20 Questions to Ask Before Applying for a Personal Loan

Personal loans are a popular financial option, with The Ascent's research revealing the average personal loan balance in the U.S. is $5,538.

Personal loans are widely used because they're versatile financial products. You can borrow and enjoy a lot of flexibility in what the money is used for.

But before you apply for a personal loan, you need to ask yourself some key questions to make sure it's the right financial move. Here are 20 of them.

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Before you borrow, you need to consider why you're taking on this financial obligation.

If you're securing a personal loan to improve your finances -- perhaps by using the money to pay down debt or start a business -- then it likely makes sense to go forward.

But if you're borrowing to enable you to live beyond your means, taking out a personal loan is a bad idea and you should be reworking your budget instead.

Borrowing money means committing your future income to covering a new financial obligation. It can make it harder to budget in the future, so it should usually be avoided unless you really need the loan.

That means you should consider whether you can find an alternative to borrowing before you apply for a loan. If you're taking a wedding loan, for example, you might be better off scaling down the festivities. Or if you're borrowing for a big purchase, does it make sense to defer it and save up to pay cash?

To be clear, there are times when borrowing is worth it -- just make sure this is one of them.

Personal loans are just one of many borrowing options available to most people. You'll want to choose the best one for your particular needs.

If you're making a purchase you plan to pay off within the next few months, then a credit card offering a 0% promotional APR may be a better option than a personal loan. Or if you're borrowing to improve your home, a home equity line of credit or cash-out refi might make more sense.

Explore all the different ways to borrow and compare benefits and costs before deciding that a personal loan is the right one.

Personal loan lenders check your credit score. If yours isn't very good, it may be harder to get approved for a loan. Or you might be able to borrow, but only at a very high rate.

Take a look at your own credit score before applying. If you find that your score is likely to be an obstacle, consider working to improve it before pulling the trigger on applying for a personal loan.

ALSO READ: How to Increase Your Credit Score

No matter how good your credit is, lenders aren't going to approve you for a personal loan if they don't think you can pay it off. So, they're going to want to take a close look at your income to see if your earnings are sufficient to cover the monthly payment.

Most personal loan lenders want to see not only that you're making enough but also that your earnings have been pretty consistent. If you just got a new job at a higher salary, that may not be sufficient to get approved for a loan if your old job paid very little.

Consider waiting until you've got a period of consistent, stable earnings before you apply for a personal loan.

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In an ideal world, you could wait until you had good credit and solid, stable income before applying for a personal loan. Unfortunately, many people don't live in an ideal world.

There are plenty of times you need to borrow when you may not have the credentials lenders tend to look for. In these situations, consider asking someone to cosign for you.

If a friend or family member is better able to qualify for a loan, they can agree to guarantee a loan for you by cosigning. This significantly increases your chances at loan approval.

Unfortunately, your cosigner is taking a big risk because your debt will affect their finances. So be sure you're confident you won't let them down by paying late or defaulting on your debt, which would leave them to pay off the balance.

When you take out a personal loan, you're committing to pay it back. Usually, that means making monthly payments. So you need to know whether your budget has the wiggle room to accommodate them.

In some cases, a personal loan could actually help you reduce monthly payments. This can happen, for example, if you use a personal loan to consolidate high-interest debts. But that's not always the case. If your new loan payment will reduce the funds available to you, make sure your budget isn't already maxed out.

You don't want to miss any payments on your personal loan, so you need to be sure you can commit to making them for the entire duration of the payback period.

Since most people repay their loans over several years, be certain you won't have a big income change that could leave you unable to pay.

Having an emergency fund is helpful before borrowing so you can draw from it to cover your loan bill if something goes wrong with your income. But you should also think about lifestyle changes you're planning soon.

If you're anticipating a career switch that could come with a big pay cut, you may want to refrain from committing to a loan you could struggle with at your lower salary.

Personal loans often come with a choice of repayment period. You could opt for a loan you repay in as little as a few years or stretch out your payment timeline for a decade.

While it's tempting to opt for a longer payoff timeline since that makes your monthly payments lower, it also makes total borrowing costs higher. So consider this trade-off before applying so you can find a lender offering a loan term that makes sense for you.

ALSO READ: The Pros and Cons of Longer Repayment Terms on Personal Loans

Many personal loan lenders also give you a choice between a fixed-rate loan or a variable-rate one.

Fixed-rate loans are predictable. You know what your interest rate will be up front, and it never changes. Your payments also stay the same for the entire life of the loan.

Variable-rate loans are unpredictable. You'll probably be offered a lower starting interest rate with this option, compared with a fixed-rate loan. But as the name implies, the rate can vary. You could end up seeing your interest rate and monthly payments go up.

Consider whether you're willing to gamble with a potential rate increase when you decide what kind of loan to apply for.

