10 Most Important Questions to Ask Before You Take Out a Personal Loan To Avoid Issues

Personal Loan

Personal loan can sometimes serve as an attractive financial option, you know that period in life when it comes handy. It offers a cost-efficient alternative to credit cards and facilitating the management of significant expenses while mitigating interest costs.

The prevalence of personal loans is experiencing a notable upswing, as evidenced by the approximately 20.2 million borrowers in the United States, as reported by the online lending marketplace, Lending Tree.

However, prior to embarking on this financial venture, it is of utmost importance to establish a well-defined repayment strategy. Regardless of whether your intent is to employ a personal loan for the purpose of consolidating debt, enhancing your domicile, financing an extensive journey, or facilitating a cross-country relocation, meticulous deliberation holds significant weight.

In the forthcoming sections, we shall delve into ten crucial questions that warrant contemplation, ensuring your preparedness for the acquisition of a new personal loan.

1. Determining Your Loan Amount?

The initial step in the personal loan selection process involves pinpointing your precise financial requirement. While the minimum loan threshold generally commences at approximately $500, the majority of lending institutions establish a starting point of $1,000 to $2,000. Should your financial need fall below the $500 mark, it could be more expedient to accumulate additional savings or seek assistance from a close acquaintance or family member, particularly in situations of immediate necessity.
For those in search of modest loan sums, PenFed, a federal credit union, extends a diverse array of personal loan alternatives. Here, borrowers have the flexibility to secure loans as meager as $600 or extend to more substantial amounts reaching up to $50,000.

personal finance
personal finance

2. Direct Payment or Bank Transfer?

When securing a personal loan, it’s vital to decide how you want to manage the funds. Typically, personal loan disbursements are channeled directly into your checking account. However, in cases where the loan’s purpose revolves around debt consolidation, certain lenders present an alternative: transmitting the funds directly to your creditors, bypassing your bank account entirely.

If you favor a more hands-on approach or plan to utilize the funds for purposes other than settling existing debts, opting for a direct transfer to your checking account is advisable.

For those seeking a personal loan tailored to debt consolidation, Happy Money emerges as a suitable choice. This lender offers the flexibility of depositing your borrowed funds either into your linked bank account or directly disbursing them to your creditors.

3. What’s the Repayment Duration

What’s the Repayment Duration? After securing a personal loan, your repayment obligations kick in, typically commencing within 30 days. Lenders generally offer a range of repayment terms, spanning from six months to a span of seven years. It’s important to note that your chosen loan duration will influence both the interest rate applied and the size of your monthly installment.

4. What’s the Interest Expense?

The interest you’ll incur on your personal loan hinges on various factors. These include your credit score, the loan amount, and the loan term (the duration over which you’ll repay it). Interest rates can fluctuate significantly, ranging from as low as 5.99% to a high of 29.99% or even more. Typically, you secure a lower interest rate with a good or excellent credit score when opting for a shorter repayment period.

According to recent data from the Fed, the average APR for 24-month personal loans stands at 11.23%. This rate often proves more favorable compared to the typical APR associated with credit cards, which is why many individuals use personal loans to consolidate credit card debt. It’s important to note that personal loan APRs are usually fixed, meaning they remain constant throughout the loan’s duration.

5. Is the Monthly Payment Manageable?

When applying for a personal loan, you’ll be presented with options for structuring your repayment plan to suit your income and financial situation. Some lenders even offer incentives, like a 0.25% or 0.50% APR reduction, if you opt for autopay.
Individuals have varying preferences when it comes to monthly payments. Some favor spreading the loan over several months or years to keep their monthly obligation as low as possible, while others prefer to pay it off swiftly with higher monthly payments.

Selecting a lengthy repayment period with lower monthly payments often accompanies higher interest rates. Although the monthly installments seem more manageable, this approach typically results in paying more interest over the life of the loan.

As a general guideline, it’s advisable not to allocate more than 35% to 43% of your income to debt, including mortgages, car loans, and personal loan repayments. For example, if your monthly take-home pay is $4,000, it’s prudent to keep your total debt obligations at or below $1,720 per month.

Mortgage lenders are particularly strict about debt-to-income ratios exceeding 43%. However, personal loan lenders may be more lenient, especially if you possess a good credit score and can demonstrate a stable income. While it might be possible to temporarily manage higher payments to save on interest, be cautious when approaching a debt-to-income ratio above 40%. Overextending yourself could lead to financial strain, so consider this option only if you have a safety net, such as a partner’s income or an emergency fund.

personal loan

6. Are There Any Fees Associated with the Personal Loan?

While personal loan providers may impose an origination fee, the majority do not charge any fees apart from the interest.
An origination fee is a one-time upfront cost that the lender deducts from your loan amount to cover administrative and processing expenses. Typically ranging from 1% to 5%, it can sometimes be applied as a flat-rate fee. For instance, if you borrowed $10,000 and faced a 5% origination fee, you’d actually receive $9,500, with the remaining $500 going to the lender. Whenever possible, it’s advisable to steer clear of origination fees.

