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

May 26, 2022

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:

  • It may be the least expensive form of credit you have access to:  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 entire balance by the time the 0 percent rate expires.)
  • You plan to use the personal loan toward something that has the potential to improve your financial standing, such as home renovation: Because home equity lines of credit (HELOCs) and home equity loans offer other options for a home remodel, make sure you talk with your banker to find the option that works best for your situation.
  • You feel confident making the monthly payments: Always explore ways you can bring in extra income, cut unnecessary expenses, or both. Generally, the higher your credit score, the lower (to a point) your interest rate will be on a personal loan.

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:

 

  • Medical expenses: Before taking on a personal installment loan, ask about financing options offered through your doctor’s office. 
  • Big-ticket items or discretionary spending: 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 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 the risk of 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.
  • In some cases, paying for a car: 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 strongest contender when it comes to paying for higher education. Their rates are typically lower. And unlike personal loans, they don’t require the first payment until sometime after studies have been completed.
  • 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 $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:

 

  • 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 money over the life of the loan to interest payments?
  • Depending on the type of 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 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:

  • Up to $25,000 with no origination fee
  • No property inspections or home appraisals (if you’re using the funds for home improvements or renovations)
  • A smooth application process that gets you funds as quickly as possible

 

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.

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