure you talk with your banker to find the product that works best for your situation.
• You feel confident making the monthly payments:Explore ways you can bring in extra income, cut unnecessary expenses, or both, to help you meet your repayment obligations. Generally, the higher your credit score, the lower (to a point) your interest rate will be on a personal loan.

2. When should I consider alternatives to a personal loan?

In each of the following situations, you might be better served by choosing a different kind of financing:

• Medical expenses:Before taking on a personal loan ask about financing options offered through your doctor’s office.
• Discretionary spending (big-ticket items):For nice-to-have purchases, consider waiting until you’ve saved up the funds to move forward. If there’s a true urgency (e.g., major appliance malfunction), a 0 percent interest rate credit card might be a viable alternative.
• Debt consolidation:A personal loan can work well for debt consolidation. However, if you already struggle with your credit score, you might get slapped with a high interest rate on a personal loan. That higher rate could further expose you to high monthly payments. Consider a balance transfer to a 0 percent APR credit card as a way to quickly pay down debt without racking up more.
• Paying for a car (in some cases):Auto loan rates will likely be lower than those you can get for a personal loan. That’s mostly because the car itself serves as collateral.
• College tuition:Student loans are still your best option when it comes to paying for higher education. Rates are typically lower, and unlike personal loans, you aren't required to make your first payment until after you've completed your studies.
• Emergency expenses:Get in the habit of building up an emergency fund so you can respond to unexpected circ*mstances without accruing debt.

3. How much can I borrow and how do I receive the money?>

|If approved for the loan, you receive the principal in one lump sum payout. The amount you can borrow depends on a number of factors, including your credit score. Generally speaking, the principal amount often sits somewhere between $1,000 and $25,000, though some banks offer higher loan amounts for their customers. In considering how much to borrow, make sure you feel comfortable making the monthly payments.

4. How do I receive the money and what will my payments look like?

A personal loan is an installment loan. That means you owe a fixed amount each month until you pay off the entire amount. Most personal loans have a payback period between 12 and 60 months. The term of a loan is the amount of time it takes to pay off the entire amount – assuming you make all your payments on time.

Personal loans may be either short-term (1 to 5 years) or long-term (up to 30 years). Either way, by the time your term is complete, you will need to have paid off the principal (the lump-sum amount you receive). You’ll also need to factor in monthly interest.

Depending on the amount needed for your loan, and your current (or projected) financial standing, you’ll want to consider:

• Am I better off choosing a longer loan term so each monthly payment will be less?
• Or, should I opt for a shorter term so I spend less on interest over the life of the loan?
• Is there a prepayment penalty if I want to pay back my loan before the term is up?

5. How much interest should I expect to pay?

Many (though not all) personal loans are unsecured. An unsecured loan doesn’t require the borrower to put up collateral, such as a home or car, to match the value of the amount borrowed.

Unsecured also means if you were to default on the loan, the lender wouldn’t be able to claim your property as they would in the case of a secured loan. To offset this risk lenders will often charge higher interest rates.

Typically, personal loan companies will charge between 7 and 17 percent annual percentage rate (APR) based on a combination of factors. These can include an applicant’s credit score, funding and operating costs, risk premiums and profit margins.

According toFederal Reserve data, the average APR on a 24-month personal loan at a commercial bank was 10.63 percent in 2022. But, the rates can be even higher (above 17 percent) if you have poor credit.

Take a moment to check your credit score, many banks offer this as a free service for customers.Does it make sense to spend time paying down debt to boost your score and get a better rate? Or, should you consider a secured personal loan? Collateral for a loan can include personal property, as well as savings account funds or certificates of deposit (CDs).

6. Will applying for a personal loan hurt my credit?

When you apply for loans, potential lenders will pull your credit history to help determine whether or not they are willing to loan you money. In many cases, this type of credit check is considered a hard inquiry, which can cause your score to dip for a few months.

It may not be a big deal if you have strong credit. But if you have concerns about your credit standing, talk to your lender and ask for loan applications that only use a soft inquiry, which doesn't affect your score.

7.Which type of lender should I choose?

Do some comparison shopping. Rates and fees can vary between lenders so it’s best to dive in and weigh your options before applying.

If you are looking for fixed rates and a loan that doesn’t require collateral, explore aPersonal Loanand take steps toward your financial goals today.