11 Important Things to Consider About Personal Loans

Personal loans are often a sticky subject. Most times, you need money fast to purchase an item, or to pay off a bill. That does not leave you with a good feeling. Thus, you have come to dread consumer installment loans. I can understand that needing a loan is not always a good thing. Sometimes, a personal loan can help, but not always. Obtaining a personal loan may be a good thing if you use it properly. The key is to make smart financial decisions and use credit wisely. Continue reading to find out all the things to consider about personal loans. Understanding these 11 things helps you make smart financial decisions and keeps you from drowning.

Things to Consider about Personal Loans

As anything related to finance, personal loans are complex. But not so complex that you cannot have a high understanding of them. As a matter of fact, I cannot stress enough how important it is that you fully understand personal loans before you decide to get them. If you have absolutely no idea, you should start from the basics. And this is what we’ll do right now. Besides this, we’ll also get into some details, so you can fully understand this financial concept.

Number 1 – What Is A Personal Loan?

Since we are talking all things to consider about personal loans, it is important to truly understand personal loans. I am going to give you a basic breakdown of loans and dig in a little deeper throughout this article. A personal loan is money loaned to you by a financial institution. You promise to repay the money by making regular monthly payments for a specified amount of time. The financial institution can be a bank, credit union, online lender, or even family and friends. The amount you repay per month is static, so it typically does not change. There is interest added onto the money you borrow. That amount varies based upon your credit score.

There are typically fees associated with a personal loan. It is important that you read all the fine print and understand what you are signing. This is a contract you are binding yourself to and you should not enter it without thought and consideration. Lenders expect you to repay the loan and you give your word you will. I know it is easy to get lost in all the details of a loan agreement, but it is important that you understand it. There are implications if you do not pay the loan timely. If you do not understand your agreement, you may find yourself in default.

Number 2 – Different Types Of Personal Loans

When thinking about borrowing money, some more things to consider about personal loans are the different personal loan options. As I mentioned, there are different types of lenders. You can borrow from a personal loan finance company or online lenders. Honestly, you can borrow money from just about anyone. Always make sure you have some type of binding contract. This protects you just as much as the lender.

When you think of a personal loan, the first type that comes to mind is one from a well-known bank. Today, online banks are a huge part of lending money. In the past, online loans were for those with bad credit, but that is not the case anymore. Online loans are fast and easy. You apply and submit all documents online. You receive a response in about 24 hours. If approved, the money is in your bank account in less than a day. Interest rates tend to be a little higher, but that might be worth it to you for the ease of applying.

There are also fast cash loans and payday loans. Be careful when it comes to these types of loans. They are a quick way to get small amount of cash. They have high-interest rates and short repayment schedules. If used properly, they can help you through a time when you are hurting for cash. However, if used poorly, they can only hurt you, your financial outlook and your credit. If you do not pay them back on time, you get hit with large fees. If you know for sure you can pay the money back on time, it may be a good temporary solution. These types of loans should not be used as a permanent fix and should not be used often.

Number 3 – How Can I Get A Personal Loan?

One of the first things to consider about personal loans is which one is right for you. There are many different lenders out there, but they may not all fit your needs. It is on you to do some research. I realize this may not be how you want to spend your time, but it could save you money. There is so much information available to you online, a few searches should produce the information you need.

Remember, lenders have different fees and interest rates. If you get a loan from the first lender you come across, you could spend more money than you need. It important that you educate yourself. Banks are not going to do all the work for you, no matter how friendly they seem. Remember, they are in the business to make money. I am not trying to paint banks in a negative light, just reminding you that you need to arm yourself with information.

It is important to understand how much money you really need. Remember, this is not free money. You have to pay it back. The more money you borrow means the more money you repay. Only borrow what you need. Do not think ‘oh, it would be really nice to get a new TV’ and add that into your loan. There may be better ways to pay for a TV other than a loan on which you are paying interest. Focus on your goal for borrowing the money. Do not get sucked into thinking about all the things you want to buy.

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Number 4 – How Do I Apply?

Knowing how and where to apply for a loan definitely falls into the things to consider about personal loans category. Believe it, or not, this is the easiest step when it comes to personal loans. I remember a time when applying for a personal loan meant going into the bank and sitting for what seemed like hours. You had to sit in one of those uncomfortable chairs and wait for someone. You hoped that you did not see anyone you knew. Finally, someone became available and then the tedium of filling out the form, which was on paper. Then it seemed to take weeks before you got a phone call telling you if you were approved.