7. Is My Credit Score Adequate?

Before embarking on your personal loan journey, it’s crucial to be aware of your credit score and ensure it meets the necessary criteria for qualification. Many personal loan providers, particularly those online, prefer applicants with a good credit score. However, if you have an established relationship with a bank, a positive track record of timely bill payments, and adherence to previous loan and account terms, you might secure a favorable deal despite a less-than-perfect credit score.
At times, credit unions extend personal loans with lower interest rates to individuals with fair or average credit scores. However, joining such unions is usually a prerequisite, and in some cases, you might need to open a savings account before becoming eligible for a loan.

For those who lack a robust credit history, Upstart offers a potential solution by accepting applicants with insufficient credit history or even those without a credit score. It’s important to note, though, that you may face higher fees and interest rates compared to applicants with excellent credit. Therefore, a comprehensive review of the loan’s terms and conditions is advisable before committing.

8. Are There Alternative Options?

When contemplating your financial needs, consider the possibility of using balance transfer cards, especially if your goal is to eliminate existing debt.
These cards often feature limited-time promotional offers of 0% APR, allowing you to enjoy interest-free periods that can extend up to 21 months, potentially saving you a substantial amount of money. Furthermore, depending on your financial circumstances, you might have the opportunity to transfer multiple credit card balances to your new card, provided that the cumulative balance remains within your credit limit.

Some of the standout choices among no-interest credit cards that facilitate balance transfers include the Citi Simplicity® Card and the Wells Fargo Reflect® Card.

Nevertheless, it’s essential to be aware of the associated limitations of balance transfer cards, including transfer limits, which are often lower than your actual credit limit, and transfer fees, typically around 3%. It’s worth exploring the possibility of obtaining a fee-free alternative like the Wings Visa Platinum Card.

Beyond debt consolidation, 0% APR credit cards also serve as a valuable means of financing significant purchases that you intend to repay over time.

9. What’s My Timeline for Accessing Funds??

Consider your urgency in obtaining the required funds. The speed of fund delivery varies among personal loan lenders.
For instance, lenders like LightStream offer the convenience of electronic fund transfers on the very day you receive approval, while Discover Personal Loans ensure funds are in your possession by the following business day. On the contrary, some lenders may necessitate up to 10 business days to process your request. Therefore, if swift access to funds is pivotal to your circumstances, it’s advisable to opt for lenders that prioritize expeditious delivery.

10. What Impact Will a Personal Loan Have on My Credit Score?

Personal loans represent a form of installment credit, distinguishing them from the revolving credit associated with credit cards. The inclusion of both credit types in your financial profile contributes positively to your credit mix.

However, it’s crucial to remember that while having a diversified credit mix is beneficial, it should align with your actual financial needs. Taking on additional debt, along with its associated interest, should be a thoughtful decision based on necessity.

For maintaining a robust credit score, prioritize the two primary factors: punctual payments and prudent credit utilization. Although the acquisition of an installment loan might not substantially boost your score on its own, its most significant impact can be witnessed when it’s used to settle revolving debts, like credit card balances. By paying off these balances and maintaining your credit utilization below 10%, you’ll observe a remarkable enhancement in your credit score.

Furthermore, platforms like Select offer a user-friendly widget that allows you to input your personal information to discover suitable personal loan offers without any adverse effects on your credit score.

Final Thought

In summary, personal loans can serve as an attractive alternative to 0% APR credit cards. However, like any financial tool, they are most advantageous when employed with a well-thought-out strategy. Once you’ve carefully considered the questions outlined above, it’s advisable to initiate a soft inquiry on the lender’s website or through a reputable third-party lending platform. This step enables you to explore your potential loan options without causing any damage to your credit score. Only after you’ve gained clarity on your prequalification should you proceed with a formal loan application, which would involve a hard inquiry into your credit history.

READ – 9 Important Questions to Ask About Your Credit Card Debt

I'm Darlington, a finance-focused blogger, author, and online strategist. With two published books on Amazon, I'm dedicated to simplifying finance and passive income topics. As a crypto and forex enthusiast, I explore diverse niches—stock investing, affiliate marketing, real estate, and more. Let's navigate the world of finance together, unraveling opportunities and pathways to financial freedom.
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