Personal loans first-timer's guide: 7 questions to ask

May 26, 2022

As you explore your personal financing options, here are some important questions to consider.

Many loans seem 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. In fact, 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.

If you're looking to explore this option, first ask yourself these questions:

 

1. How do I know if a personal loan is right for me?


Applying for a personal loan makes the most sense in certain cases. For instance:

  • It may be the least expensive form of credit available to you:  Make sure you explore every available alternative before you start applying for any kind of loan. Would a 0 percent APR credit card or balance transfer, for example, offer a more sustainable or cheaper choice? (Of course, you'd need to pay off the balance by the time the 0 percent rate expires.)
  • You plan to do something that could give you a return on your investment: Home renovation is a popular option for this type of loan. Because home equity lines of credit (HELOCs) and home equity loans can also be good options for funding a home remodel, make sure you talk with your banker to find the product that works best for your situation.
  • You feel confident making the monthly payments: Explore ways you can bring in extra income, cut unnecessary expenses, or both, to help you meet your repayment obligations. Generally, the higher your credit score, the lower (to a point) your interest rate will be on a personal loan.

Learn more about Personal Loans through U.S. Bank, use our calculator to estimate your monthly payment and apply in three easy steps.  

2. When 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:

  • Medical expenses: Before taking on a personal loan ask about financing options offered through your doctor’s office. 
  • Discretionary spending (big-ticket items): For nice-to-have purchases, consider waiting until you’ve saved up the funds to move forward. If there’s a true urgency (e.g., major appliance malfunction), a 0 percent interest rate credit card might be a viable alternative.
  • Debt consolidation: A personal loan can work well for debt consolidation. However, if you already struggle with your credit score, you might get slapped with a high interest rate on a personal loan. That higher rate could further expose you to high monthly payments. Consider a balance transfer to a 0 percent APR credit card as a way to quickly pay down debt without racking up more.
  • Paying for a car (in some cases): Auto loan rates will likely be lower than those you can get for a personal loan. That’s mostly because the car itself serves as collateral.
  • College tuition: Student loans are still your best option when it comes to paying for higher education. Rates are typically lower, and unlike personal loans, you aren't required to make your first payment until after you've completed your studies.
  • Emergency expenses: Get in the habit of building up an emergency fund so you can respond to unexpected circumstances without accruing debt.

 

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 $1,000 and $25,000, though some banks offer higher loan amounts for their customers. 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:

  • Am I better off choosing a longer loan term so each monthly payment will be less?
  • Or, should I opt for a shorter term so I spend less on interest over the life of the loan?
  • Is there a prepayment penalty if I want to pay back my loan before the term is up?

 

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 this risk lenders will often charge higher interest rates.

Typically, personal loan companies will 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, the average APR on a 24-month personal loan at a commercial bank was 10.63 percent in 2022. But, the rates can be even higher (above 17 percent) if you have poor credit.

Take a moment to check your credit score, many banks offer this as a free service for customers. 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, potential lenders will pull your credit history to help determine whether or not they are willing to loan you money.  In many cases, this type of credit check is considered a hard inquiry, which can 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 lender and ask for loan applications that only use a soft inquiry, which doesn'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 are looking for fixed rates and a loan that doesn’t require collateral, explore a Personal Loan and take steps toward your financial goals today.

Related content

Evaluating interest rate risk creating risk management strategy

6 things to know about long-term care insurance cost and benefits

Military homeownership: Your guide to resources, financing and more

Do I need a financial advisor?

How to plan and save for adoption and in vitro fertility treatment costs

Preparing for retirement: 8 steps to take

At your service: outsourcing loan agency work

Car shopping: Buying versus leasing your next vehicle

For today's homebuyers, time and money are everything

How I did it: Bought a home without a 20 percent down payment

Money Moments: Tips for selling your home

Overcoming high interest rates: Getting your homeownership goals back on track

Should you buy a house that’s still under construction?

Everything you need to know about consolidating debts

5 things to consider when deciding to take an unplanned trip

Certificates of deposit: How they work to grow your money

Stay committed to your goals by creating positive habits

Major purchases: How to pay for big ticket items

What financial advice would you give your younger self?

