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Loans

10 questions to ask before taking out a personal loan

A personal loan can help with consolidating debt, home improvements and other necessities.

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Personal loans can provide an affordable alternative to credit cards and help you finance life's big purchases while saving on interest. 

Personal loans are growing in popularity: As of the third quarter of 2023, roughly 23.2 million borrowers in the U.S. owed a total of $241 billion in personal loans, according to online lending marketplace Lending Tree. While that's far less than we've taken out in mortgages, credit card bills and car loans, it's still double the $117 billion in outstanding personal loans seen in 2017.

It's critical to have a repayment plan if you're looking to take out a personal loan, whether it's to consolidate debt, finance a home improvement or pay for a cross-country move.

Below, CNBC Select shares 10 questions you should answer to be well-prepared for a new personal loan.

What we'll cover 

1. How much money do I need?

The smallest personal loans begin at around $500, but most lenders have a minimum of between $1,000 to $2,000. If you need less than $500, it might be easier to save the money, use a credit card or borrow from a friend or family member. 

For borrowers looking for smaller loans, PenFed, a federal credit union, provides a wide range of personal loan options. Customers can borrow as little as $600 or as much as $50,000.

PenFed Personal Loans

  • Annual Percentage Rate (APR)

    7.99% to 17.99% APR

  • Loan purpose

    Debt consolidation, home improvement, medical expenses, auto financing and more

  • Loan amounts

    $600 to $50,000

  • Terms

    1 to 5 years

  • Credit needed

    Good/Excellent

  • Origination fee

    None

  • Early payoff penalty

    None

  • Late fee

    $29

2. Do I want to have the money sent to my bank account?

When you take out a personal loan, the cash is usually sent to your checking account. If you're using a loan for debt consolidation, however, some lenders will send the funds directly to your creditors.

If you prefer a hands-on approach or are using the money for something other than paying off existing debt, have the funds wired to your checking account.

A Happy Money personal loan may be a good choice if you're looking to finance debt consolidation. Happy Money allows you to deposit the money you borrow into your linked bank account or directly to your creditors.

Happy Money

  • Annual Percentage Rate (APR)

    11.72% - 17.99%

  • Loan purpose

    Debt consolidation/refinancing

  • Loan amounts

    $5,000 to $40,000

  • Terms

    2 to 5 years

  • Credit needed

    Fair/average, good

  • Origination fee

    0% to 5% (based on credit score and application)

  • Early payoff penalty

    None

  • Late fee

    5% of monthly payment amount or $15, whichever is greater (with 15-day grace period)

Terms apply.

3. How long will I have to pay it back?

You'll have to start paying the loan company back in monthly installments within 30 days. Most lenders provide repayment terms between six months and seven years. Both your interest rate and monthly payment will be impacted by the length of the loan you choose.

4. How much interest will I pay?

Your interest rate depends on several factors, including the loan amount, your credit score and your term, or the length of time you'll be paying the loan back. Interest rates can be as low as 5.99% or over 29.99%. Typically, you'll get the lowest interest rate if you have a good or excellent credit score and you choose the shortest possible repayment term. 

According to the Fed's most recent data, the average APR for 24-month personal loans was 12.17%. This is often well below the average credit card APR, which is why many consumers use loans to refinance credit card debt.

Personal loan APR is most often fixed, which means it stays the same for the life of the loan.

See if you're pre-approved for a personal loan offer

5. Can I afford the monthly payments?

When you apply for a personal loan, you can choose which repayment plan works best for your income level and cash flow. Lenders will sometimes provide an incentive for using autopay, lowering your APR by 0.25% or 0.50%.

Some borrowers prefer to make their monthly payments as low as possible, so they choose to pay back their loan over several months or years. Others prefer to pay their loan faster, so they choose the highest monthly payment.

Choosing a low monthly payment and a long repayment term often comes with a higher interest rate. In the long run, you up paying more for the loan. 

As a general rule, borrowers should aim to spend no more than 35% to 43% on debt, including mortgages, car loans and personal loan payments. If your monthly take-home pay is $4,000, for example, you should keep all total debt obligations at or below $1,720 a month.

Mortgage lenders in particular are known for denying loans to people with debt-to-income ratios higher than 43%. Personal loan lenders tend to be a bit more forgiving, especially if you have a good credit score and proof of income. If you think you can handle higher payments temporarily to save on interest, you may be able to stretch this ratio a bit to take on a higher monthly payment.

It's harder to be approved with a debt-to-income ratio above 40%, and stretching yourself too thin could lead to cash flow problems. You should only do this as a temporary measure and if you have some kind of safety net, such as a partner's income or an emergency fund.

6. Does the personal loan have fees?

Most lenders don't charge any fees other than interest, although some may charge an origination fee, a one-time upfront charge subtracted from your loan to pay for administration and processing costs. It's usually between 1% and 5% of the loan amount, although sometimes it can be a flat fee. If you took out a loan for $10,000 and there was a 5% origination fee, you would only receive $9,500 and $500 would go back to your lender. Origination fees are rare enough that you should be able to avoid them.

7. Do I have a good enough credit score?

Before you start applying for personal loans, it's important to know your credit score. Most lenders, particularly online banks, are looking for applicants to have a good credit score, considered 690 or above. If you have an existing relationship with a bank, however, you may get approved for a favorable deal with a lower score if you have a good history of paying bills on time and honoring the terms of your past loans and accounts. 

Some credit unions will offer lower interest rates on personal loans and work with borrowers who have fair or average credit scores. But you usually need to become a member of the union and may need to open a savings account before you can qualify.

Upstart accepts applicants who have insufficient credit history or don't have a credit score at all. You'll likely pay higher fees and interest rates than if you had a good credit score, so be sure to read the terms and conditions before you sign on for the loan.

