4 Things To Think About Before Applying For A Personal Loan

Personal loans are one of the most efficient ways to get cash in your pockets quickly and responsibly. They can come with lower interest rates than other types of loans and also in smaller amounts, making it easy to cover small expenses and repay the loan in a short timeframe. Whether you're trying to make a down payment on a new car, take a road trip, or get the perfect holiday gift, a personal loan is a fast and easy way to get it done.

Before applying for a personal loan, however, there are 4 elements that you will want to consider to ensure that the decision you make is the right one.

#1 Type of Loan

The first thing you need to know before applying for a personal loan is identifying the need or objective for the loan. There are different kinds of personal loans and your needs will determine which one you should get.

Secured Loans

A secured loan is a loan that is backed by some kind of collateral—such as your home or vehicle. This means that the lender provides you with a loan under the condition that if it is unpaid, the collateral could be repossessed. The benefit of these kinds of loans is that the interest rates are much lower and it's easier to get approved for larger loan amounts.

If you are confident that you can repay the loan, need a larger loan amount, and want the lowest interest rate possible, a secured loan is a great option once you understand the risk.

Unsecured Loans

An unsecured loan is a loan that isn't backed by collateral, so the only factor the lender will take into consideration is your financial history to determine your likeliness to pay back the loan. The interest rates on these kinds of loans are a little higher and the loan amounts are generally lower.

A credit card, for example, is a type of unsecured loan and is better suited for smaller financial goals and borrowers with a solid financial history.

#2 Credit Score

Keep in mind that your credit score will affect and can be affected by borrowing a loan, so it's important to take it into consideration during the process.

Having a higher credit score means you can secure better interest rates, costing you less in the long run. It can also determine your ability to qualify for certain loans. The higher the loan amount, the higher your credit score will need to be. If you're not in a rush to get approved for a loan, then it might be worth your time to first work on improving your credit score before starting the application process. Doing so will make it easier and more affordable to get the loan you need.

Taking out a loan can also have a positive impact on your credit score. Making payments on time will help you build up a positive credit history and diversify your financial past. While some may worry that applying for a personal loan will bring down their credit score, new credit applications only affect 10% of your credit score—affects which subside after one year of the application.

In a nutshell, the impact of applying is small and short-term, while the benefits of a strong credit history and score are more permanent.

#3 Loan Term

Your monthly payments will be determined by your interest rate, loan amount, and loan term. Your loan term is how long you plan to take to repay the loan and will be the primary factor that determines how much you'll end up paying each month.

A loan term is usually 1-6 years, though it can vary depending on how much you borrow and how much you are able to pay each month. You should try to pay as much as you can each month without making your monthly budget unreasonably tight. While it can be tempting to try to pay the loan off as quickly as possible for a lower interest rate, late fees from missed payments can add unnecessary stress to the repayment period.

If you're not sure how long your loan term should be, three years is a pretty good timeframe for most people. It gives you enough time and flexibility to repay the loan comfortably without the higher interest rate and longer timeframe of a five-year plan.

#4 Interest Rate and Fees

The total amount you end up repaying will be your loan amount plus your interest rate and any other associated fees. Some providers will show your annual fees and interest rate as a combined percentage known as APR (annual percentage rate).

There are two kinds of APR:

  • Fixed APR: A fixed APR won't change over the course of your loan; the percentage your provider gives you up front is the same percentage you'll be repaying when you make your last payment.

  • Variable APR: A variable APR is an interest rate that could change over the course of your loan term, though it isn't guaranteed to change. If your provider offers you a loan with a variable APR, there will be a minimum and maximum percentage that they can change it to over the course of the loan.


Getting an APR, especially a fixed APR, is a great way to make planning for a personal loan easier. It means you're unlikely to be surprised with hidden fees and you can easily figure out what your monthly payments will be for various loan terms. APRs can also be an easy way to compare potential providers against each other.

If a provider you're considering doesn't offer an APR upfront, check to see if they have a personal loan calculator. This is a useful tool that can make comparing different loan providers much simpler.

Bottom Line

Applying for a personal loan is a quick way to get the money you need while also leaving a lasting, positive impact on your financial standing. They’re flexible, they can boost your credit score, and the application process is fast and easy so you can focus on what’s important.

Keep the loan-shopping experience simple and stress-free by understanding what you need a loan for, what kind of loan you need, how it will impact your credit score, and how to secure the lowest rate possible.

* Please consult with your attorney, financial consultant/planner, accountant, and/or tax advisor for advice concerning your particular circumstances.  The information contained herein is for general informational and educational purposes only and should not be construed as professional, tax, financial or legal advice or a legal opinion on specific facts or circumstances. The information or opinions contained herein should not be construed by any consumer and/or prospective client as an offer to sell or the solicitation of an offer to buy any particular product or service.

The information contained herein was prepared for general information and educational purposes only and should not be construed as professional, tax, financial or legal advice or a legal opinion on specific facts or circumstances. Eloan a Division of Banco Popular de Puerto Rico, its subsidiaries and/or affiliates are not engaged in rendering legal, accounting or tax advice. Please consult with your attorney, financial consultant/planner, accountant, and/or tax advisor for advice concerning your particular circumstances.