3 Questions You Must Ask Yourself Before Signing a Personal Loan When Interest Rates Are High

The fact that U.S. personal loan balances reached $225 billion in the first quarter of 2023, as per TransUnion, indicates they're a popular means of borrowing money. And it's easy to see why.

With a personal loan, you can borrow money for any purpose. You're not restricted the same way you are with a mortgage loan, for example, which only allows you to use your loan proceeds toward the purchase of a home.

But these days, it's more expensive to sign a personal loan than it was in the past. That's because borrowing rates are up across the board right now in the wake of a string of rate hikes by the Federal Reserve. So before you sign a personal loan, make sure to run through these key questions.

1. Am I borrowing money for a good reason?

Because personal loans are more expensive today, you'll want to make sure you're signing one for a good reason. If your car needs repairs and you can't get to work without it, that most certainly counts. Similarly, if a few appliances in your home need to be replaced and you can't really function well without them, go ahead and borrow.

But now's really not a good time to take out a personal loan to do something like go on vacation or tackle home improvements that can wait, like replacing your perfectly functional kitchen countertops with a nicer stone. If you're going to pay a fair amount of interest on a loan, it should be to address an actual need or do something that significantly improves your life. 

2. Can the purchase I'm borrowing money for wait?

Maybe you're eager to upgrade your furniture because your kids are a little older and you're finally less worried about nicer pieces getting destroyed. But if your existing furniture is in good enough shape and you've had it for years, why rush to take out a personal loan at a time when doing so is apt to be expensive? Instead, you may want to wait a year or so and see if rates come down.

This, of course, is one example. The point is that if you're looking to borrow money for an expense that can wait, holding off could work to your benefit.

3. Is my credit score in good shape?

It's important to make sure your credit score is in good shape before signing any sort of loan, personal loans included. The higher that number, the more competitive an interest rate you're likely to snag. 

Experian, one of the three major credit bureaus, defines a good credit score as a 670 through 739, while a score of 740 to 899 is very good and a score of 800 or above is excellent. If your credit score is 650, you may want to hold off on applying for a personal loan until it rises a bit. Otherwise, you might get stuck with an interest rate that makes your loan difficult to pay off. 

The fact that interest rates are high doesn't automatically mean you shouldn't sign a personal loan today. Just address these questions first so you don't end up regretting your decision.