8. What other options do I have?

If you need to pay off debt, a balance transfer credit card with a 0% introductory APR is another option instead of a personal loan. These cards allow you to pay zero interest, some for up to 21 months, which can easily save you hundreds of dollars.

In addition to balance transfers, 0% APR credit cards are also excellent for financing large purchases over time.

The Citi Simplicity® Card and the Wells Fargo Reflect® Card both have zero-interest periods that last 21 months from card opening and neither charge annual fees.

Citi Simplicity® Card

On Citi's Secure Site
  • Rewards

    None

  • Welcome bonus

    None

  • Annual fee

    $0

  • Intro APR

    0% Intro APR for 21 months on balance transfers from date of first transfer and 0% Intro APR for 12 months on purchases from date of account opening.

  • Regular APR

    19.24% - 29.99% variable

  • Balance transfer fee

    There is an intro balance transfer fee of 3% of each transfer (minimum $5) completed within the first 4 months of account opening. After that, your fee will be 5% of each transfer (minimum $5).

  • Foreign transaction fee

    3%

  • Credit needed

    Excellent/Good

Wells Fargo Reflect® Card

On Wells Fargo's secure site
  • Rewards

    None

  • Welcome bonus

    None

  • Annual fee

    $0

  • Intro APR

    0% intro APR for 21 months from account opening on purchases and qualifying balance transfers.

  • Regular APR

    18.24%, 24.74%, or 29.99% Variable APR on purchases and balance transfers

  • Balance transfer fee

    5%, min: $5

  • Foreign transaction fee

    3%

  • Credit needed

    Excellent/Good

See rates and fees. Terms apply.

If you don't want to pay a balance-transfer fee, there's the Wings Visa Platinum Card.

Wings Visa Platinum Card

Information about the Wings Visa Platinum Card has been collected independently by CNBC and has not been reviewed or provided by the issuer of the card prior to publication.
  • Rewards

    None

  • Welcome bonus

    None

  • Annual fee

    $0

  • Intro APR

    0% for the first 12 months on purchases and balance transfers

  • Variable APR

    8.15% to 18.00%

  • Balance transfer fee

    Either $10 or 3% of the amount of each balance transfer, whichever is greater.

  • Foreign transaction fee

    None

  • Credit needed

    N/A

Terms apply.

Pros

  • No annual fee
  • No fee charged on purchases made outside the U.S.
  • Low 8.15% to 18.00% variable APR
  • No deadline for when balances can be transferred, though the intro period starts at account opening

Cons

  • Credit union membership required, which may cost $5
  • No rewards program
  • Transfer timeline: Balances can be transferred at any time during the first 12 months, but the intro period begins when you open your account
  • Estimated total fees and interest on debt repayment: $638

9. How soon do I need the money?

Some lenders need up to 10 business days to provide the funds to borrowers. If quick access is important for your situation, LightStream delivers funds electronically on the same day you're approved. It offers loans for as little as 7.49% APR, the lowest rate of any lender.

LightStream Personal Loans

  • Annual Percentage Rate (APR)

    7.49% - 25.99%* APR with AutoPay

  • Loan purpose

    Debt consolidation, home improvement, auto financing, medical expenses, and others

  • Loan amounts

    $5,000 to $100,000

  • Terms

    24 to 144 months* dependent on loan purpose

  • Credit needed

    Good

  • Origination fee

    None

  • Early payoff penalty

    None

  • Late fee

    None

Terms apply. *AutoPay discount is only available prior to loan funding. Rates without AutoPay are 0.50% points higher. Excellent credit required for lowest rate. Rates vary by loan purpose.

Discover Personal Loans will deliver funds the next business day and has loans available for as little as $2,500 or as much as $40,000.

Discover Personal Loans

  • Annual Percentage Rate (APR)

    7.99% to 24.99%

  • Loan purpose

    Debt consolidation, home improvement, wedding or vacation

  • Loan amounts

    $2,500 to $40,000

  • Terms

    36, 48, 60, 72 and 84 months

  • Credit needed

    Good

  • Origination fee

    None

  • Early payoff penalty

    None

  • Late fee

    $39

Terms apply.

10. How will a personal loan affect my credit score?

Personal loans are a form of installment credit, while credit cards are considered revolving credit. Having both types in your profile strengthens your credit mix.

While taking on an installment loan will not really boost your credit score, using a personal loan to pay off revolving debt will cause the most noticeable increase. Once your cards are paid off, keep your spending below 10% of your available credit and notice what a difference it makes.

CNBC Select now has a widget where you can put in your personal information and get matched with personal loan offers without damaging your credit score.

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Bottom line

Personal loans are most beneficial when you have a plan. After you've answered these questions, do a soft inquiry on the lender's website or a third-party lending marketplace to see your options without hurting your credit score. Only after you see what you prequalify for should you follow through with a hard inquiry

For rates and fees for the Amex EveryDay® Credit Card, click here

For rates and fees of the Discover it® Balance Transfer, click here.

Information about the Wings Visa Platinum Card and Amex EveryDay® Credit Card has been collected independently by Select and has not been reviewed or provided by the issuer of the card prior to publication.

Why trust CNBC Select?

At CNBC Select, our mission is to provide our readers with high-quality service journalism and comprehensive consumer advice so they can make informed decisions with their money. Every insurance review is based on rigorous reporting by our team of expert writers and editors with extensive knowledge of insurance products. While CNBC Select earns a commission from affiliate partners on many offers and links, we create all our content without input from our commercial team or any outside third parties, and we pride ourselves on our journalistic standards and ethics.

Catch up on CNBC Select's in-depth coverage of credit cardsbanking and money, and follow us on TikTokFacebookInstagram and Twitter to stay up to date.

Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.
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