It’s always good to go into any financial matter with eyes wide-open. There’s no such thing as a bad question when it comes to your money.

If you’re looking to take out a personal loan, here are nine questions that are certainly NOT stupid, but in fact, could be beneficial to be posed to the lender:

1. How Much Will This Cost Me?

The loan “cost” is usually the interest payments plus any fees; be sure to ask what your interest rate is before taking out any loan. Interest rates can vary from person to person, depending on such factors as your state of residence, credit score, and available collateral.

Once you know your interest rate, you can compare it to your other options, like credit cards. According to the Federal Reserve, the average interest rates for taking out a personal loan were cheaper than those of credit cards. The Fed says that the average interest rate for a credit card in 2022 was 14.53%, while personal loans were closer to 9.5% (although your rate may differ from this, depending on the factors listed above).

So if you’re thinking about financing a big payment with a credit card, it’s a good idea to shop around for personal loan rates first.

2. What is the Personal Loan Term Length? 

You could be paying your loan back for anywhere from 12 to 84 months on average, depending on the lender.

Opting for a longer-term generally means that your monthly payment is lower.  The trade-off, however, is that you could pay more in interest.

Also, note that in most cases, your first payment will be due within 30 days for many lenders.

3. How Big of a Loan Should I Get?

You can get a personal loan in the range of $1,000 to $100,000, depending on the lender. Most offer loan terms from one to seven years.

However, the size of the loan can vary based on many factors, including the lender you choose and your credit score.
Also, it’s important to only take out as much as you can afford. Be sure to look at your current debts and income sources and consider how a loan might affect your monthly budget.

4. How Quickly Will I Get the Money?

It depends; some lenders cut you a check the same day, some ACH deposit funds into your account after a few days, and others may take weeks.

In any case, you don’t want to be in urgent need of urgent funds only to hear that you’re 30 days away from a check. So, it’s best to ask upfront when the funds will be available.

The timing may also depend on how you apply for the loan—online or in-person—among other factors.

5. Does the Personal Loan Have Fees?

Some personal loan lenders may charge a sign-up fee, also known as an origination fee, but others may not charge any fees other than interest. Verify with your lender whether this is the case.

If the lender does have an origination fee, it’s often a one-time charge due as an initial payment for between 1-10% of the loan. The origination fee is also typically included in the loan Annual Percentage Rate (APR - A loan's annual percentage rate, or APR, is what credit costs you each year, expressed as a percentage of the loan amount.

The APR, which is usually higher than the nominal, or named, interest rate you're quoted for a loan, includes most of a loan's up-front fees as well as the annual interest rate), so you’ll be paying any origination fees back in small amounts over time. Beware of hidden fees!

6. How Do I Know You Are a Trustworthy Lender?

Here are some potential red flags to look out for:
  • Suspicious or hidden fees
  • Pushy, aggressive advertising
  • Loans that don’t require any credit check (however it’s fine if lenders offer a pre-qualification that doesn’t impact your credit)
  • Claims that seem too good to be true (Fast money! Guaranteed approval Etc.)

Additionally, there are some indirect questions you can ask to find out if your lender is trustworthy, such as:
  • How many customers do you serve? A large customer base can indicate that the lender has more experience and a proven track record of service.
  • How long have you been in business? Chances are, if your lender has been in business for multiple decades, then they could be a more trustable institution. Vet carefully any lender that’s less than five years old.
  • What does your company do for the community? The best lenders are more than business; they are community partners. Ask if the lender supports any causes or participates in any local economic development organizations.

7. How Does My Credit Score Affect My Loan?

Lenders may label your credit score into tiers, such as “good”, “fair”, or “needs work.” It’s important to know where you stand, because in general, the better your credit score is, the easier it will be to get a loan with a better rate, and vice versa.

Also, not only will your credit score affect the loan, but the loan may affect your credit score. Before you get a loan, lenders will perform a credit check, which may impact your credit score slightly. If that unnerves you, some lenders let you pre-qualify, which means you can see if you might be able to get a loan without impacting your credit score.

8. How Convenient is the Repayment Process?

It’s good to have options. Most lenders will accept checks by mail, but what electronic options are available? Online payments, auto-drafts, and especially mobile apps are not only convenient, but they can save you a lot of money on stamps!

Even if you don’t prefer to pay online now, you may change your mind in a year or two, so the more options the better.

9. Should I Secure My Loan with Collateral?

Securing a loan involves using personal property—such as your automobile or household goods—as part of a guarantee that you will be back the loan.

The benefit is that secured loans can be easier to get and/or have more favorable terms. Collateral makes lenders feel better about loaning you money if you have some stake in the result.

Keep in mind, however: if you don’t pay back your loan, the lender may be legally able to seize your property. So it’s important to carefully consider leveraging critical collateral such as your automobile that you may feel you can’t afford to lose if you are unable to repay your loan.

Asking Questions Is Essential

Trustworthy lenders should be happy to help you understand loan details and concepts that may not be clear to you. However, it’s ultimately up to you.

Be curious. Be inquisitive. Be conversational. Before signing up for a loan, ask the right questions so that you can feel more confident about your decision both now and later.

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