Thinking About a Personal Loan?

A personal loan can be a great financial tool—whether you're consolidating debt, covering medical bills, planning a wedding, or handling an unexpected expense. But before you sign on the dotted line, it’s important to fully understand what you’re getting into.

Personal loans come with responsibilities, and making an informed decision can help you avoid costly mistakes down the road. Here are the key things to know before taking out a personal loan:

1. What Is a Personal Loan

A personal loan is a type of unsecured loan that allows you to borrow a fixed amount of money, which you repay over a set term—usually in equal monthly payments. Since its unsecured, there’s no collateral involved (like your car or house), but that also means interest rates may be higher than secured loans.

2. Your Credit Score Matters—A Lot

Lenders use your credit score and credit history to determine whether you qualify and what interest rate you’ll be offered. Generally:

• A higher credit score means a lower interest rate
• A lower credit score could mean higher rates or denial of the loan

Before applying, check your credit report and score. If it's low, consider improving it before taking out a loan.

BUILDING YOUR CREDIT SCORE: ONE STEP CLOSER TO FINANCIAL FREEDOM

3. Know the True Cost of the Loan

It’s not just about the interest rate—it’s about the APR (Annual Percentage Rate). The APR includes both the interest and any fees, such as:

• Origination fees (usually 1%–8% of the loan)
• Late payment fees
• Prepayment penalties (yes, some lenders charge you for paying off early!)

Always compare APR, not just interest rates, when shopping around.

4. Understand the Loan Term

Loan terms typically range from 1 to 7 years. While a longer term can lower your monthly payment, it usually means paying more in interest over time.

Ask yourself:

Do I want lower payments or a quicker payoff?
Can I comfortably afford the monthly payment for the full term?

These two questions will be the deciding factor when discussing the terms of the loan.

QUESTIONS YOU SHOULD BE ASKING BEFORE TAKING ON DEBT

5. Use the Loan for the Right Reasons

Personal loans are versatile, but just because you can get one doesn’t mean you should. Good reasons to take out a personal loan include:

• Consolidating high-interest credit card debt
• Funding emergency expenses
• Covering necessary home or car repairs

Less advisable reasons might include luxury purchases, vacations, or funding risky business ventures.

6. Shop Around Before You Commit

Don’t just go with the first lender that pre-approves you. You’ll want to compare banks to ensure you’re getting the most bang for your buck.

Look at:

• APR
• Repayment terms
• Fees
• Reviews and customer service

Many lenders offer soft credit checks for prequalification, which won’t affect your credit score.

7. Missing Payments Can Hurt You

Missing even one payment can:

• Damage your credit score
• Lead to late fees or increased interest
• Send your loan to collections

Make sure the monthly payment fits your budget and consider setting up auto-pay to avoid missing due dates.

8. You Might Have Better Options

Before jumping into a personal loan, ask yourself:

Can I save for this expense over time?
Can I tap into a secured loan (like a home equity loan) at a lower rate?
Is a home equity line of credit a better option for me?

Sometimes alternatives offer more favorable terms, especially if you're not in a rush.

LOAN VS. LINE OF CREDIT: WHAT’S THE DIFFERENCE?

Think Long-Term

A personal loan can offer breathing room or help solve a short-term problem—but it’s still a financial obligation that affects your long-term goals. Before you borrow, understand the full picture: how much you’ll pay over time, how it fits into your budget, and whether it helps or hinders your financial health.

Bottom line: Borrow smart. Ask questions. Read the fine print. And don’t take out a loan unless you’re confident you can repay it.

Thinking about a personal loan for home repairs or small remodels? Check out these projects that can actually boost the value of your home: