Could You Save Money With a Personal Loan? Here's How to Find Out

In some cases, a personal loan may be your most cost-effective way to borrow.

There may come a point in your life when you need to borrow money. Maybe you racked up some medical bills; lost your job; or your car decided to stop working, and the cost to repair it was astronomical.

When it comes to borrowing money, you have choices. A lot of people may be quick to reach for a credit card. But a personal loan could be a more cost-effective way to borrow. Keep reading to learn more about personal loans and when you should get one.

What is a personal loan?

A personal loan allows you to borrow money for any reason. It can be to:

• Finance home repairs
• Pay for a vacation
• Pay off credit card debt

Personal loans are unsecured, which means they're not tied to a specific asset, unlike mortgages and auto loans. So to qualify for a personal loan, you'll generally need a decent credit score. There are personal loans for fair credit, but those usually come with higher interest rates.

For more information, check out our guide to learn how personal loans work.

Will you save money by borrowing with a personal loan?

A personal loan could be your least expensive way to borrow from an interest rate perspective. But to figure out if that's the case, you'll need to ask yourself these questions:

1. How much am I looking to borrow?

Personal loans generally come with a minimum borrowing amount. In some cases, the lowest amount you can borrow may be as low as $1,000 or $2,000, but in other cases, it can be higher -- more like $5,000. If you only need to borrow a few hundred dollars, then a personal loan may not be a good money-saving solution because it might cause you to take on a higher loan balance than you actually need.

2. What interest rate will I qualify for?

As mentioned earlier, the higher your credit score, the more likely you'll be to qualify for a good interest rate on a personal loan. To make sure you're getting the best rate, shop around for a loan and see what offers you get.

3. Can I qualify for a 0% APR credit card instead?

Personal loans typically charge less interest than credit cards, but there's an exception. If you're able to secure a 0% APR credit card with a lengthy introductory period, that could end up being your cheaper borrowing option.

Just make sure you can pay off your balance by the time your introductory period comes to an end. If you don't, you'll immediately be slapped with a credit card interest rate that could be very high. But if you qualify for one of these cards and you think you'll be able to pay off your loan somewhat quickly, then a personal loan may not be your best option.

A personal loan could save you money the next time you need to borrow -- but that's not always the case. Run through these questions before you apply for one to ensure that you're making the right move.