10 ways to increase your home’s curb appeal

What you should know about buying a car

Credit: Do you understand it?

Is it the right time to refinance your mortgage?

6 questions to ask before buying a new home

5 things to avoid that can devalue your home

What is a home equity line of credit (HELOC) and what can it be used for?

Your financial aid guide: What are your options?

9 simple ways to save

3 awkward situations Zelle can help avoid

Here’s how to create a budget for yourself

Money Moments: How to manage your finances after a divorce

Helpful tips for safe and smart charitable giving

Money Moments: 8 dos and don’ts for saving money in your 30s

Travel for less: Smart (not cheap) ways to spend less on your next trip

Understanding guardianship and power of attorney in banking

What’s in your emergency fund?

What you need to know about renting

From LLC to S-corp: Choosing a small business entity

Maximizing your infrastructure finance project with a full suite trustee and agent

6 tips for trust fund distribution to beneficiaries

How to build wealth at any age

How to manage your money: 7 tips to improve your finances

LGBTQ+ financial planning tips

Investment strategies by age

Should I itemize my taxes?

Your 5-step guide to financial planning

What is Medicare? Understanding your coverage options

8 steps to take before you buy a home

What to know when buying a home with your significant other

How you can take advantage of low mortgage rates

5 financial goals for the new year

Retirement savings by age

Annual insurance policy review checklist

Allowance basics for parents and kids

What’s your financial IQ? Game-night edition

Tips for realtors to help clients get their homeownership goals back on track

How I did it: Turned my side hustle into a full-time job

Retirement plan options for the self-employed

5 reasons why couples may have separate bank accounts

Common unexpected expenses and three ways to pay for them

It's possible: 7 tips for breaking the spending cycle

Myths vs. facts about savings account interest rates

Closing on a house checklist for buyers

How do interest rates work?

Multiple accounts can make it easier to follow a monthly budget

Is it time to get a shared bank account with your partner?

Don’t underestimate the importance of balancing your checking account

7 steps to keep your personal and business finances separate

Which is better: Combining bank accounts before marriage — or after?

30-day adulting challenge: Financial wellness tasks to complete in a month

Estate planning checklist: 8 steps to secure your legacy

8 steps to choosing a health insurance plan

Key milestone ages as you near and start retirement

How to build a financial plan that covers your savings and expenses

How I did it: Switched career paths by taking an unexpected pivot

What you need to know before buying a new or used car

Estate planning documents: Living trusts vs. will vs. living will

Why estate planning is important

How a Health Savings Account (HSA) can benefit your retirement plan

Year-end financial checklist

Housing market trends and relocation impact

An investor’s guide to marketplace lending

What is a CLO?

Beyond Mars, AeroVironment’s earthly expansion fueled by U.S. Bank

ABL mythbusters: The truth about asset-based lending

Finance or operating lease? Deciphering the legalese of equipment finance

Buying or leasing? Questions to ask before signing a contract

Collateral options for ABL: What’s eligible, what’s not?

Can ABL options fuel your business — and keep it running?

Insource or outsource? 10 considerations

The secret to successful service provider integration

Evaluating interest rate risk creating risk management strategy

Safeguarding the payment experience through contactless

COVID-19 safety recommendations: Are you ready to reopen?

Unexpected cost savings may be hiding in your payment strategy

Tech lifecycle refresh: A tale of two philosophies

Changes in credit reporting and what it means for homebuyers

4 benefits of independent loan agents

Middle-market direct lending: Obstacles and opportunities

How to sell your business without emotions getting in the way

5 steps to take before transitioning your business

10 tips on how to run a successful family business

Talent acquisition 101: Building a small business dream team

How to fund your business without using 401(k) savings

Costs to consider when starting a business

How to test new business ideas

The costs of hiring a new employee

How to expand your business: Does a new location make sense?