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There are many different personal loan lenders out there. And the rates and terms you're offered from one lender to another can vary dramatically.

Always shop around with multiple lenders and get rate quotes before you commit to actually applying for a loan. Look for lenders who will estimate your rates without a hard credit check. That way, you can ensure you borrow at the most affordable rate and avoid damaging your credit score by applying for too many loans at once.

ALSO READ: How a Hard Inquiry on My Credit Report Actually Affected my Score

When you're comparison shopping with lenders, interest is one of the most important loan terms to look at.

Interest is the cost you pay to borrow. If you're charged a higher interest rate, payments will be more expensive because more of your money will go toward interest than if you were charged a lower rate.

Paying more interest over time means more interest goes into the creditor's pocket instead of you being able to use it for other things. Before you apply, make sure the lender you're choosing will take the minimum amount of your money possible in interest.

Interest rate is one important factor that affects your costs. Fees are another. If one lender charges a high origination fee, it may not be the most affordable borrowing option even if the interest rate appears lower.

Look at the big picture and compare the annual percentage rate (APR), which takes fees and interest into account. And consider the big picture by looking at total loan costs from each lender you're thinking about borrowing from.

ALSO READ: What Is a Personal Loan Origination Fee, and Should You Pay One?

Lenders should disclose total monthly payments before you borrow. Make sure you're comfortable with paying that particular amount each month. If your rate is a variable one, also pay attention to how high your rates could go.

If you aren't comfortable paying the highest potential amount you could owe, you may need to choose a different loan or a longer repayment timeline, continue shopping around for a better rate, or borrow less.

In many situations, you may decide to pay off your personal loan early. This could happen after an income increase, if you come into a lump sum of money, or if you simply decide to rework your budget to make extra payments and become debt-free faster.

If you want to pay off your debt ahead of schedule, the last thing you want is to owe a penalty for doing so. So, before you borrow, make sure your lender doesn't charge you for early payoff unless you're 100% confident that there is no circumstance where you'd ever pay off your debt early.

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As long as you pay them off each month, credit cards are a no-brainer for savvy Americans. They protect against fraud far better than debit cards, help raise your credit score, and can put hundreds (or thousands!) of dollars in rewards back in your pocket each year.

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Remember, when you're committing to a monthly payment, that's less money you have to do other things. Make sure you understand the opportunity cost of the personal loan.

For example, will the monthly payment mean you can't invest as much for retirement, thus jeopardizing your goal of leaving the working world early?

If you consider the trade-offs before you go ahead and submit your application, you can make sure it's the right choice. And in an ideal scenario, the loan will actually help you accomplish your other objectives, such as by enabling you to pay off debt more quickly after using a personal loan to consolidate it.

Taking out one loan can affect your ability to get another. That's because lenders consider your debt-to-income ratio in deciding whether to approve you for a loan.

As a result, if you're considering taking on a big debt -- such as a mortgage loan or car loan -- you may want to hold off on securing a personal loan until you do.

Otherwise, you may get a great rate on a smaller personal loan but end up paying a lot more in interest on a much larger mortgage. Or, worse, you may not be able to get the large loan at all.

ALSO READ: What Is Your Debt-to-Income Ratio and Why Does It Matter When Applying for a Mortgage?

You never want to borrow unless you're 100% confident you understand how your loan works. If you're confused about any aspects of the personal loan you're considering -- from the fees to the interest payments to your payoff timeline -- don't apply for the loan until all your questions are answered.

Some lenders are better than others. Since you'll be dealing with yours for the next few years as you pay off your debt, you'll want to be sure they aren't going to create major hassles for you.

Check their customer reviews and complaints to see if there's a history of problems. If you see lots of negative comments and past customers describe serious issues such as payments being misapplied, think about getting a loan from a different lender.

There may be times when you need to borrow quickly. If so, the timeline for getting your loan application approved and the funds distributed can be very important.

Some personal loan lenders can provide your money in as little as a day, while others will take much longer to distribute funds. When getting the cash ASAP matters, this needs to be a consideration before you apply for a loan.

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As long as you pay them off each month, credit cards are a no-brainer for savvy Americans. They protect against fraud far better than debit cards, help raise your credit score, and can put hundreds (or thousands!) of dollars in rewards back in your pocket each year.

But with so many cards out there, you need to choose wisely. This top-rated card offers the ability to pay 0% interest on purchases until late 2021, has some of the most generous cash back rewards we’ve ever seen (up to 5%!), and somehow still sports a $0 annual fee.

That’s why our expert – who has reviewed hundreds of cards – signed up for this one personally. Click here to get free access to our expert’s top pick.

Now that you have the answers to these 20 key questions, you can decide if you're ready to go ahead and apply for a personal loan. Since you've taken the time to consider all the issues, you'll almost assuredly be happy with your choice to move forward with a lender that offers you the best rate and terms.