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10 questions to ask yourself before applying for a personal loan


Personal loans can offer an affordable alternative to credit cards and help you finance the big purchases of life while saving on interest.

Increasingly, personal loans are gaining popularity, with approximately 20.2 million borrowers in the United States according to the online loan marketLoan tree.

It is essential that you have a clear repayment plan, that you are looking to take out a personal loan to consolidate debt, finance a home renovation, finance your next big trip or pay for a move across the country.

Below, CNBC Select offers 10 questions you need to 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 to find out how much you need. The smallest personal loan sizes start 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 extra money up front or borrow money from a friend or family member if you’re in a hard situation.

2. Do I want to pay my creditors directly or have money sent to my bank account?

When you take out a personal loan, cash is usually delivered directly to your checking account. But if you are using a debt consolidation loan, some lenders offer the option of sending the funds directly to your other creditors and completely ignoring your bank account.

If you prefer a practical approach or use the money for something other than repaying existing debt, have the funds transferred to your checking account.

3. How long will I have to pay it back?

You will need to start repaying the loan company in monthly installments within 30 days. Most lenders allow repayment terms between six months and seven years. Your interest rate and monthly payment will be affected by the term 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, the amount of the loan, and your duration (the length of time you will repay the loan). Interest rates can reach 3.49% and reach 29.99% or more. Generally, you will get the lowest interest rate when you have a good or excellent credit score and choose the shortest possible repayment term.

According toLatest Fed Data, the average APR for personal loans at 24 months is 9.63%. This is often well below the average APR for credit cards, 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 pay the monthly payment?

When you apply for a personal loan, you have the option of choosing the repayment plan that best suits your income and cash flow level. Lenders will sometimes provide an incentive to use automatic payment, reducing 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 off their loan over several months or years. Others prefer to pay off their loan as quickly as possible, so they choose the highest monthly payment.

Choosing a low monthly payment and a long repayment tenure often comes with the highest interest rates. It might not seem like it because your monthly payments are much smaller, but you end up paying more for the loan over its lifetime.

In general, borrowers should not spend more 35% to 43% on debt, including mortgages, car loans and personal loan payments. So, if your monthly net salary is $ 4,000, for example, you should ideally keep all total debts at, or below $ 1,720 each month.

Mortgage lenders in particular are known to refuse loans to people with debt-to-income ratios above 43%, but personal lenders tend to be a bit more forgiving, especially if you have good credit and proof of income. If you think you can temporarily manage higher payments to save a lot on interest, you may be able to stretch this ratio a bit to take a higher monthly payment.

It is more difficult 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 sort of safety net, like a partner’s income or a relief fund.

6. Does the personal loan have fees?

Personal lenders may charge registration or set-up fees, but most do not charge fees other than interest.

Set-up fees are one-time upfront fees that your lender subtracts from your loan to pay for administration and processing fees. It is generally between 1% and 5%, but it is sometimes billed on a lump sum basis. For example, if you took out a $ 10,000 loan and there was a 5% set-up fee, you would only receive $ 9,500 and $ 500 would go to your lender. It is best to avoid installation costs if possible.

7. Do I have a sufficient credit rating?

Before you start applying for personal loans, it is important to know your credit score to make sure that you qualify. Most personal lenders are looking for applicants for good credit, especially online banks. However, if you have an existing relationship with a bank, you can be approved for a favorable deal if you have a good history of paying bills on time and honoring the terms of your loans and past 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 have to become a member and sometimes you have to open a savings account before you can qualify for a loan.

8. What other choices do I have?

If you are looking to pay off your debts, balance transfer cards are another option.

With a limited time 0% promotional APR, a balance transfer card lets you pay zero interest for up to 21 months, saving you hundreds.

And depending on your situation, you can also transfer more than one credit card balance to the new card (as long as the total does not exceed your credit limit).

Some of the best interest-free credit cards that offer balance transfers are theWells Fargo Platinum Card, theCiti Simplicity Cardand theUS Bank Visa Platinum Card.

However, balance transfer cards are becoming increasingly difficult to qualify as lenders are tightening their requirements for new loans. They also have other drawbacks, including balance transfer limits (which are often lower than your actual card limit) and balance transfer fees (usually 3%), unless you can get an alternative flawless like the Wings Visa Platinum Card.

In addition to balance transfers, 0% APR credit cards are also great for financing large purchases that you want to pay over time. Here are our top choices for interest-free credit cards:

Best for 21 months

Best for 20 months

Best for 18 months

Best for 15 months

9. How long do I need the funds?

Some personal lenders remit funds electronically on the day of your approval. Other lenders need up to 10 business days. If quick access to money is important to your situation, be sure to select lenders with prompt delivery.

10. How will a personal loan affect my credit score?

Personal loans are a form of installment credit, while credit cards are considered revolving credits. Having both types of credit in your profile will strengthen your credit combination.

A diversified credit mix is ​​useful, but that’s not all. Some say that adding a new installment loan, like a car loan or a mortgage, can increase your score, but it makes no sense to get into debt (plus interest) unless you do. really need it.

To maintain a good credit score, first focus on the two most important factors: on-time payments and the use of credit.

Although an installment loan does not improve your score much, using a personal loan to pay off revolving debt will result in the most noticeable increase in your credit score. Once your cards are reimbursed, keep your spending below 10% of your available credit and notice the difference.

Conclusion

Personal loans are a great alternative to 0% APR credit cards, but like any financial product, they are more beneficial when you have a plan. When you have gone through the above questions, do a gentle investigation on the lender’s website or in a third party loan market so that you can see your options without harming your credit score. After seeing what you are prequalifying for, only then should you proceed with a thorough investigation.

Information on the Citi Simplicity card, Chase Freedom, the Wings Visa Platinum card, the Amex EveryDay credit card, the US Bank Visa Platinum card, the Wells Fargocards and Capital One cards were independently collected by CNBC and were not reviewed or provided by the card issuer prior to publication.

Editorial note: The opinions, analyzes, criticisms or recommendations expressed in this article are those of the editorial staff of CNBC Select only and have not been examined, approved or otherwise approved by a third party.

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