July 28, 2025
Whether you work an hourly job or have a six-figure salary, a personal installment loan can provide a financial boost in times of need. But only when you choose to get one — and choose wisely.
Many Americans avoid personal installment loans, often because they don’t know how they work or if they’ll be approved. One in five Gen Zers, for instance, don’t know how to apply for a personal loan, and one in five Gen Xers don’t believe they’d qualify for one. But some people will get these loans wherever they can, even if they’re a bad deal.
Whether you’re someone who is hesitant to apply or is overeager to, it’s important to ask and answer the following five questions before getting a personal installment loan. That way you can make a more informed decision about how to navigate your finances.
While your credit score may not be the only thing lenders consider when you apply for a personal installment loan, it is often a key factor in their decision process. And not just for determining whether you get approved or not.
Loans aren’t free money. Lenders expect to be repaid; with interest. Your credit score is an indicator of your trustworthiness — of the likelihood that you’ll repay the loan in a timely manner. And the more trustworthy a lender believes you are, the less risky the lender thinks it is to loan you the money. So, lenders may use your credit score to help determine not just whether they’ll loan you money, but how much money they’ll loan you and at what interest rate.
Because of this, it’s important to check your credit score before you start searching for personal installment loans. It’ll give you a better idea of the loan amounts and rates you should expect from lenders.
As with all loans, every personal installment loan falls into one of two categories: secured or unsecured. And there’s just one major difference between them — collateral.
Collateral is a borrower’s asset that can be seized if they fail to repay the loan. This asset is often something like a car or a house, and it offers an extra layer of security for the lender. That’s why loans that require collateral are called secured loans, while those that don’t are called unsecured loans.
Generally speaking, interest rates are lower for secured loans, since a lender’s risk is lowered by their ability to seize your asset if you don’t repay the loan. Conversely, interest rates are typically higher for unsecured loans, as lenders are risking more without that guarantee of collateral.
Considering this, it’s important to determine whether you should get a secured or unsecured personal loan before applying for the first loan you see. And knowing your credit score can help! If you have poor credit or no credit history, a secured loan could be a good option since the collateral gives lenders more confidence that you’ll repay the loan. If you have great credit, you may be able to get a higher loan amount at a lower interest rate through an unsecured loan — without having to put an asset on the line!
You should only take out a loan that you’re confident you can pay back in a timely manner. Whether you’re borrowing a lot of money or a lower amount, you should be able to afford whatever your minimum scheduled repayment amount is every period — without ruining your budget. This may require some budget adjustments, such as spending less on new clothes or eating out less each month so you can repay the loan. But repaying your loan on schedule will help you get out of debt faster, and may even boost your credit score.
On the other hand, not repaying your loan can have negative consequences. If you have an unsecured loan, falling behind on payments or defaulting can sink your credit score. If you have a secured loan, it can also lead to the loss of whatever asset you put up as collateral. Worse, if you’re not careful, failure to repay a loan can even lead to bankruptcy.
“If you aren’t intentional about how you manage your loan, it can quickly turn into a burden that leads to financial problems and damage to your credit,” writes Evelyn Waugh, a personal finance writer at Experian. “But if you haven’t applied for a loan yet, you’re in a good position to plan for what you can afford before you borrow.”
When weighing whether you can afford a loan, it’s also important to figure out when that loan will be fully paid off. After all, you don’t want to be in debt forever. Plus, your payoff timeline can impact your minimum regular payment amount, along with how much interest you’ll pay over the life of the loan.
As a general rule, a longer payoff timeline will require lower minimum payments than a shorter payoff timeline for the same loan amount. But this longer payoff timeline will also accrue more interest than the shorter one.
Whether a borrower has a longer or shorter payoff timeline, they can also make extra payments to repay the full loan early. Though this isn’t always without stipulations. Some lenders charge prepayment penalties and other closing fees. So if you intend to pay off your loan early, you should get a loan that doesn’t charge these fees.
Before you sign on the dotted line, you want to ensure that a lender is legitimate. Because many aren’t.
Researching the lender is a great place to start — even if it’s a popular lender. You want to make sure they have proper accreditation and registration. You’ll also want to verify that their website is secure (an “https” in the website address as opposed to just “http” is a good indicator) and explore customer reviews.
Similarly, you’ll want to read the loan’s fine print and compare the loan details with loans from other lenders. If an interest rate sounds too predatory to be legal, check. And if the loan seems too good to be true, check that, too.
As Celia Winslow, an executive vice president at the American Financial Services Association, recently told Bankrate, “the offers that are often too good to be true, usually are just that.” So, doing your due diligence and keeping an eye out for signs of fraud is nonnegotiable. It’s OK to be skeptical. When it comes to your finances, you only want to do business with lenders you can trust.
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