Personal Loans: Questions to Ask Before You Borrow

There are lots of reasons you may be thinking about applying for a personal loan. Whether you’re considering borrowing money to pay for unexpected expenses, consolidate debt, supplement reduced income, or just to help with managing your money and building credit, ask yourself these questions to help you determine if a personal loan is the right solution for your borrowing needs:

Is a personal loan really the right solution for my borrowing needs?

Personal loans can work for a lot of situations due to their flexibility, fixed interest rates and predictable monthly payments.

If you want to get a personal loan as part of a debt consolidation strategy, it may be a wise solution if interest rates are lower than that of your existing debt. If you’re considering applying for a personal loan for things like home improvements, weigh the costs with how much the improvements will increase the value of your home before borrowing.

However, as with any financial decision, it's important to evaluate your specific needs, ability to repay and other available options for getting extra money before applying for a personal loan.

What is my current credit score, and how will taking out a personal loan affect this?

Although many lenders focus on a loan applicant’s credit score, OneMain Financial also considers other factors like your credit history and ability to repay the loan. It’s always a good idea to check your credit to correct any errors and address potential issues like outdated or incorrect information. If you’re a OneMain customer, you can check your VantageScore by logging in to your online account.

Credit scores are determined through a combination of payment history, debts, length of credit history, credit utilization ratio, types of credit used and new credit. Essentially, credit scores reward you for responsible financial behavior and penalize you for things like missed payments or outstanding debts. With that in mind, paying your bills on time can be one of the best ways to maintain and raise your credit score. Conversely, if payments are missed, your credit score could drop.

Some lenders, like OneMain, will allow you to check to see if you’re prequalified for a loan, which won’t impact your credit score at all. If you’d like to learn even more about the importance of credit history and scores, and how to improve yours, check out some of our credit tips including 6 Tips to Improve Your Credit Score and What is VantageScore and How Does It Work?

Will I be able to afford the monthly payments?

Calculate your monthly budget to determine how much you can comfortably afford to repay each month. After you’ve gone through your monthly expenses and created a budget, be sure to use a personal loan calculator to get an idea of what you might pay each month and how those payments would fit into your budget.

Make sure that adding a loan payment to your budget won't strain your finances or lead to missed payments on other obligations.

How much money should I borrow?

Consider only borrowing what you need to avoid overextending yourself financially. How much money you should borrow when taking out a personal loan really depends on these three factors:

• The amount it would take to accomplish your goal
  
• How much you qualify for
  
• Your lender’s minimum and maximum loan sizes
  

However, even if you qualify to borrow a certain amount of money, that doesn’t mean you should borrow that much if you don’t really need it. Whenever possible, you should borrow the least amount of money that you need in order to accomplish goals and mitigate debt.

How can I get the best interest rate?

The interest rate a lender offers to you for a personal loan is largely based on your credit history, employment and income information and your other debts. The more likely you are to make your payments on time, the less risky you appear to lenders, so you may be more likely to receive a lower interest rate compared to someone who is considered high-risk.

You may be able to Improve your credit score by paying bills on time, reducing outstanding debt and correcting any errors on your credit report. Shopping around and comparing offers from multiple lenders may also help you secure the best rate.

Learn what makes you creditworthy and how to improve your chances of getting a low-interest rate on a personal loan.¹

How long will it take to pay off my personal loan, and what happens if I pay it off early?

If you decide to apply and are approved for a personal loan, your lender will provide you with the loan terms, such as the interest rate and annual percentage rate (APR), and a schedule of payments. In general, most lenders will offer personal loans with a timeframe of one to five years.

While it may seem like a good idea to pay off your personal loan early, you’ll need to revisit the terms of your loan. Some lenders will charge penalties for early repayment, and you’ll have to compare those penalty fees to the amount you’ll save in interest for paying it off early.

At OneMain, we offer personal loans with no prepayment fees.

Are there any fees and do they fit in my budget?

