Ask the Experts: 12 Common Personal Loan Questions
Personal loans might not be as popular as auto loans and credit cards, but they’re gaining ground. Since 2020, the number of Americans with personal loans jumped from 19.3 million to 23.5 million, where it stands today. That’s more than an 18.00% increase.
But just because a personal loan might be right for one person doesn’t mean it’s right for you. We’ve answered your burning personal loan questions to give you food for thought before you commit.
1. Can I afford this loan?
Personal loans can be a lifeline for unexpected expenses. But even if you’re feeling desperate, make sure that you can afford another monthly bill. Missed loan payments can drop your credit score by more than 100 points.
Or maybe you’re considering using a loan for debt consolidation. According to our personal loan study, 55.10% of LendingTree users took a personal loan to consolidate debt in the first quarter of 2024.
If you’re considering doing the same, add up your current monthly credit card bills and overall credit card debt. Then, use our debt consolidation calculator to see how much you might save.
2. What is my credit score?
Your credit score can make or break your ability to qualify for (or afford) a personal loan. Borrowers with higher credit scores are more likely to pay back what they borrow, so lenders give them the lowest annual percentage rates (APRs).
Check your credit score for free using LendingTree Spring. Then, take a look at the chart below to see what kind of APR you could expect on a personal loan.
| Credit score range | Average APR | Average loan amount |
|---|---|---|
| 720+ | 18.68% | $17,691 |
| 680-719 | 31.21% | $14,335 |
| 660-679 | 44.70% | $10,279 |
| 640-659 | 56.94% | $7,998 |
| 620-639 | 77.41% | $6,094 |
| 580-619 | 118.66% | $4,338 |
| 560-579 | 165.39% | $3,012 |
| Less than 560 | 184.89% | $2,463 |
Source: LendingTree user data on closed personal loans for the second quarter of 2024.
3. Is a personal loan the best choice for me?
A personal loan is just one of many financial tools. Depending on your situation, it might not be the best tool for the job. Consider below.
- Credit card: A credit card is better if you need to borrow on a continuing basis. Credit cards usually carry higher rates than personal loans. However, you won’t pay any interest as long as you pay your balance in full each month.
- Personal line of credit: Like a credit card, you can borrow over and over again with a personal line of credit (PLOC). PLOCs usually have lower rates than credit cards and can make more sense for large, ongoing projects. You usually need good credit or better to qualify.
- Home equity loan: You could get low rates on a home equity loan, but be aware of the risk. These use your home equity as collateral, so you could face foreclosure if you don’t keep up with your loan payments.
- Buy now, pay later (BNPL): You could use a BNPL app for help between paychecks. These small loans are usually interest free, but they may come with fees instead. Because they’re easy to use (and qualify for), be careful not to overborrow.
4. Should I get a secured or unsecured personal loan?
You’ve weighed your options and decided that a personal loan is right for you. Now you’ll need to figure out if you should get a secured or unsecured loan.
- Secured loan: A secured loan requires collateral. Cars are popular forms of collateral, as are savings accounts. Secured loans are usually cheaper than unsecured loans (and easier to qualify for, too). That’s because the lender can recoup some of its losses by seizing your collateral if you don’t pay back what you borrowed.
- Unsecured loan: Unsecured loans are the most common type of personal loan, and they don’t require collateral. However, less risk for you also means a higher interest rate, at least compared to secured loans. Unsecured loans can also have stricter eligibility requirements.
5. How much money do I need?
Personal loans come as a lump sum, so it’s important that you borrow enough for your needs. If you run out of money, you’ll have to take out another loan.
To illustrate, pretend you’re applying for a home improvement loan. You want to put down new flooring. Don’t just think about the cost of lumber, but also factor in the hardware and tools you’ll need to finish the job.
On the flip side, don’t overborrow. Just because a lender approves you for its maximum loan amount doesn’t mean you should accept it. Loans aren’t free — the more you borrow, the more interest you’ll pay.
Origination fees are also something to consider. Some lenders charge this upfront fee by deducting it from your loan before sending it to you. Origination fees are usually a percentage of your total loan amount. So, a 5.00% origination fee on a $10,000 loan is just $500. On a $50,000 loan, you’d lose out on $2,500.
6. Where do I apply for a personal loan?
Banks: Compared to online lenders, you might find a lower rate on a bank loan. However, banks tend to have higher credit score requirements. Also, note that some of the biggest banks in the country no longer offer personal loans. Some examples here are Chase, Bank of America and Capital One.
Credit unions: If your priority is cheap rates, a credit union might be for you. Per federal law, interest rates on federal credit union loans can’t exceed 18.00%. You have to be a member to borrow, but some credit unions (like PenFed) have open membership.