Thankfully, those days are long gone. Now, you can go online and fill out a loan application. Most banks, even the big ones, have the ability to apply online. They may call you and gather more information, but you probably will not have to go into the bank. If you prefer to talk to someone in person, you can still go in and handle your business. Banks are more comfortable and friendly now. So, once you are so you want to apply for a loan. After you do your research to find the right lender for you, applying for a loan can take only minutes.

Number 5 – What Role Does My Credit Play?

It always seems to come back to your credit, right? And yes, that is true. Your credit makes a difference when it comes to loans. Honestly, it makes a difference in just about everything. That is why it is important to protect it. Your credit is absolutely one of those things to consider about personal loans.

A credit score is a three-digit number that prominently appears on your credit report. Your credit report is a list of your entire credit history, including payments and credit borrowed. Any late payments you made are on your credit report. If you have not paid a bill, guess what? It is on there, too. Your credit score is an indicator to lenders. It tells them how risky it is to lend you money. It tells them how likely you are to repay money you borrow. The lower your credit score, the more of a risk you are to lenders.

It is important for you to pull your credit report to see what is on there. If there are errors, you can correct them. It also informs you what lenders know about your credit. It gives you a place to start when trying to repair your credit, or get a loan. You can get money loans for bad credit, but it may be harder. You’ll have to do more work to get a loan. You end up paying more money because your interest rate is going to be higher.

Number 6 – Interest Rates

So, about those pesky interest rates…another one of those things to consider about personal loans is interest. Sometimes, the interest rate on a loan breaks you. It can change a loan from something you can afford to something you are crazy to consider.

Stay with me while I dig deeper into interest rates. This is information that is important for you to understand. There are two types of interest, fixed and variable. A fixed rate is just that, one that is fixed and does not move. A lender calculates this type of interest based on your credit score and adds it to the principle. Interest rates can vary from 8 percent for great credit to 30 percent for poor credit.

Below I highlight the difference in numbers:

Good credit = 10 percent interest on a loan for $10,000

10 percent of $10,000 – $1,000 of interest

$10,000 (principle) + $1,000 (interest) = $11,000 loan

$11,000 divided by 36 months (repayment period) = $305.56 per month

Poor credit = 30 percent interest on a loan for $10,000

30 percent of $10,000 – $3,000 of interest

$10,000 (principle) + $3,000 (interest) = $13,000 loan

$13,000 divided by 36 months (repayment period) = $361.12 per month

Your monthly payment went up almost $60 per month simply because of your credit.

Variable interest is an interest rate that changes based on market changes. Typically, variable interest starts lower but most likely climbs higher before the end of your loan repayment. A loan with a variable rate is often reassessed every 6 months and adjusts based on the market. Sometimes, it goes down, but it often goes up. Be careful when considering a loan with a variable interest rate.

Number 7 – Fees

Other things to consider about personal loans are the fees associated with loans. Every loan has some type of fee schedule. It is important that you read all of the fine print to understand the fees. A lender must disclose all fees and penalties to you in writing. It is your responsibility to read and understand them. If you do not understand, you must ask questions until you do. It is on you to protect yourself when it comes to understanding the documents you sign.

There are a handful of fees you should expect. An application fee is something a lender charges simply for you to fill out the application and run a credit check. While these fees are often inexpensive, they are a waste for you. They add up quickly, if you decide to apply for many loans. You do not get your money back if your loan is denied. If a lender charges you an application fee, you should find a different lender.

Loans have administrative fees. These fees pay for the administration and paperwork processing of your loan. Administration fees may also include an application fee. Some lenders combine all of the different fees into one large fee called an origination fee. This typically covers the application, running your credit, processing everything and paying out the money. The most important thing to keep in mind is this fee comes out of your loan. You do not have to put out any cash, but you do not see the full amount of your loan.

Here is an example:

You apply and are approved for a loan of $2,500. The fees total $300. The amount deposited into your bank is $2,200. This is the amount you borrowed minus all fees. This can be a problem if you needed the full $2,500. You should understand the fee schedule before you apply for your loan so you ensure you receive the amount of money you need after all fees.

Number 8 – Documents

You have decided to take the plunge and apply for a loan. Before you so, more things to consider about personal loans are the documents you need. You need to prove your identity. In today’s world, banks cannot be too careful about verifying your identity. Identity theft is rampant, so banks need assurance you are who you say you are. They require picture ID, such as a drivers license, passport, or military ID. This identification must be valid and not expired.

Banks also need to know you can repay the loan. Your income is a large factor in this. You must provide proof of your income to the bank. They may want recent paystubs or bank statements showing how much income you receive regularly. If you do not have a standard job and do contract work or some other form of self-employment, the bank may want to see your tax returns. The sooner you have all of these documents prepared and ready for the bank, the faster you can be approved.

