5 factors to consider before taking out a personal loan

When it comes to your financial health, information is everything — and the first step to making a dent into repaying your debt is understanding your options, like personal loans for debt consolidation. A personal loan could help you consolidate credit card balances, pay for a big-ticket expense (think unexpected medical or vet bills, car or home repairs), or simply make it easier to manage your finances. But, before you borrow, it’s important to understand how personal loans work and which options make the most sense for your financial situation. Here are five key factors to weigh.

It might sound obvious, but it’s the most important factor. Before signing on, look at your monthly budget with a critical eye. Could you comfortably cover the new loan payment along with rent, groceries, and your streaming subscriptions? Taking out a personal loan should help to reduce financial stress, not increase it. For example, 80% of surveyed customers said taking out a Discover® personal loan to consolidate debt reduced their stress.¹

Try a “practice run.” Set aside the amount of the expected loan payment in savings for a month or two. If you barely notice the money missing, you’re probably in good shape. If not? You may want to consider a longer repayment term. That way, you’re paying less per month, and even if it’s for a longer period of time, you’ll feel comfortable knowing it fits in your budget.

Interest rates are the fine print that matter most. A fixed-rate loan means your interest rate (and your payment) won’t change for the duration of the loan, unlike a variable rate that can increase over time. That predictability may make it easier to budget, harder for financial surprises to sneak up on you, and could even help you save money on interest over the life of your loan. Let’s say you’re juggling three credit cards with rates around 22%. If you consolidate that higher-interest debt into a personal loan at a lower fixed rate, you could save hundreds (even thousands) in interest.

Some lenders charge origination fees or processing charges, which can feel like paying extra just to borrow money. And while a 3% fee may not sound like a lot, on a $10,000 loan that’s $300 gone before you even get started. Another fee to watch out for: A prepayment penalty, where you’ll need to pay an additional fee if you get a windfall or bonus and decide to pay off your entire loan before the term ends. Discover® Personal Loans has no fees, so the full loan amount can go toward paying down your debt.

Taking out a personal loan can temporarily affect your credit. Applying will result in a hard inquiry, which may lower your score. With a Discover® personal loan, you can see what your loan rate and set regular monthly payment could be before you apply, with no impact to your credit score*. But if you’re using the loan to pay down higher-interest debt and you make on-time payments, it could actually help improve your credit profile over time.

Here’s why: Let’s say you’re carrying $15,000 across three cards, and every card is close to its limit. Consolidating that debt into one personal loan lowers your credit utilization ratio. Having less debt on each of your cards and a better credit utilization ratio makes you look more responsible in the eyes of lenders.

Another factor that will affect your score: your credit mix. It only makes up a small portion of your score, but having a variety of accounts, like credit cards plus a personal loan, could potentially show that you can handle different types of debt responsibly.

Repayment terms aren’t one-size-fits-all. Some people prefer a shorter term so they’re debt-free sooner, even if it means higher monthly payments. Others may want a longer term with smaller payments that leave more room in the budget for groceries, gas, or the occasional latte. With Discover® Personal Loans, you can choose a flexible repayment schedule, from options offered that fits your budget, and if questions come up, you can reach a US-based customer service loan specialist who will explain your options and help you complete your application.

A personal loan could be a valuable tool for tackling debt or covering unexpected expenses, and the right loan is one that fits seamlessly into your financial plan. Visit Discover® Personal Loans to get started — most people get a decision the same day they apply.

_{*After you check your rate, if you move forward with an application for a new Discover personal loan, you will need to consent to a hard credit inquiry that will appear on your credit report.}

_{For debt consolidation, even with a lower interest rate or lower monthly payment, paying debt over a longer period of time may result in the payment of more in interest. A Discover personal loan is intended for personal use and cannot be used to directly pay any Capital One account (including any Discover or Capital One credit card), secured loan, or post-secondary education loan or expense.}

_{Discover makes loans without regard to race, color, religion, national origin, sex, disability, or familial status.}

¹_{ABOUT SURVEY}

_{All figures are from an online customer survey conducted in September 2024. A total of 736 Discover personal loan customers were interviewed about their most recent Discover personal loan with 546 of them using the funds to consolidate debt. All results @ a 95% confidence level. Respondents opened their personal loan between January and July 2024 for the purpose of consolidating debt. Agree includes respondents who ‘Somewhat Agree’ and ‘Strongly Agree’.}