Seven Questions to Ask When Evaluating Personal Loan Options

Top of a personal loan application. — (Image credit: Getty Images)

Whether you’re planning to consolidate credit card debt, renovate your home or embark on a dream vacation, personal loans can be a powerful tool to help you achieve your financial aspirations.

However, not all loans — or lenders — are created equal. Carefully choosing the right loan can help set you up for success. It requires asking the right questions to ensure your loan fits your needs, aligns with your goals and comes from a trustworthy provider.

To help you make confident and informed choices, here are seven essential questions that Americans should ask when evaluating personal loan options.

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1. How will it affect my credit rating?

When you apply for a loan, your credit will typically be checked through either a "soft pull" or a "hard pull." A soft pull, often used during the initial application process by some lenders, doesn’t affect your credit score or appear on your credit history.

However, once you accept a loan, a hard pull is usually conducted, which may temporarily impact your credit score and will appear on your credit report. It’s important to verify that a lender’s initial application process involves only a soft pull to avoid any unnecessary impacts to your credit score during the evaluation stage.

Be diligent in understanding how each step of the process may affect your credit.

Additionally, personal loans, classified as installment credit, can complement revolving credit like credit cards and help diversify your credit profile.

Using a personal loan to pay off credit card debt, for example, may lead to an improvement in your credit score when managed responsibly.

2. What should I know before taking out a loan?

A personal loan is not free money — it’s a financial commitment. Take the time to understand interest rates and loan terms, and how factors like credit history and debt-to-income ratio can impact your loan eligibility.

Educating yourself about these elements helps ensure you’re choosing a loan that fits your situation and goals.

3. How quickly do I need the money?

Timing matters. Online lending platforms often offer faster application and approval processes than traditional brick-and-mortar banks.

Some of these platforms will facilitate loan funding in as little as one business day after final approval, depending on your bank’s transaction processing speed.

4. Is this lender trustworthy?

Research is key to finding a reliable lender. Consumers can visit the local or regional Better Business Bureau (BBB) website or call to find customer feedback and complaints about lenders or lending platforms based in their communities or home states.

Similarly, they can explore the Consumer Financial Protection Bureau (CFPB) website and search its Consumer Complaint Database for customer complaints filed with that organization about specific lenders.

A quick online search on sites like Trustpilot can also reveal customer experiences and help you avoid untrustworthy providers.

5. Can I afford the monthly payments?

Borrowing beyond your means can make your financial situation considerably worse. If you accept a loan with a monthly payment that is more than you can manage, you can quickly rack up penalties and late fees and increase your risk of default.

Review all loan costs, including fees like origination fees, and ensure the monthly payments fit comfortably within your budget.

6. What are the repayment terms?

Depending on the size of the loan, it may take months or several years to repay it. The length of your loan term affects both your monthly payments and total interest.

Shorter-term loans have higher monthly payments, but the total interest paid will be lower when compared to longer-term loans.

Carefully review a loan’s terms, including length, payment schedule, the total interest or finance charge and any penalties, during your evaluation process. Choose terms that align with your budget and financial goals.

Also, check to see if the lending platform offers any hardship programs if your circumstances should change during loan repayment.

7. Is this the right financial option for me?

Personal loans are versatile but may not always be an ideal choice for your situation and financial goals.

For example, if you’re a homeowner, a home equity loan or line of credit could offer better terms than a personal loan. Take the time to shop around and figure out what solution best aligns with your financial circumstances, needs and other factors.

While personal loans can help you achieve financial milestones — whether it’s paying off and consolidating debt, covering emergency expenses, or making home renovations — they are just one piece of a larger financial puzzle.

The path to improving your financial well-being requires an ongoing commitment to manage your spending and saving habits. Remember to ask the right questions and choose a loan that supports — not hinders — your journey to financial success.

Disclaimer

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

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As Chief Executive Officer of Prosper Marketplace, David oversees the company’s vision, overall operations and performance. David joined the company in March 2016 as Chief Financial Officer and was named CEO in December 2016. David brings more than 20 years of financial management experience to this role. Prior to joining Prosper Marketplace, David served as Senior Financial Officer of USAA’s Chief Operating Office, where he oversaw USAA’s real estate unit, bank, P&C and life insurance companies, investment management company and the call centers/distribution functions.