The One Question You Must Always Ask Before Getting a Personal Loan

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Don’t sign that loan until you address it. 

There’s a reason personal loans tend to be so popular among U.S. consumers, as evidenced by the fact that total personal loan balances rose to $222 billion by the end of 2022, according to TransUnion. With a personal loan, you can borrow money for any purpose, whether it’s to renovate your home, repair an ailing car, or start a small business of your own.

Plus, compared to other options, like charging expenses on a credit card, a personal loan can be a more affordable way to borrow. And personal loan interest is fixed, not variable, so once you sign your loan, you don’t have to worry about your payments increasing over time.

But if you’re going to take out a personal loan, it’s important to make sure it truly fits into your budget. That’s because falling behind on one of these loans could have serious consequences.

What will your monthly payments look like?

The main question you have to ask yourself before putting a personal loan in place is how much you’ll end up spending each month on loan payments. Once you have that figure, you can run the numbers to see if a personal loan will fit into your budget.

Let’s say you really want to renovate your kitchen and decide that a personal loan is the best way to finance that project. Based on the amount you need to borrow and what personal loan rates look like today, that could leave you with a $300 monthly payment.

If there’s room in your budget to carve out an extra $300, then that doesn’t sound too risky or problematic. But if most months you’re barely left with $75 after paying your bills, then you probably should not be taking on a personal loan that will require you to spend $300 on a monthly basis.

Falling behind could have consequences

Any time you’re late paying a debt, it goes on your credit report and can cause serious damage to your credit score. Personal loans are no exception, and sometimes, all it takes is a single late payment to turn an otherwise great credit score into a score that barely qualifies as good.

That’s why you can’t take the risk of signing a personal loan whose payments don’t seamlessly fit your budget. If there’s any doubt in your mind about your ability to repay your loan, hold off — especially if you’re borrowing for a non-emergency purpose, like renovating your living space.

The idea of a personal loan may be tempting, and if you have strong credit, you might qualify for a competitive interest rate on one. But if you fall behind on your loan, that impressive credit score might become anything but. And that could put you in a tough spot financially if you run into an emergency expense you need to borrow for.

Even if you don’t fall behind on your personal loan payments, taking on large payments could result in financial stress. That’s not something you need in your life. So make sure you understand what monthly payment you might be signing up for, and make certain that it’s a number you can afford with relative ease.

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