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How to Choose a Personal Loan: A 10 Step Guide
Key takeaways
- Check your credit report and credit score early to see if there are any errors to be corrected in your report and if your score is high enough to help you get good loan terms.
- Compare lenders by using prequalification—so there is no effect on your credit score—to find the best rate, term, and fees.
- Before signing for the loan, confirm that the monthly payments will fit your budget and review disclosures carefully.
Personal loans are a popular financial tool for consumers who need to borrow money in a lump sum, want the freedom to use it for just about any purpose, and, typically, want fixed monthly payments.
Depending on the lender, personal loans can have fixed or variable interest rates and vary in repayment terms, fee structures, and qualification criteria. So, there is a lot to consider when you’re shopping for a personal loan.
In this article, we'll share a 10-step guide on how to choose a personal loan aligns with your financial goals and budget.
A 10-step guide for choosing a personal loan
You can use a personal loan for credit card consolidation, home improvement, vacation,, , wedding, and unexpected expenses—there are few limits. The purpose of the loan, however, is one of the factors that could influence your decision-making. Here's a step-by-step look at how to choose a personal loan, designed to help you make an informed and confident decision.
1. Know your borrowing needs
What is the loan for, and how much do you need? Some lenders will approve loans of up to $50,000 or more. You'll want to make sure a lender's loan limit will cover your needs.
If you can't borrow enough to cover your plans, you'll have to come up with some other sources. And if you borrow more than you really want, you could end up paying more in interest than you needed to. Borrowing just the right amount will enable you to optimize the monthly payment and affordability.
2. Check your credit score
Your credit score is a reflection of your creditworthiness. A higher score could qualify you for higher borrowing amounts and lower interest rates.
Check your credit score well before you apply. If you think the score could be or should be improved, you'll have time to take steps to do that. These might include paying down high balances on credit cards and disputing errors on your credit report.
3. Compare interest rates
Compare the personal loan interest rates from different lenders so you can find the lowest rate, as well as other favorable terms. Even a slight difference can have a big effect on the total amount of interest you pay over the life of the loan.
Lenders who offer loan prequalification are more likely to give you specific information about their personal loan terms. You can obtain important information without the need for a hard credit inquiry, which occurs when you formally apply for a loan and can impact your credit score.
4. What are the personal loan terms and monthly payments?
The personal loan term is the number of months or years you are given to repay the loan through your fixed monthly payments. A lender might offer you the option of a shorter term—3 years—or a longer term—perhaps 5 years.
A shorter loan term means you can pay less interest over the life of the loan, but your monthly payments will be larger. A longer term for the same amount means smaller monthly payments but more in total interest. Review your budget to see which option works best for you.
With credit cards, you must make at least the minimum monthly payment. The higher the balance, the higher the monthly minimum. However, if you make just the monthly minimum, it could take years to pay off the balance.
With a personal loan, the loan terms tell you exactly when you'll be debt-free.
5. Are there any fees or additional costs on personal loans?
A personal loan could come with origination fees, late payment penalties, and prepayment charges or it might not have any fees or extra charges. Fees add to the overall cost of the loan, so it's important to find out whether a given loan would have them and, if so, how much they are.
6. How long does it take to get the money?
Sometimes you need a personal loan to cover a pressing need. If so, you might value a loan that can transfer funds to you within one business day. That’s often the case with a personal loan. Ask a lender how long they generally take for approval and how long after that you might expect to receive the money.
7. Evaluate customer support and online tools
A lot of lenders today use online applications and e-sign tools, along with other user-friendly digital features, to make the lending process seamless. Online rate checkers let you "test the waters" to see which loan and interest rate options you may qualify for. Payment calculators can help you visualize how a monthly payment fits into your budget.
A bank with a nearby branch could conveniently provide services like this, too.
A lender that offers a mobile app or online banking can make it easy to check your balance and make payments. Friendly customer service can improve all aspects of loan management. Knowing that help is only a click or phone call away, or that you have a branch just around the corner, can assure you that that the "human touch" is always there, even in a digital world.
8. Does the monthly personal loan payment fit my budget?
Before you put your name on the dotted line, take another look at your budget. Double-check that you have included all your expenses and there is room for the new monthly payment. Taking out a loan with a fixed rate is a good way to make sure you know exactly how much your payment will be each month.
9. Read all terms and disclosures carefully
The loan agreement will tell you everything you need to know about the loans' interest rate, terms, repayment rules, and any fees or charges. If you don't understand certain terms or sections, ask for clarity before signing your name.
10. Apply confidently for your personal loan
Once you're done with the heavy lifting of comparing loan offers and choosing a lender, the next step involves filling out some forms. Make sure to provide all answers as accurately as possible, because this can help to provide a smoother and faster approval process. Be ready to submit your ID, income information, and recent bank statements. Some lenders provide instant approvals, while others can take up to several days to process your application.
FAQs
The interest rate is important when you are choosing a personal loan, but there are many other factors to consider. These might include:
- The total amount that a bank will loan you.
- The loan term—the number of months or years you have to pay it back.
- Fees and other additional costs.
- Customer services.
Your financial circumstances and goals will help to determine how much weight you put on each factor.
What qualifies as a good rate for a personal loan varies from one borrower to the next. Your credit score could have a significant impact on loan approval and what terms you are offered.
In general, the interest rates for personal loans are lower than credit card interest rates.
Many lenders do prequalification with a soft credit check. This enables you to get a more accurate idea of the loan terms you might qualify for, and it doesn't affect your credit score.
When you apply for a loan, however, the lender likely will do a hard inquiry on your credit report. This typically has a small, temporary effect on your score.
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