Should I Get a Personal Loan? 6 Signs It Might Be a Good Idea

If you’re wondering; should I get a personal loan? Then this blog article’s a must-read. Click here for more info and see whether it’s the right choice for you!

Should I get a personal loan?

If you’re asking yourself that question, you’re in good company. From medical emergencies to car repairs to consolidating debt, millions of Americans are turning to personal loans as a solution.

In fact, a staggering 83 million people–or 34% of Americans–have taken out a personal loan in the past year.

That’s great for them, but what about you? Is taking out a loan the best way to handle your unique financial situation?

Here are six things to consider before you take out a personal loan.

1. What Are You Using It For?

Personal loans are classified as unsecured debt, which means you don’t have to put down any collateral to get it.

The good news is that most personal loans offer a lower interest rate than credit cards. This makes it a great choice for consolidating and paying off high-interest credit card debt.

If you’ve fallen on hard times due to medical bills, unemployment, or other factors beyond your control, this could be a viable way for you to get back on your feet financially.

Still, caution is needed. Lower interest rates might tempt you to take out a personal loan to finance a luxurious vacation or an expensive piece of jewelry.

Don’t do it! Debt is debt–and a personal loan is no exception. If you regularly get in the habit of buying high-ticket items you can’t afford, it’ll take more than a personal loan to bail you out.

2. How’s Your Credit Score?

Assuming you have legitimate reasons to take out a personal loan (not for a trip to Tahiti), what are some factors to consider?

A major one is your credit score. Lenders need to know that you’re trustworthy before they’ll give you money for any “personal” reason.

Think about it this way. A lender can repossess your car or your house if you fail to make payments, right?

But what happens if you fail to pay back a personal loan? Short of sending you to collections, there’s nothing they can physically take to repay the loan.

The better your credit score, the more trustworthy you appear to lenders. That’s not to say it’s impossible to get a personal loan if you have poor or average credit. You’ll just have to pay a higher interest rate for it.

3. What Are the Repayments Like?

Unlike a 40-year mortgage or other long-term loans, personal loans are generally capped at seven years.

That means that whatever amount you borrow, you’ll need to repay it in seven years or less (with interest).

In a financial pinch, you may not have much of a choice. But let’s say you’re taking out the loan to finance a large, expensive project, like a major remodel on your house.

How much will you need to pay back every month? Do you earn enough or have enough savings to cover the monthly payments? If the payments are too high, you could easily fall behind–and fall into even more debt than you started with.

If you’re unsure how much you need to borrow or what your monthly payments might be, a loan calculator is a good place to start.

4. Who Are You Borrowing From?

If you have a good working relationship with your current bank, that’s a great place to apply for a personal loan.

But banks aren’t the only option out there. Many credit unions offer personal loans with better interest rates and lower fees than major banks.

In recent years, online marketplace lending has also been a popular source for personal loans. It’s basically a digital “matchmaking” system that pairs borrowers and lenders quickly and easily.

Whichever avenue you choose, be sure you’re borrowing from a reputable lending company. The internet can be a powerful tool to get you the cash you need, but there are also plenty of loan scams out there.

5. Have You Considered Other Options?

A personal loan may be the best option for you–or it might not be.

Before you send in your application, make sure you’ve considered other viable financial paths.

For example, some people seek out personal loans to consolidate higher-interest student loans. This sounds great on the surface, but what are you giving up? Many student loans come with federal benefits or loan-specific protections that you’d lose by refinancing.

What if you’re trying to consolidate credit card debt? Shop around for a new credit card that offers a promotional zero-percent interest rate on balance transfers.

You might also consider borrowing from a Roth IRA or retirement account to temporarily cover your expenses. If you do, just make sure to pay yourself back when your finances stabilize.

6. Does the Loan Come with Hidden Fees?

Before you make any final decisions on a personal loan, be sure to read all the fine print.

Many lenders try to sneak in an insurance policy right before you sign a deal. They may even say it’s legally required for personal loans (it’s not, by the way).

If you choose to add such coverage to protect your family from a financial burden, that’s fine. Just make that decision because you’ve researched it and thought about it, not because you feel pressured.

Another question to ask the lender is if there are any penalties for paying off the loan early. If your financial situation improves quickly and you’re able to pay off the loan ahead of schedule, wouldn’t that be a nice option to have?

Should I Get a Personal Loan? Final Thoughts

As you can see, there are pros and cons to taking out a personal loan.

Because every financial situation is unique, your best bet is to weigh your options and make an informed decision.

Of course, “Should I get a personal loan?” isn’t the only important question to ask. To get (and stay) out of debt, you need to get in the habit of making smart decisions with your finances.

Click here for our latest insights into smarter ways to handle your money.