8 questions to ask yourself before taking out a personal loan

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Ask yourself these questions before applying for a personal loan. (iStock)

When finances are tight, it is tempting to turn to a personal loan. Borrowers use personal loans for a variety of reasons including debt consolidation, moving expenses, vacations, and to cover lost income. While personal loans offer flexibility and can provide much-needed relief when the going gets tough, it’s essential that you research your options carefully to avoid ending up with a loan on unreasonable terms.

Before you apply for a personal loan, here are some frequently asked questions that might help you decide if it is right for your finances:

1. When is a personal loan a good idea?

A personal loan can be a good idea if you can afford to make monthly payments and qualify for a fair interest rate. Use Credible’s free online tools in the online marketplace to see what type of loan interest rate you qualify for.

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If possible, avoid lenders who market to people with bad credit or who offer loans without a credit check. Many of these companies charge excessive interest rates. The average rate for personal loans varies from 6 percent to 36 percent, But each state has different usury laws that dictate the maximum a lender can charge. Some “bad credit” and payday lenders charge up to 300% interest. These rates can complicate the management of borrowers.

2. How much money do I need to borrow?

Before you apply for a personal loan, sit down and figure out exactly how much money you need. Try to borrow only as much as you can afford to repay. If you are considering taking out a personal loan to consolidate other debt, your lender may ask you for specific numbers and may even require you to allow them to send payments directly to your other debt accounts. Some lenders charge loan origination fees, which could increase your total loan amount or reduce the amount you receive on the loan.

Credible can help you compare personal loan companies (and hopefully offer you the lowest rates for what you’re looking for).

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You should also consider using an online personal loan calculator to determine how much money you can afford to borrow.

3. How long do I have to repay my personal loan?

Your lender will discuss your repayment terms with you. Typically, personal loans have repayment terms of between one and five years. Some lenders will allow you to choose your repayment terms. If you want to save the most money, choose a shorter repayment term. However, a longer repayment term will give you lower monthly payments. Use an online research tool like Credible to compare rates from several lenders.

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4. How do I get the best interest rate on my personal loan?

If you want to qualify for the best interest rates, there are a few things you can do to help persuade a lender to offer the best deal, including:

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5. Will a personal loan affect my credit rating?

Personal loans affect your credit score. When you apply for a loan, the information is included on your credit report and can affect your score. Loan applications add serious credit demand to your credit report. If you have too many requests, your score might drop.

When you receive a loan, the new debt also affects your credit score. However, a personal loan can have a positive impact on your credit score if you make payments on time or if you use the loan to pay off other debts.

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6. Where can I get a personal loan?

Many types of lenders offer personal loans. Many people prefer to work with their local credit union. If you are a member of a credit union, you might benefit from working directly with them for a personal loan. Many credit unions offer lower rates or are more willing to work with clients who have difficulty qualifying. You can also work with banks, online lenders, or crowdfunding options.

You can compare rates and see different loan options all in one place using an online tool like Credible.

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7. What is the difference between a secured loan and an unsecured personal loan?

When you take out a personal loan, you may be eligible for a secured or unsecured loan. Most personal loans are unsecured which means the lender gives you money with just your signature. Some loans may require collateral, such as a car or a house. These loans are unsecured because the lender guarantees your commitment to repay with something you own. If you don’t make your payments, the lender can take your collateral

8. What are the alternatives to personal loans?

Personal loans are not your only option if you need additional income. Here are some alternatives:

0% APR credit card: If you want to consolidate your debt or save money on paying off your debt, consider transferring your balances to a 0% APR rate credit card. If you use an online tool like Credible to compare credit card offers, you can find a credit card with promotions ranging from six to eighteen months with no interest.

Home equity loan or home equity line of credit: Homeowners may be able to tap into their equity and access a lump sum or a line of credit. Your home is used as collateral in these types of loans. While interest rates slowly start to rise, you can still get lower interest rates than normal.

Peer-to-peer loan: If you want to avoid banks and credit unions, consider a peer-to-peer loan company. These sites connect people willing to lend money to individuals or businesses.

Personal loans can be a great option if you need a little extra cash to get you through the next few months, pay for emergency relief, or consolidate other debt payments. Remember to do your research to find the one that best suits your needs.

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