Thinking About a Personal Loan? A 3-Question Check Before You Apply

A personal loan can be a sensible way to pay for a large, one-off expense or to replace expensive credit card debt with a fixed monthly payment. It can also be an expensive mistake if the rate, the fees or the timing are wrong. This two-page guide covers the benefits and drawbacks, gives you a three-question check, and then explains how to compare offers and apply in the right order.

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What a personal loan is

A personal loan is money you borrow in one lump sum and repay in fixed monthly installments over a set term, often two to seven years. Most are unsecured, meaning you don't put up a car or house as collateral; the lender decides based on your credit history, income and existing debts. Banks, credit unions and online lenders all offer them.

Benefits

• Predictable payments: a fixed rate and fixed term mean the same payment every month and a known end date.
• Often cheaper than credit cards: for borrowers with good credit, personal loan rates are frequently lower than typical credit card rates.
• Simplifies debt: consolidating several card balances into one loan leaves you with one payment to track.
• No collateral: your home or car isn't at risk if the loan is unsecured, although missed payments still carry serious consequences.

Drawbacks

• Fees: some lenders charge an origination fee, taken from the loan amount or added to it. Always compare the APR, which includes fees, not just the interest rate.
• Rates depend on credit: with fair or poor credit, the offered rate can be high enough to make the loan a bad deal.
• Temptation to re-borrow: clearing credit cards with a loan only helps if you don't run the cards back up.
• A hard inquiry when you apply: a full application usually involves a hard credit check, which can lower your score slightly for a while.

If the difference between an interest rate and an APR is new to you, our guide to APR vs interest rate explains it in a few minutes.