Considering a personal loan? Personal loans offer a flexible solution for a wide range of financial needs, whether you’re consolidating debt, handling emergency expenses, or funding a large purchase. According to TransUnion, the number of people taking out personal loans has risen from 15 million to more than 20 million in recent years.
If you’re thinking about taking out a personal loan, here are five things you should know before making your decision.
Although taking out a loan sounds like it will help you, it might end up hurting you in the long term. Knowing why you need to borrow the money can help you gain a clear understanding of what it is exactly that you need.
You’ve probably heard this over and over again, but saving money is the best way to cover costs. However, saving money takes time and you may be looking for a faster solution. Borrowing money to pay for a broken car, health insurance, or other unexpected costs, isn’t ideal but it may be necessary.
If the expense isn’t urgent, it may be better to save up rather than borrow. Loans come with interest and fees, so unless you need the money immediately, saving could be the better option.
Key Tip: Ask yourself if the expense can wait. If so, consider saving for it instead of taking out a personal loan.
Learn more: The 4 Best Reasons For A Personal Loan
Not all personal loans are the same, so it’s essential to shop around before taking out a personal loan. Various lenders offer different interest rates, fees, and repayment terms. Common sources include:
When comparing options, consider:
Learn more about Interest rates, check out our article on The Average Personal Loan Interest Rate.
Applying for a personal loan is relatively simple, but you’ll need to provide certain information. Here’s what most lenders require when you’re taking out a personal loan:
Some lenders offer pre-qualification, allowing you to see loan terms before officially applying.
Key Tip: Have your documents ready before applying to speed up the approval process for taking out a personal loan.
Before taking out a personal loan, it’s crucial to consider how much you can afford to repay. Over-borrowing can lead to financial stress. To determine affordability, calculate your debt-to-income ratio (DTI). Ideally, your DTI should be between 35% and 43%.
When borrowing, consider:
our credit score is one of the key factors that lenders use to determine your eligibility for a personal loan and the interest rate you’ll be offered. A higher credit score typically results in more favorable loan terms, such as lower interest rates, while a lower score may limit your options and lead to higher costs over time.
To stay on top of your credit health, it’s important to regularly monitor and improve your score. Luckily, there are several tools available that make this easier. Here are some credit reporting services we recommend to help you track and boost your credit score:
Many people overlook the importance of checking their credit score regularly, which can be a costly mistake. You’re entitled to a free annual credit report from major bureaus like Equifax, Experian, and TransUnion, so take advantage of this to stay informed and make improvements when necessary.
Can I take out a personal loan with bad credit? – Yes, but you may face higher interest rates. Consider improving your credit score first.
To learn more about bad credit personal loans, check out our guide on How to Get A Personal Loan with Bad Credit
How long does it take to get a personal loan? – Approval times vary by lender, but some online lenders offer same-day approval.
What happens if I can’t repay my loan? – Missing payments can harm your credit. Contact your lender for options like payment extensions or debt consolidation.
Taking out a personal loan can be a smart financial move—if done wisely. By understanding why you need the loan, comparing different offers, preparing your documents, calculating what you can afford, and checking your credit score, you’ll be better equipped to make informed decisions.