4 Questions to Ask Before You Apply for a Personal Loan

personal loanPersonal loans are loans issued by banks, private lenders, and credit unions. Some of the more popular uses of personal loans are to consolidate credit card debt, pay for major home improvements or repairs, and other items like vacations.  Before you sign on the dotted line there are some questions you should ask to ensure a personal loan is the right solution for your situation.

How do I know which personal loan is right for me?

Before making any decision regarding a personal loan, you should carefully consider all of your options. There are many resources available online, such as financial calculators, that can help borrowers simulate the impact of taking out a personal loan would have on their finances. Using a debt consolidation or personal loan financial calculator, can provide potential borrowers answers to key questions like what would the estimated payment will be based on various  personal factors such as your current credit score and loan length? By running the numbers ahead of time, potential borrowers can see which loan package best fits within their budget.

What will lenders want to know about me?

Financial institutions will want to verify that you have a stable income stream and are a good credit risk. Lenders will look at any debt you have, including any outstanding student loans or personal credit card and mortgage debt to determine 1) how much additional debt you qualify for and 2) if you will be able to afford the additional monthly payment on the requested loan.  Your credit score indicates how responsible you are with current and past debt and is a major factor in determining the interest rate and terms of your loan. If you have too much personal debt and few assets to provide as collateral to the bank, you may need to have someone co-sign the loan.

What is the approval process?

The approval process for a personal loan is fairly straightforward. Applying for credit will impact your credit score so you want to compare.  Once the application is completed, either online or at the financial institution if you prefer, you will receive a pre-approval notice or denial within 1-2 business days. Depending on your lender they may require copies of your most recent pay stubs, W-2’s, and tax returns.

Are there any traps I should avoid?

A personal loan can be a great option to make a major purchase or pay off higher interest debt however, there are several potential traps you should watch out for.

One of the easiest traps to fall into is taking out a larger loan amount than you need. Another trap to avoid is selecting a loan based solely on the interest rate and not the total cost of the loan. The annual percentage rate or APR, is the total cost of the loan including interest and fees expressed as a yearly rate. In an effort to protect consumers in dealings with creditors and lenders, the Truth in Lending Act or (TILA) was passed in 1968.  In a series of regulations, the Federal Reserve spelled out in detail what information lenders are required to provide to potential borrowers before they can sign loan documents. The most important information lenders must disclose to borrowers are the annual percentage rate (APR), total cost including fees to the borrower, and the term of the loan.

Prepayment penalties or origination fees are uncommon on most personal loans but are something you want to ask your lender about and verify before signing your loan documents. An origination fee is a fee that is charged upfront and taken out of the loan proceeds. Pre-computing is a method of calculating the interest due on a loan and adding that to the balance due on the loan up front. This has the effect of increasing the amount of interest you will pay if you pay the loan off before the payoff date.

By asking questions and carefully weighing the options before applying for a personal loan, you can avoid costly mistakes and ensure you are making the right decision for your financial situation.

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10 Responses to 4 Questions to Ask Before You Apply for a Personal Loan

  1. Vivian Black 11/16/2017 at 6:46 pm #

    I appreciate that you mentioned how a personal loan can affect your credit score, so it would be important to compare them carefully. That’s perfect to learn since I am thinking of getting a personal loan since I just really need it badly to bail my fiance out of jail. He had been falsely accused thus we’ll need a criminal attorney’s help too. Hopefully, I can loan enough to cover the expenses and still be able to pay it back. Thanks for the helpful read about personal loans.

  2. Heather 08/09/2017 at 9:05 am #

    With any type of credit or loan option, you definitely want to do your homework before you decide on one. Thanks for sharing this guide!

  3. Gregory Willard 08/16/2016 at 10:01 am #

    I think it’s a great idea to figure out what lenders will want to know about you. I had a friend that needed to get a loan for personal reasons, and wasn’t ready for everything they asked. If I were in that situation, I think I would want to be as prepared as possible.

  4. Chella 07/09/2015 at 5:49 pm #

    I think it is really important for one to seriously consider these questions in order to avoid making a hasty decision that could prove costly in the future. Prior preparations before taking a personal loan are very vital and would save one a great deal of trouble and frustrations in the long run.

  5. SB @ One Cent at a Time 06/28/2015 at 7:39 pm #

    The first step is to find a creditor within a family, if not found then only the rate comparison comes in to picture. I’d swap 15+% credit card debt with a 11% personal loan any day, provided fees are not much.

    • Paul 06/29/2015 at 4:51 am #

      A personal loan is a great option for debt consolidation SB, as long as the terms make sense and the underlying cause of taking on the debt has been addressed.

  6. Jayson @ Monster Piggy Bank 06/20/2015 at 6:49 pm #

    After all these questions asked, there must be follow-up questions until we know what we’re getting ourselves into. These 4 questions are necessary to mostly cover the most important details in personal load application.

    • Paul 06/22/2015 at 6:31 am #

      As with any process involving your finances, there are many questions that you will have. Look at all of your options, get as much information as possible, and make the right decision for your particular situation.

  7. Zee Hamdani 06/19/2015 at 4:54 pm #

    Good questions to ask before applying for a personal loan. Though I personally think no one should take out a loan for a vacation as it may cause lots of problems for you in the long run. Loans should only be used for important things.

    • Paul 06/22/2015 at 6:23 am #

      I agree with you Zee and I wouldn’t encourage that, I mentioned it in the post because it is a major reason consumers take out personal loans.