Taking out a personal loan can be a smart financial move—whether you’re consolidating debt, covering emergency expenses, or financing a large purchase. But before you sign on the dotted line, it’s essential to do your homework. Making the wrong choice can cost you in interest, fees, or financial stress down the line.
This guide outlines the 10 most important things to check before taking a personal loan to ensure you’re making an informed, financially sound decision.
1. Your Credit Score
Why it matters: Your credit score directly impacts your loan eligibility, interest rate, and terms.
What to do: Check your credit score through a free service or your bank. If it’s below 650, consider improving it before applying, or look for lenders who specialize in bad credit loans.
Pro Tip: A higher score (typically 700+) can unlock lower APRs and better loan offers.
2. Interest Rate (APR)
Why it matters: The annual percentage rate (APR) determines the true cost of the loan, including interest and some fees.
What to do: Compare APRs from at least 3 different lenders. Even a small difference in APR can save you hundreds—or even thousands—over the life of the loan.
3. Loan Fees and Hidden Charges
Why it matters: Some loans come with origination fees, prepayment penalties, or late fees that can increase the total cost.
What to do: Read the fine print. Ask the lender about all fees, including:
- Origination fee (1%–8% of loan amount)
- Late payment penalties
- Prepayment or early payoff charges
4. Loan Term (Repayment Period)
Why it matters: Longer terms lower your monthly payment but increase overall interest paid. Shorter terms mean higher payments but less interest.
What to do: Choose a loan term that fits your monthly budget while minimizing interest costs. Use a personal loan calculator to model different scenarios.
5. Monthly Payment Amount
Why it matters: Your monthly payment must be affordable, or you risk default and credit damage.
What to do: Review your budget to determine how much you can comfortably pay each month. Include other obligations like rent, groceries, and insurance.
6. Total Loan Cost
Why it matters: It’s easy to focus on monthly payments and forget the total amount you’ll repay.
What to do: Add up the principal, interest, and all fees to find the true cost of the loan. Ask for an amortization schedule or total repayment estimate.
7. Purpose and Necessity of the Loan
Why it matters: Personal loans should be used for needs, not wants—especially when interest is involved.
What to do: Ask yourself if the loan is essential. Good uses include:
- Emergency medical bills
- Debt consolidation
- Home repairs
Avoid borrowing for luxury items, vacations, or unnecessary spending.
8. Lender Reputation and Reviews
Why it matters: Scams and predatory lenders exist—especially online.
What to do: Check reviews on Google, Trustpilot, BBB, and Reddit. Stick to well-reviewed lenders with clear terms, transparent fees, and responsive customer service.
9. Prequalification Option
Why it matters: Prequalifying helps you estimate loan offers without impacting your credit score.
What to do: Look for lenders that offer a “soft pull” prequalification. This lets you compare rates and terms safely before committing to a full application.
10. Impact on Credit Score
Why it matters: Applying for a loan triggers a hard inquiry, which can slightly lower your credit score.
What to do: Limit applications to a short window (15–30 days) to minimize the impact. And avoid taking multiple loans at once, which can signal risk to lenders.
Final Thoughts
Before taking a personal loan, take time to evaluate your financial situation and compare offers thoroughly. A personal loan can be a useful tool, but only when used wisely and responsibly.
Checklist Recap Before You Apply:
✅ Check your credit score
✅ Compare APRs and loan terms
✅ Read the fine print for hidden fees
✅ Review your budget
✅ Confirm the loan’s necessity
✅ Verify the lender’s legitimacy
By following these 10 steps, you’ll not only avoid costly mistakes but also position yourself for better rates, terms, and long-term financial health.