Is Taking Out a Personal Loan Right for You?

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.

 

1. Why Do You Need to Take Out a Personal Loan?

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

2. Comparing Loan Options Before Taking Out 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:

  • Banks: Typically offer lower interest rates but may have stricter credit requirements.
  • Online Lenders: Faster approval but potentially higher rates.
  • Credit Unions: Often offer more flexible terms for members.
  • Peer-to-Peer Lenders: Connect borrowers with individual investors; terms vary.

When comparing options, consider:

  • Interest Rates: Look for a competitive rate but be wary of deals that seem too good to be true.
  • Fees: Check for origination fees, prepayment penalties, and late fees.
  • Repayment Terms: Ensure that the loan payments fit your budget.

Learn more about Interest rates, check out our article on The Average Personal Loan Interest Rate.

3. What Do You Need to Apply for a Personal Loan?

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:

  • Personal Information: Your name, address, and contact details
  • Loan Amount: The amount you need and the purpose of the loan
  • Credit Score: Lenders will check your credit to determine your eligibility
  • Proof of Income: Pay stubs, tax returns, or bank statements

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.

4. How Much Can You Afford to Repay?

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:

  • Total Repayment Costs: Think beyond monthly payments—factor in the total cost, including interest.
  • Flexibility: Ensure you can handle loan payments even if unexpected expenses arise.

5. Why Your Credit Score Matters When Taking Out a Personal Loan

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:

  • Experian Boost™ – Helps improve your credit score by adding utility and phone bill payments to your report.
  • ExtraCredit – Provides in-depth credit tracking, offering insights into what’s affecting your score.
  • FreeScore360 – Gives you access to all three credit scores and reports, helping you stay informed.
  • ViewFreeScore – A free service that lets you check your score anytime.
  • PFM Verify – Offers personal finance management tools along with credit monitoring.

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.

FAQs About Taking Out a Personal Loan

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.

Be Smart About Taking Out a Personal Loan

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.

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MyUSAFinance is not a lender and does not make credit decisions. MyUSAFinance.com connects interested persons with a lender from its network of approved lenders. MyUSAFinance.com does not control and is not responsible for the actions or inactions of any lender, is not an agent, representative or broker of any lender, and does not endorse any lender. All loan approval decisions and terms are determined by the loan providers at the time of your application with them. The time to receive loan proceeds varies among lenders, and in some circumstances faxing of application materials and other documents may be required. Submitting your information online does not guarantee that you will be approved for a loan. You may exit the process at any step as you are under no obligation to accept the loan presented. For details on your loan please contact your lender directly. This service is not available in all states. Residents of Arkansas, New York, Vermont and West Virginia are not eligible to use the service to request a loan. By using this website or services, you represent and warrant that you are at least 18 years old, that you are a resident of the United States, and that you are not a resident of any state where the loan you are applying for is illegal. In some cases, you may be given the option of obtaining a loan from a tribal lender. Tribal lenders are subject to tribal and certain federal laws while being immune from state law including usury caps. If you are connected to a tribal lender, please understand that the tribal lender’s rates and fees may be higher than state-licensed lenders. Additionally, tribal lenders may require you to agree to resolve any disputes in a tribal jurisdiction. You are urged to read and understand the terms of any loan offered by any lender, whether tribal or state-licensed, and to reject any particular loan offer that you cannot afford to repay or that includes terms that are not acceptable to you. MyUSAFinance.com does not pull your credit or look at your creditworthiness, but responsible lenders will. By submitting your information to MyUSAFinance.com, you are giving lenders in MyUSAFinance.com’s network permission to verify your social security number, driver license number or other identification, and to review your creditworthiness by pulling your credit history from major credit bureaus as well as from alternative credit bureaus such as Teletrack or DP Bureau. MyUSAFinance.com receives compensation from its lenders based on advertising services. MyUSAFinance.com is a free service and will never charge a fee to be connected to a lender.
Representative Example
If you borrow $5,000 and the loan had an 8% origination fee ($400), on a 48 month repayment term at a 19.25% APR, the monthly repayment will be $134.16. Total repayment will be $6,439.50. Total interest paid will be $1,039.50.
Important Information
MyUSAFinance.com is unable to supply you with an exact APR (Annual Percentage Rate) that you will be charged if you are approved for a loan. APRs depend on multiple factors, including the lender’s requirements and offers, your credit worthiness, your state of residence, and the type and term of the loan you request. You will be given the details on the APR, loan fees, and other terms by your lender when you are redirected to your loan agreement during the loan request process. The lenders and lending partners we work with offer 61-day to 84-month loan terms with an APR range of 5.99% to 35.99% depending on how the APR is calculated, the duration of the loan, loan fees incurred, late payment fees, non-payment fees, loan renewal actions, and other factors. Loans from a state that has no limiting laws or loans from a bank not governed by state laws may have an even higher APR. Keep in mind that the APR range is not your finance charge and your finance charge will be disclosed later on. Some states cap APR and the amounts of charges for an online personal loan. Loan terms may range from 2 weeks to 84 months depending on your loan and the lender you are connected with.
Implications of Late and Non Payment
Your lender may charge you late fees as well as fees for non-sufficient funds. Please review your loan agreement carefully for information about the financial implications of non-payment before you provide your electronic signature. Non-payment may involve debt collection practices as it is set by applicable law. Your lender may set late payment fees in accordance with state regulations. Lenders are within their rights to report your failure to repay a loan to one or all of the major credit reporting agencies — Experian, Equifax. After the lenders receive payment in full, they can report it to the credit reporting agencies. We remind that late payment or non-payment of your loan can have negative impact on your credit history. Some of the lenders in our network may automatically renew your short term loan if it becomes past due. This term is clearly identified in your loan agreement. You should check your loan agreement for your lender’s policy on automatic loan renewal prior to e-signing it. If your loan is renewed, there will be additional charges as determined by your lender, and the minimum term can be set up. Your lender may offer you other options in addition to renewal, including the ability to repay your loan in full at a later date or repay your loan over time in a series of installment. You are encouraged to contact your lender as soon as possible if you are unable to repay your loan on the scheduled repayment date or make regular installment payment on time. For more information about your lender’s specific procedures as they apply to late payments, please review your loan agreement or contact your lender directly. Origination, documentation and other additional fees may apply to your online personal loan deal. Late payment, non-payment fees and other penalties may apply to both short term and online personal loan deals in case of missed payments. Please review your loan agreement carefully for information about the financial implications before you provide your electronic signature.