The loan term affects both your monthly payments and the total interest paid over time. Shorter loan terms can result in higher monthly payments but lower overall interest costs.

Sometimes, personal loans will have an origination fee, which is a one-time, upfront fee that that lender charges in order to cover the cost of processing your loan.² For example, when OneMain is permitted by law, it charges an origination fee. The amount of the fee depends on the state laws where the loan is made. The fee can either be a flat fee (ranging from $25 to $500) or a percentage of the total loan amount (typically between 1% to 10%).

While not all personal loans have origination fees, it’s important to compare lenders and examine the total cost of the loan. A personal loan with an origination fee may offer a lower interest rate than one without, and therefore, decrease the total cost of the loan. However, before you agree to a loan with an origination fee, be sure that the fee fits into your budget.

What is the difference between an interest rate and annual percentage rate (APR), and how do they impact my personal loan?

An interest rate is the cost you will pay each month to borrow the money, expressed as a percentage. It is a percentage of your principal, so the amount you pay in interest correlates with how much you owe on the loan.

An annual percentage rate (APR) reflects the interest rate, as well as any other charges that you may pay, such as an origination fee. The APR is typically higher than your interest rate.

Learn more about the difference between APR and interest rates.

Are there different types of personal loans?

While personal loans can be used for just about anything, there are two different types of personal loans — secured and unsecured. Depending on your credit history and income, you may have a preference of one over the other.

A secured loan requires you to provide collateral, such as your car or other valuable item, while an unsecured loan doesn’t require any collateral.

With a secured loan, the lender could take possession of the collateral if you were to default on the loan. However, your interest rate and APR may be lower with a secured loan and you may also qualify to borrow more money.

What happens if I’m unable to make my monthly loan payments?

Although you have good intentions of making all of your monthly personal loan payments, sometimes life happens. Whether a job loss or other unexpected hardship impacts your ability to repay your loan, a personal loan is considered past due even if a payment is just a few days late. If your payment is delinquent, you may be charged a late fee.

Should your personal loan go into default, it would mean the payment is late by 30-90 days, depending on the terms of your loan. If this happens, you’ll most likely end up owing more money as penalties, fees and interest charges will build up on your account, and your credit will be damaged.

However, there’s no need to let it get to this point. As soon as you realize you’ll be unable to make a payment, communicate with your lender to see what options you have. If you have a unique situation, such as job loss, your lender may allow you to make a partial payment or negotiate a settlement.

If you have a personal loan with OneMain and are having difficulties making payments, please contact your local branch during business hours Monday-Friday. Find your branch phone number by logging in to your online account or using our online branch locator.

What to do before applying for a personal loan

By considering your answers about taking out a personal loan, you’ve already taken the first step toward making an informed decision about whether it’s the best choice for you in your present circumstances. Evaluating your financial situation, seriously considering why you need the loan, understanding the process of how to get a personal loan, and assessing your ability to make the monthly payments are all considerations you’ll need to weigh before you apply for a personal loan.

If you decide that taking out a personal loan is the right next step, you’ll want to be prepared for the questions the lender will ask. Typically, when applying for a personal loan, your lender will look into your credit history, income and debt-to-income ratio, as well as ask the following questions:

• How much money do you need?
  
• How will you use the money?
  
• How will you repay the loan?
  
• Can you put up any collateral?
  

Even our best-laid plans have a way of being changed by things over which we have no control. Unforeseen circumstances could be the reason you’re considering taking out a personal loan, but they can also affect your ability to repay that loan. By taking a calm, rational evaluation of your financial needs and speaking with a credible lender, you’ll be able to make the best decision for your situation.

Source:

1. https://loans.usnews.com/how-to-get-a-low-interest-rate-on-a-personal-loan
   
2. https://www.thebalance.com/personal-loan-origination-fees-should-you-pay-4686779247
   

This article has been updated from its original publication in 2020. By Melina Duffett, Contributed by Kim Gallagher.