Should I Get a Personal Loan? Things To Consider

A personal loan can be a good solution for some people but a huge financial burden for others. So, should you get a personal loan? Here are 10 things to consider first.

by Andrea Norris-McKnight

Things To Consider Before Getting a Personal Loan photo

You can get a personal loan for a number of reasons, from financing a home remodel to paying for a vacation. Perhaps the most common reason is to consolidate debt. These days, some people are using a personal loan as an emergency fund or to cover everyday expenses.

Getting a personal loan can be a big financial decision. It isn’t a wise choice for everyone, and it can be an expensive way to borrow money if you have bad credit.

It’s essential to carefully consider the factors before taking the plunge and getting a personal loan. It could mean the difference between bettering your financial situation or falling deeper into debt.

Factors Lenders Will Consider

A lender will consider a few factors to determine how much of a risk you might be. In other words, what is your ability to repay the loan? Considering these factors before loan shopping can help determine whether you should borrow and which lenders you want to consider.

Your Credit Score

Personal loans are typically unsecured, meaning you don’t have to put up collateral. As a result, lenders often rely on your credit score to determine if you qualify for a loan and what interest rate you’ll be offered.

Before applying for a personal loan, check your credit score and ensure it’s in good shape. A higher credit score should lead to better loan terms.

Bad credit personal loans are available, but interest rates can be extremely high, so consider other borrowing options before taking a personal loan if you have poor credit.

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Your Debt-To-Income Ratio

Your debt-to-income (DTI) ratio measures how much debt you have compared to your income. Lenders use this ratio to determine your ability to repay the loan. Ideally, your DTI ratio should be below 36%. If your DTI ratio is high, you may not be able to get approved for a personal loan.

Your Income and Employment History

In addition to looking at your DTI, the lenders want to see that you have a stable income. Freelancers and job hoppers might not get approval or will end up with a higher interest rate. Another borrowing option might be cheaper.

10 Things To Consider Before Taking Out a Personal Loan

Any one of these factors could impact your ability to repay a loan. Consider each one carefully.

1. Your Financial Situation

Before taking out a personal loan, carefully evaluate your current financial situation.

Determine if you have enough income to comfortably repay the loan and create a budget to track your expenses if you don’t already have one.

Make sure you have a steady source of income and a reliable credit history to increase your chances of approval.

2. The Purpose of the Loan

Clearly define why you are borrowing. It’s essential to borrow only for essential needs, such as debt consolidation, home improvement, medical emergencies or other significant expenses.

You should avoid using personal loans for discretionary spending. It likely won’t be worth the cost of borrowing and could damage your finances.

3. The Interest Rate

Ensure you understand the interest rate and how it will impact your monthly payments and the total cost of the loan. Some lenders may offer a lower rate for a shorter loan term or automatic payments.

Interest rates on personal loans can vary significantly between lenders. It’s essential to compare interest rates from multiple sources to find the best deal. A lower interest rate can save you hundreds or even thousands of dollars over the life of the loan.

An online personal loan calculator can help you evaluate the cost of borrowing in terms of interest.

4. The Fees

Some lenders may charge fees for origination, prepayment or late payments. Origination fees can be exceptionally high with some lenders, as much as 10% of the loan amount.

These fees can add up quickly and significantly increase the total cost of the loan. Make sure you understand all the fees associated with the loan before signing on the dotted line.

5. The Loan Term

Personal loans can have terms ranging from a few months to several years. A longer loan term may lead to lower monthly payments but can also result in paying more interest over the life of the loan. However, a short-term loan could mean unaffordable payments.

Consider the loan term carefully and choose one that fits your budget and financial goals.

6. Loan Repayment Flexibility

Look for loan repayment options that suit your financial situation. Some lenders offer flexible repayment terms, allowing you to make extra payments without penalty or even choose a payment schedule that works best for you.

7. The Fine Print

Before signing any loan agreement, make sure you thoroughly read and understand the terms and conditions. If you have any doubts or questions, get clarification or find another lender.

8. Impact on Your Credit Score

A new loan will increase your debt-to-income ratio, which could lower your credit score in the short term. However, making timely payments and using the loan responsibly could improve your credit score over time.

9. Your Repayment Plan

Before getting a personal loan, make sure you have a plan for repaying it. Consider your monthly budget and future expenses you could incur that might impact your ability to repay your loan.

If you are using a personal loan for credit card consolidation, make sure you don’t run up your credit card balances and end up with a worse debt problem than before consolidating.

10. Loan Alternatives

Personal loans are just one option for financing. Depending on your circumstances, you might be eligible for other forms of credit, such as a home equity loan, a credit card with a low-interest promotional period or a debt consolidation loan. Explore all your options to find the best fit for your needs.

A Personal Loan Isn’t Right for Everyone

A personal loan can be a good option for some people but a huge financial burden for others.

Be sure to thoroughly research all aspects of a loan before committing, and ensure you have a solid plan for repaying the borrowed funds. And remember that personal loans should be used responsibly and only when necessary.

About the Author

Andrea Norris-McKnight took over as the editor of The Dollar Stretcher and After 50 Finances after working under the site founder and previous editor for almost 15 years. She has also written for Money.com, GOBankingRates.com, HavenLife.com and The Sacramento Bee.