The Most Important Dos and Don’ts of Personal Loans

While borrowing money is rarely ideal, there are some situations in which a personal loan can make sense.

Debt consolidation is one of them. When you owe a ton of money on credit cards with exorbitant interest rates, a personal loan can help you consolidate your credit card debt and save money with a considerably lower APR.

Personal loans can also be advantageous for debt consolidation due to the fact they come with fixed interest rates, monthly payments, and repayment schedules. This way, you know exactly how long you’ll be paying them down. This is a stark contrast with credit cards, which come with high variable APRs and payments that fluctuate based on how much you spend.

There are definitely other situations in which a personal loan can make sense for your finances aside from debt consolidation. Regardless of how you plan to use the loan proceeds, however, there are some important steps you can take to make sure your personal loan experience goes off without a hitch.

Here are the most important dos and don’ts of using a personal loan.

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Personal Loan Dos

• Shop around and compare rates. The personal loan space is incredibly competitive, and you’ll likely find a better range of loan rates and terms if you shop around and check out at least three or four lenders. Not only should you compare loan rates from individual lenders such as SoFi, but also consider comparing rates from multiple lenders with a loan platform like Credible. Personal loans from Credible offer interest rates as low as 4.60% APR* with autopay, and their personal loans often have no origination fees or other hidden fees.
• Make sure to check for personal loan fees. If you do consider other lenders, make sure to compare the fees on the different loans. Some lenders, such as LendingClub, charge an origination fee of up to 6% of your loan amount, and you shouldn’t pay an origination fee if you don’t have to.
• Create a monthly budget so you know whether your new monthly payment is affordable. As you compare loan offers, make sure your new loan payment is one you can afford. It can help if you create a monthly budget that lets you know exactly what your bills are and exactly how much you can allocate toward debt repayment each month. (See also: How to Budget: A Personal Budget Guide That Actually Works)
• Compare repayment terms, or how long you’ll pay your loan off. In addition to the monthly payment on the new personal loan you’re considering, you should also compare loan repayment terms. Many personal lenders let you borrow for seven years or longer, so you should check to see how long you’ll have to make your loan payment before your personal loan is paid off.
• Read the fine print. You should also make sure you’re reading the fine print on any loan offer you’re considering. The devil is often in the details, so you should always read the fine print when you borrow money, anyway. At the very least, make sure you know exactly how much you’ll pay each month, how long your loan term lasts, your interest rate, and any fees that may be charged on your loan for any reason.

Personal Loan Don’ts

• Don’t forget to check for loan fees. Don’t assume a loan is a good deal based on the monthly payment and interest rate alone. You’ll also want to check for loan fees — particularly application and origination fees. Also make sure to check for late fees and other penalties you may be charged if your loan experience doesn’t go as planned.
• Don’t use debt consolidation as an excuse to rack up more debt. If you plan to use a personal loan to consolidate debt, don’t sabotage yourself by continuing to use credit cards for purchases you can’t immediately pay for. While you’re trying to pay down debt with a personal loan, it can help to switch to cash or debit cards for your regular spending.
• Don’t go with the first lender you come across. It’s okay to check out lenders that advertise or have a branch in your area, but you shouldn’t go with the first lender you encounter. Make sure you compare rates from multiple lenders that can offer different loan packages based on your credit score and other factors.
• Don’t borrow more than you can pay back. Make sure you’re not biting off more than you can chew with a personal loan. If you borrow more than you can pay back and you’re late on payments or your loan goes into default, you’ll do serious damage to your credit score and send your finances into a tailspin.
• Don’t write off online lenders. Finally, you can get a personal loan from your local bank or credit union. However, online lenders and loan platforms like SoFi and Credible tend to have the best rates and loan terms for consumers with good credit or better. If you’re also considering personal loans from your local bank, make sure to see how their offer stacks up with online lenders before you pull the trigger. Compare our favorite personal loan companies here.

The Bottom Line

Personal loans offer a cheaper way to borrow money than credit cards do, but you should know that all borrowing options come with the same major downsides. For starters, you have to repay every penny you borrow. Plus, you’ll have to pay the fees and interest you’re charged along the way. With that in mind, you might want to consider saving up for whatever you want to buy instead of taking out a personal loan.

If you want to take out a personal loan to consolidate high-interest debt, however, the rules change. You might not want to borrow money, but doing so could help you save money on interest and pay off existing debt faster. Still, you should only use this strategy if you’re serious about debt repayment and ready to change up your habits.

At the end of the day, we believe personal loans should only be used with an abundance of caution and common sense. If you feel you can meet those standards, then compare loan rates and terms using a platform like Credible. If you’re scared you’ll only rack up more debt, you’re better off avoiding new loans and credit cards altogether.

Pay Off Your Debt Faster – Credible offers personal loan rates starting at 4.60% APR* with autopay. Compare personal loans from multiple lenders and erase that debt for good. Get started here.