A lender may ask for some other type of document or may have additional forms for you. You should respond quickly to any and all requests. Failure to do so may result in your loan being delayed and even denied.

Number 9 – What Is Pre Approval?

Many people often wonder about pre-approval when thinking about things to consider about personal loans. The reality is that not many people understand what pre-approval really is. To complicate matters, you probably heard the terms pre-approval and pre-qualified. Many lenders use them interchangeably even though they really are not the same thing.

A pre-approval means that the lender has done a hard pull of your credit and taken a good look at it. As a result, the lender believes you are a great candidate for a loan and offers you a pre-approval letter. This letter basically gives you a belief that you can receive a loan with the lender. A pre-approval does not guarantee you an interest rate or monthly repayment amount. The bank may be able to give you an estimate but often you do not lock into a rate until you apply.

A pre-qualification is a little different. The lender has to a soft pull of your credit and made a cursory glance at it. From the quick look, the lender thinks you are a good candidate. This is not a guarantee and you still need to go through the entire application process for approval.

Number 10 – Budget

Your budget is absolutely one of those things to consider about personal loans. Not many people like to talk about a budget, but it can change your life. Creating a budget puts you in control of your money and your spending. Often people see a budget as a limit to your life and spending, but it really is not. It helps you regain control of how you spend your money. It allows you to spend money on the things you really want and need instead of random things you do not even realize.

You should sit down and list out all the items on which you spend money. Prepare to be shocked. You most likely spend money you do not even realize. You probably spend more money on random things than you know. When you write it all down, you can take a hard look at it and remove those extras. This is the time to end that gym membership you do not use. Are you paying for subscriptions you do not use? Now is the time to cancel them.

Once you have slashed all those items you do not use from your spending, now you can look at where else you spend money. You can compare it to your income and begin to make changes. It may be hard at first, but once you see all your savings, it is worth it. You can decide whether you will budget or get a personal loan. You may decide that you save enough money and you do not need a personal loan. Or you may see that you really cannot afford to repay a personal loan and decide to make some changes first. Creating a budget puts you in the driver seat to make decisions instead of feeling like things are out of control.

Eight key steps to creating an effective budget

Number 11 – Do I Need Collateral?

A personal loan is typically an unsecured loan. This means that there is no collateral associated with the loan. This is a risky loan for a bank because there is nothing to hold you to repayment. Collateral is something of value that you offer to the lender as a promise to repay the loan. If you do not repay the loan, they can take the item. A mortgage on a house is a perfect example of a secured loan with collateral. You and the bank own the house together. As long as you repay the mortgage, the house is essentially yours. Once you repay the mortgage, the house legally becomes yours. However, if at any point during the mortgage repayment, you do not pay the loan, the bank can take the house.

If the bank is requiring collateral from you, it means that you have poor credit and they do not want to take the risk. When thinking about things to consider about personal loans, you can decide if you are willing to put up an item as collateral, or if you want to work on repairing your credit. Repairing your credit is possible, but it takes consistent and hard work. It may be something you should consider.

What Does It Mean To Default On A Loan?

One of the major things to consider about personal loans is can you afford it? This is one of the first things to consider about personal loans. If you cannot afford to repay the loan, you should not apply for one. The last thing you want to do is default on a loan. Defaulting on a loan means you are not paying the loan. This often happens when one cannot afford to repay it. You want to do everything you can to avoid defaulting on a loan.

Defaulting on a loan is a huge negative hit to your credit score. It causes it to plummet. In addition, defaulting on a loan is incredibly stressful. Lenders want their money and they work hard to get it. This could mean they send you to a collections company. These companies are ruthless. They do not care about you or your situation. All they want is to get money. The lender may take you to court to get their money.

There are ways to prevent yourself from falling into default. If you realize that you cannot repay the loan, contact the lender before you miss payments. Lenders often work with you to change your payment schedule or payment amount so you can pay something. Lenders want their money and if they can get something from you, it is better than the cost of having to fight for it. Be upfront with your lenders sooner rather than later. It is better to try to work with them than against them. They have more resources than you do and they often win.


We talked about many things to consider about personal loans. There is one last thing I want to take the time to highlight while I still have your attention. That is your ability to afford a loan. Of all the things to consider about personal loans, that is the most important. If you cannot afford to repay the loan, do not apply for one. Look for other options before you dig yourself a deeper hole.

Taking on a loan that you already know you cannot afford is just a bad idea. All it does is hurt your credit and put you in a stressful situation. A loan is not free money. You must repay it. Even though it is money upfront and may feel like it is giving you some breathing room, it is only temporary. In a month, you must start to make payments. Enter into a loan wisely and thoughtfully.