Credit Sesame on what to consider and when to take out a personal loan.
When you need extra money, there are several options you can consider, including using a credit card, tapping into home equity or a personal loan. Often people use a personal loan as a way to access cash quickly, often without putting up any collateral.
It’s a good idea to time your personal loan application wisely and understand your financial situation before committing to this type of financing.
Understanding personal loans
A personal loan is a form of financing that is typically unsecured. Unsecured means it does not require putting up any collateral like your home. Instead, only your signature is needed if you qualify.
Some lenders, however, offer only secured personal loans, which can put your home or another form of collateral pledged at risk if you do not repay your debt.
The good news about personal loans is that they are commonly paid back over 24 to 60 months, a relatively short period.
The fixed interest rate on a personal loan can be higher (usually over 10%) than for many other types of loans, although rates are typically lower than a credit card would charge. For example, a borrower with a credit score above 720 may be charged less than 12.5% interest for a personal loan compared to the average new credit card APR of 22% (in December 2022).
“Because there is usually no collateral required, a personal loan requires a higher credit score and can be more difficult to obtain than a secured loan such as a mortgage or car loan,” says Laura Sterling, vice president of marketing for Georgia’s Own Credit Union.
The money borrowed is paid in a lump sum at closing, and personal loan funds can be used for virtually anything, including home improvements, debt consolidation, medical expenses, and big events like a wedding.
Good candidates for a personal loan
According to Brian Greenberg, CEO/founder of Insurist, a worthy prospect for a personal loan is someone with a steady income and a good credit score (720 or higher).
“Not only does that mean you should have the ability to pay back your loan, but it also means you are more likely to be approved for the loan in the first place,” he says.
A bad candidate for a personal loan is someone who has little or no income or whose income fluctuates widely.
“This person is unlikely to be able to repay their debt, which could lead to defaulting on their payments or even bankruptcy,” Greenberg continues.
Why timing your personal loan is important
Knowing the ideal time to apply for a personal loan is important. You would be wise to apply when your creditworthiness and credit score is high. It’s a good idea to ensure you are in a strong financial position to repay your loan on time, as agreed.
“It can be hard for individuals to perfectly time when they should take out a loan. So it’s important to have an idea of what you need the loan for and when you need it so that you can make sure it can work for you,” says Shawn Plummer, CEO of The Annuity Expert and a certified financial professional.
Furthermore, unsecured personal loans start charging interest immediately, so it’s wise to be sure you get the loan at the right time.
“Getting your personal loan too early means you’re already paying for the loan and paying interest before the money starts working for you. Getting the loan too late means you can’t use the money for what you needed it for,” adds Plummer.
There are “bad times” to apply for a personal loan, such as when you lack the means to repay your debt comfortably.
“What you are using the personal loan for is more important than timing. For example, if you are planning to use loan funds for emergency expenses like a needed operation, it can still be worth it. But if you are considering a personal loan to pay for something that is not a necessity – like a vacation – it may be better to wait for lower interest rates,” suggests Sterling.
When is a good time to take out a personal loan?
The truth is, there is no “best time” to apply for a personal loan. The answer depends on your financial circumstances and money needs. You could always wait things out hoping that personal loan interest rates drop, but trying to time the rate market is often a lesson in futility. After all, rates can rise even higher; meantime, you’ve postponed pursuing money you need sooner not later.
Still, Plummer recommends applying for and taking out a personal loan a little before you need the funds but not more than a month ahead of the latter.
“Remember – if you take out a personal loan too early, you will start paying for it before getting use out of it,” he says.
If you apply for a personal loan at a time when your credit score is high, you are more likely to get a better interest rate. That’s why Sterling recommends reviewing your credit reports and working to improve your credit score well before applying for a personal loan.
If your financial health is in question, it is probably not a good time to consider applying for a personal loan.
“If you’ve just lost your job, it’s not the best time to apply. On the other hand, if you’ve just had an increase in income, that could be a great time to apply for one,” advises Greenberg. “You’ll also want to consider whether or not you have any outstanding debt on credit cards or other loans before applying for a new personal loan. It’s probably not wise to take out another loan until those debts are paid off first.”
Do your homework and shop around for financing options carefully. Compare loan offers and interest rates to get the best deal possible. You may end up choosing a different form of financing than a personal loan after performing the necessary due diligence.
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Disclaimer: The article and information provided here is for informational purposes only and is not intended as a substitute for professional advice.
