Personal loans first-timer's guide: 7 questions to ask
As you explore all your options for personal financing, here are some important questions to consider.
Many loans seem pretty self-explanatory based on their titles. It’s clear, for instance, that an auto loan will help you get a car. Or that a student loan goes to fund education. Mortgages finance houses, business loans bankroll business ventures, and so on.
By comparison, the term “personal loan” doesn’t reveal much about how this type of financing can help reach your goals. As it happens, you can put the money from a personal loan toward just about anything you wish. And, if the lender is satisfied with your income information, you can often receive the loan funds in your account within a week or less.
Ask yourself these questions during your personal loan discovery process:
1. How do I know if a personal loan is the right option for me?
Applying for a personal loan makes the most sense in certain cases. For instance:
Click here to learn more about Personal Loans through U.S. Bank, use our calculator to estimate your monthly payment, and apply in three easy steps.
2. For what types of goals/expenses should I consider alternatives to a personal loan?
In each of the following situations, you might be better served by choosing a different kind of financing:
3. How much can I borrow, and how do I receive the money?
If approved for the loan, you receive the principal in one lump sum payout. The amount you can borrow depends on a number of factors, including your credit score. Generally speaking, the principal amount often sits somewhere between $3,000 and $25,000. In considering how much to borrow, make sure you feel comfortable making the monthly payments.
4. How do I receive the money, and what will my payments look like?
A personal loan is an installment loan. That means you owe a fixed amount each month until you pay off the entire amount. Most personal loans have a payback period between 12 and 60 months. The term of a loan is the amount of time it takes to pay off the entire amount – assuming you make all your payments on time.
Personal loans may be either short-term (1 to 5 years) or long-term (up to 30 years). Either way, by the time your term is complete, you will need to have paid off the principal (the lump-sum amount you receive). You’ll also need to factor in monthly interest.
Depending on the amount needed for your loan, and your current (or projected) financial standing, you’ll want to consider:
5. How much interest should I expect to pay?
Many (though not all) personal loans are unsecured. An unsecured loan doesn’t require the borrower to put up collateral, such as a home or car, to match the value of the amount borrowed.
Unsecured also means if you were to default on the loan, the lender wouldn’t be able to claim your property as they would in the case of a secured loan. To offset the higher risk they assume with an unsecured loan, the lender charges higher interest rates.
Typically, personal loan companies charge between 7 and 17 percent annual percentage rate (APR) based on a combination of factors. These can include an applicant’s credit score, funding and operating costs, risk premiums and profit margins.
According to Federal Reserve data as of April, 2022, the average APR on a 24-month personal loan at a commercial bank was 10.63 percent.1 But, others can hit you even harder (above 17 percent) if you have poor credit.
Take a moment to check your scores through a credit reporting service or talk to your banker about how to check your current score. Does it make sense to spend time paying down debt to boost your score and get a better rate? Or, should you consider a secured personal loan? Collateral for a loan can include personal property, as well as savings account funds or certificates of deposit (CDs).
6. Will applying for a personal loan hurt my credit?
When you apply for loans, the potential lenders pull your credit history to help determine whether or not they are willing to loan you money. In most scenarios, these credit checks count as a hard inquiry, and could cause your score to dip for a few months.
It may not be a big deal if you have strong credit. But if you have concerns about your credit standing, talk to your loan provider and ask for loan applications that only count as soft inquiry. A soft inquiry won’t affect your score.
7. Which type of lender should I choose?
Do some comparison shopping. Rates and fees can vary between lenders so it’s best to dive in and weigh your options before applying.
If you’re already a U.S. Bank customer, check to see whether a Personal Loan could be right for you. If approved, you’ll enjoy benefits that include:
Are you looking for fixed rates and a loan that doesn’t require collateral? Explore a Personal Loan and take steps toward your financial goals today.