Online lenders: Online loans can be a good choice for borrowers of all credit scores. You could get a bad credit loan with a score as low as 300. And rates are competitive if you have excellent credit. Best of all, you won’t have to leave home to seal the deal.
7. How do I apply for a personal loan?
Applying for a personal loan can feel daunting, but the process is pretty simple. Each lender’s application might be a little different, but overall, here’s what to expect:
Prequalify for several loans
Prequalification lets you check your eligibility without hurting your credit score. You can usually prequalify on the lender’s website. You could also visit LendingTree’s personal loan marketplace. Our free tool can help you prequalify for up to five lenders at once.
Compare loan offers
One lender could offer you a lower rate than another, even if your information hasn’t changed. Shopping for loans is sort of like shopping around for insurance. Each lender has its own way of calculating your APR.
Once you’ve gotten your personal loan offers, pay special attention to APR, origination fees, term lengths and loan amounts. A low APR is great, but it’s not helpful if that APR only applies to small loans when you need something bigger.
Formally apply
After you pass prequalification, formally applying usually boils down to details and paperwork. You will need to provide an ID, and the lender might want to see things like pay stubs and bank statements. You can usually upload these electronically, and depending on the lender, you could get an approval decision within seconds.
If you formally apply with more than one lender, get all of your applications submitted within 14 days. Otherwise, you could risk multiple hard credit pulls (likely dropping your credit score).
Receive your loan and begin repayment
Most lenders send loans as direct deposit. You could get your money the same day you apply, or you might have to wait a few business days. Each lender’s approval and funding timeline is different.
Also, some lenders can pay your creditors on your behalf if you’re consolidating debt (often called direct pay). Direct pay can help you resist temptation — the loan will skip your hands. Plus, some lenders (like Achieve) will give you an APR discount for opting in.
Your first loan payment will be due 30-45 days after you’ve gotten your money. Signing up for autopay can help you keep on track. Like the direct pay discount, autopay is another common APR discount on personal loans.
8. How much interest will I pay?
How much interest you’ll pay goes beyond your APR. Term length (or how long you have to pay off your loan) also plays a huge role. The general guidelines are:
- Longer loan term: Higher APR, more overall interest, lower monthly payments
- Shorter loan length: Lower APR, less overall interest, higher monthly payments
The longer your loan term, the more time interest has to accrue. But since you’ll have more time to spread your balance across, your monthly payments will probably be lower. Use our personal loan calculator to see how term lengths can impact overall interest.
Lenders also usually charge lower APRs on shorter loans than they do on longer ones. After all, longer loans are higher risk for the lender (you have more time to default).
9. How can I make sure a loan is legit?
Unfortunately, there’s no shortage of predatory lenders waiting to take advantage of people in tough spots. Look out for red flags like prepayment penalties, APRs above 36.00% and excessively short repayment terms (from a few weeks to a few months).
The Consumer Financial Protection Bureau (CFPB) also maintains a lender complaint database. That tool, along with LendingTree lender reviews, can help you take the pulse of a lender’s customer service.
10. What happens if I can’t repay my loan?
If you can’t repay your loan, call your lender immediately. Some (like Discover) have financial hardship assistance programs. Late payments can appear on your credit history for up to seven years, so avoid falling behind at all costs.
But let’s assume you let your loan go and quit paying completely.
| Length of time | Consequences |
|---|---|
| 0 to 30 days | Lender may or may not report late payment to credit bureaus, late fees could apply |
| 30 to 90 days | Lender will probably report late payment, credit score will start to drop |
| 90 to 120 days | Lender might consider you in default, which means you didn’t hold up your end of the loan |
| 120 days or more | Lender has likely sent your debt to collections, you could be sued by debt collectors |
11. Why did I get rejected for a personal loan?
In general, personal loan requirements vary, and many personal loan lenders keep their specific requirements secret. Still, when a lender denies you for a personal loan, it could be because your:
- Credit score was too low
- Current amount of debt was too high compared to how much you earn (called debt-to-income ratio, or DTI)
- Annual income didn’t meet requirements
- Credit reports show a history of late payments or bankruptcies
- Employment history was too volatile
Under the Fair Credit Reporting Act (FCRA), lenders must send you a letter detailing the reasons behind your denial.
If you were denied, whatever you do, avoid taking out a payday loan. You’ll likely end up in a cycle of debt. Instead, consider a bad credit loan. Adding a cosigner or co-borrower with good credit can also help.
12. What are my rights under the Truth in Lending Act?
To boost borrower protections, the Truth in Lending Act (TILA) requires lenders to provide transparency about certain loans.
If you have an unsecured personal loan under $58,300 (adjusted annually for inflation), your lender must disclose APRs, service charges and fees. It must also provide you with a monthly repayment schedule, including total principal and interest due.
If your lender isn’t upfront about the information above, move along. You could be working with a shady company.