Taking out a loan — a personal loan, in particular — is not a minor decision and not one you should make without considering all the potential factors involved. We want to break down all the questions you should be asking both yourself and any potential lenders before signing any loan.
Before you even type “personal loans near me” into your Google search, it’s important to get all the facts straight on your end. Answering the questions below will help you clarify exactly what you need and how that will impact your financial situation.
We’re mostly addressing personal loans here, rather than a mortgage or car loan, and the reasons for taking out a personal loan vary widely. Whether you’re seeking a loan to pay off a debt or to cover an emergency or something else, you should take the time to figure out exactly how much it will take to handle the situation. This way, you’re seeking out lenders who fit your needs, and you’re not getting into financial danger by borrowing more money than you need.
For better or worse, your credit score will have a major impact on your loan options. Not just which lenders you can work with, but also the terms and fees tied into your loan.
Credit scores typically are between 300 to 850 based on your previous credit history. This is how lenders and banks measure the amount of risk they’re taking when you become a borrower. The higher your score, the more likely lenders will be willing to give you lower interest rates and better repayment options.
If you aren’t sure what your credit score is, you can run your free credit report through the official site AnnualCreditReport.com and then request your credit score. There is often a small fee to obtain the actual score.
This can be hard to assess because your lender and interest rate can make a big impact on what that monthly payment looks like. But there are a few aspects to keep in mind well in advance.
One is your debt-to-income (DTI) ratio, calculated by adding up all your monthly debt payments (mortgage, credit card minimums, car loans, etc.), adding up your gross monthly income, and then dividing your debt by your gross income. Most banks and loan providers recommend a DTI of under 35%, so you want to make sure you’re not taking out an amount of money that will put you over that ratio.
You’ll also want to consider whether you want to take longer to pay off the principal, which will make monthly payments lower, or pay more each month to pay it off faster.
Depending on your financial situation, you may want to compare other potential options to ensure that a personal loan is the best path for you. So, for example, if you’re looking at loans to make home improvements or renovations, it might be beneficial to lay out the pros and cons of personal loans versus home equity loans or home equity lines of credit. If you need a small amount of money — maybe even too little for a lender — and have a regular paycheck, you should consider whether a cash advance app might be a better fit.
Obviously, the hope is that taking a loan and paying back the lender is a very smooth process that all goes according to plan, but that’s not necessarily always the case. Before signing a lending agreement, you need to have a plan in place in case the worst comes to pass, and you find yourself not able to make your payments. This could look like having a family member or partner or friend on-call to help cover missed payments, or some other form of backup.
Signing an agreement with a predatory lender can make an already stressful financial situation even worse, so it is certainly important to take the time to vet potential lenders. You can look them up on a customer review site like Trustpilot or try the Consumer Financial Protection Bureau’s Consumer Complaint Database.
Signing a loan agreement doesn’t have to be stressful or confusing. Knowing your needs upfront and truly evaluating your repayment ability can put you into a good financial space to begin searching for a personal loan. Lenders like WithU Loans want to make taking out short-term personal loans less overwhelming and more empowering.