Personal loans can provide an affordable alternative to credit cards and help you finance life’s big purchases while saving on interest.
Increasingly, personal loans are growing in popularity, with roughly 20.2 million borrowers in the U.S. according to the online lending marketplace Lending Tree.
It’s critical that you have a clear repayment plan, whether you’re looking to take out a personal loan to consolidate debt, finance a home improvement, fund your next big trip or pay for a cross-country move.
Below, Select offers 10 questions you should ask yourself to make sure you’re 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 loan sizes begin at around $500, but most lenders offer a minimum of $1,000 to $2,000. If you need less than $500, it might be easier to save up extra cash in advance or borrow the money from a friend or family member if you’re in a pinch.
For borrowers looking for smaller loans, PenFed, a federal credit union, provides a wide range of personal loan options, and customers can borrow as little as $600 or as much as $50,000.
2. Do I want to pay my creditors directly or have money sent to my bank account?
When you take out a personal loan, the cash is usually delivered directly to your checking account. But if you’re using a loan for debt consolidation, a few lenders offer the option to send the funds directly to your other creditors and skip your bank account altogether.
If you prefer a hands-on approach or are using the money for something other than paying off existing debt, have the funds wired to your checking account.
A Marcus by Goldman Sachs Personal Loan may be a good choice if you’re looking for a no-fee personal loan to finance debt consolidation. Marcus allows you to send money to up to 10 creditors, and then deposits any additional money you borrow directly into your linked bank account.
3. How long will I have to pay it back?
You’ll have to begin paying the loan company back in monthly installments within 30 days. Most lenders provide repayment terms between six months and seven years. Both your interest rate and monthly payment will be impacted by the length 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, loan amount and your term (length of time you’ll be paying the loan back). Interest rates can be as low as 3.49% and as high as 29.99% or more. Typically, you’ll get the lowest interest rate when you have a good or excellent credit score and you choose the shortest repayment term possible.
According to the Fed’s most recent data, the average APR for 24-month 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.
Personal loan APR is most often fixed, which means it stays the same for the life of the loan.
5. Can I afford the monthly payment?
When you apply for a personal loan, you have the opportunity to choose which repayment plan works best for your income level and cash flow. Lenders will sometimes provide an incentive for using autopay, lowering your APR by 0.25% or 0.50%.
Some people prefer to make their monthly payments as low as possible, so they choose to pay back their loan over several months or years. Others prefer to pay their loan off as quickly as possible, so they choose the highest monthly payment.
Choosing a low monthly payment and a long repayment term often comes with the highest interest rates. It might not seem like it because your monthly payments are so much smaller, but you actually 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 payments. So if your monthly take home pay is $4,000, for instance, you should ideally keep all total debt obligations at, or under $1,720 each month.
Mortgage lenders in particular are known for denying loans to people with debt-to-income ratios higher than 43%, but personal loan lenders tend to be a bit more forgiving — especially if you have a good credit score and proof of income. If you think you can temporarily handle higher payments in order to save a lot on interest, you may be able to stretch this ratio a bit to take on a higher monthly payment.
It’s harder to be approved with a debt-to-income ratio above 40%, and stretching yourself too thin could lead to cash flow problems. You should only do this as a temporary measure and if you have some kind of safety net, such as a partner’s income or an emergency fund.
6. Does the personal loan have fees?
Personal loan lenders may charge a sign-up, or origination, fee, but most don’t charge any fees other than interest.
An origination fee is a one-time upfront charge that your lender subtracts from your loan to pay for administration and processing costs. It’s usually between 1% and 5%, but sometimes it’s charged as a flat-rate fee. For example, if you took out a loan for $10,000 and there was a 5% origination fee, you would only receive $9,500 and $500 would go back to your lender. It’s best to avoid origination fees if possible.
7. Do I have a good enough 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 loan lenders are looking for applicants to have a good credit score, particularly online banks. However, if you have an existing relationship with a bank, you may get approved for a favorable deal if you have a good history of paying bills on time and honoring the terms of your past loans and accounts.
Sometimes, credit unions will offer lower interest rates on personal loans and work with borrowers who have fair or average credit scores. But you often need to become a member and sometimes you need 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 have insufficient credit history or don’t have a credit score at all. You will likely pay higher fees and interest rates than if you had a good credit score, so be sure to clearly read the terms and conditions before you sign on for the loan.
8. What other choices do I have?
If you’re looking to pay off debt, balance transfer cards are another option.
With a limited-time promotional 0% APR, a balance transfer card allows you to pay zero interest for up to 21 months, easily saving you hundreds.
And depending on your situation, you may also be able to 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 no-interest credit cards that offer balance transfers are the Citi Simplicity® Card, the U.S. Bank Visa® Platinum Card and the Wells Fargo Reflect℠ Card.
However, balance transfer cards have a few draw backs, including balance transfer limits (which is often lower than your actual card limit) and balance transfer fees (typically 3%), unless you can get a no-fee alternative like the Wings Visa Platinum Card.
In addition to balance transfers, 0% APR credit cards are also excellent for financing large purchases that you want to pay for over time. Here are our top choices for no-interest balance transfer credit cards:
Best for 21 months
- Citi Simplicity® Card
- Wells Fargo Reflect℠ Card
Best for 20 months
- U.S. Bank Visa® Platinum Card
Best for 18 months
- Citi® Double Cash Card
Best for 15 months
- Amex EveryDay® Credit Card
- Capital One SavorOne Cash Rewards Credit Card
9. How soon do I need the funds?
Some personal loan lenders, like LightStream, deliver funds electronically on the same day you are approved; Discover Personal Loans will deliver fund the next business day. Other lenders need up to 10 business days. If quick access to money is important for your situation, be sure to select lenders with fast delivery.