How jumbo loans can help home buyers and your builder business

When to consider switching banks for your business

5 tips to help you land a small business loan

How to build a content team

Multigenerational household financial planning strategies

How to track expenses

How to manage your finances when you're self-employed

Good debt vs. bad debt: Know the difference

Good money habits: 6 common money mistakes to avoid

Reviewing your beneficiaries: A 5-step guide

How to talk about money with your family

Financial steps to take after the death of a spouse

Retirement advice: How to retire happy

Retirement income planning: 4 steps to take

Preparing for retirement: 8 steps to take

Working after retirement: Factors to consider

4 steps to finding a charity to support

Year end tax planning tips

Tips for navigating a medical hardship when you’re unable to work

11 essential things to do before baby comes

Webinar: Uncover the cost: Starting a family

Preparing for adoption and IVF

Checklist: 10 questions to ask your home inspector

Resources for managing financial matters after an unexpected death

What you need to know as the executor of an estate

What documents do you need after a loved one dies?

Checklist: financial recovery after a natural disaster

How does money influence your planning?

Student checklist: Preparing for college

The A to Z’s of college loan terms

Co-signing 101: Applying for a loan with co-borrower

Practical money skills and financial tips for college students

How to build credit as a student

5 things to know before accepting a first job offer

How I did it: Paid off student loans

Bank Notes: College cost comparison

What to do with your tax refund or bonus

5 tips for creating (and sticking to) a holiday budget

Growing your savings by going on a ‘money hunt’

Working with an accountability partner can help you reach your goals

Does your savings plan match your lifestyle?

Uncover the cost: Wedding

Uncover the cost: International trip

Are savings bonds still a thing?

Tips to overcome three common savings hurdles

Adulting 101: How to make a budget plan

Personal loans first-timer's guide: 7 questions to ask

Mindset Matters: How to practice mindful spending

How can I help my student manage money?

Things to know about the Servicemembers Civil Relief Act

You can take these 18 budgeting tips straight to the bank

Do you and your fiancé have compatible financial goals?

U.S. Bank asks: Transitioning out of college life? What’s next?

U.S. Bank asks: Do you know your finances?

Personal finance for teens can empower your child

How to save for a wedding

Dear Money Mentor: How do I set and track financial goals?

Lost job finance tips: What to do when you lose your job

Money Moments: 3 smart financial strategies when caring for aging parents

Money management guide to financial independence

7 financial questions to consider when changing jobs

How to stop living paycheck to paycheck post-pay increase

Bank from home with these digital features

How grandparents can contribute to college funds instead of buying gifts

How to open and invest in a 529 plan

Using 529 plans for K-12 tuition

Is a home equity loan for college the right choice for your student

Parent checklist: Preparing for college

How to apply for federal student aid through the FAFSA

What to consider before taking out a student loan

Are you ready to restart your federal student loan payments?

How to use debt to build wealth

What’s a subordination agreement, and why does it matter?

Understanding the true cost of borrowing: What is amortization, and why does it matter?

Your quick guide to loans and obtaining credit

Dear Money Mentor: How do I begin paying off credit card debt?

Dear Money Mentor: What is cash-out refinancing and is it right for you?

Crypto + Homebuying: Impacts on the real estate market

House Hacks: How buying an investment property worked as my first home

Your guide to breaking the rental cycle

What are conforming loan limits and why are they increasing

4 ways to free up your budget (and your life) with a smaller home

Money Moments: How to finance a home addition

Beyond the mortgage: Other costs for homeowners

10 questions to ask when hiring a contractor

These small home improvement projects offer big returns on investment

Should you get a home equity loan or a home equity line of credit?

Mortgage basics: What’s the difference between interest rate and annual percentage rate?

Is a home equity line of credit (HELOC) right for you?

How to use your home equity to finance home improvements

How do I prequalify for a mortgage?

Can you take advantage of the dead equity in your home?

4 questions to ask before you buy an investment property

10 uses for a home equity loan

Test your loan savvy

Take the stress out of buying your teen a car

Questions to ask before buying a car

How to choose the best car loan for you

Disclosures

Start of disclosure content

Loan approval is subject to credit approval and program guidelines. Not all loan programs are available in all states for all loan amounts. Interest rate and program terms are subject to change without notice. Mortgage, Home Equity and Credit products are offered through U.S. Bank National Association. Deposit products are offered through U.S. Bank National Association. Member FDIC.