How to Use This Calculator
Personal loans are unsecured loans that can be used for almost anything. Before taking one, use this calculator to understand the true cost:
- Determine how much you actually need to borrow - avoid borrowing more than necessary as personal loans have higher rates than secured loans like mortgages or auto loans
- Check your credit score first at annualcreditreport.com - scores above 720 typically qualify for the best rates (under 10%), while scores below 630 may see rates above 20% or even 36%
- Research current personal loan rates from banks, credit unions, and online lenders - rates vary dramatically by lender and credit score, so compare at least 3-5 offers
- Enter any origination fees accurately - some lenders charge upfront fees (typically 1-8% of loan amount), others charge flat fees ($50-$500), and some charge nothing at all
- Understand fee structure - some lenders deduct the origination fee from your proceeds (you receive less cash), while others add it to your balance (you owe more)
- Compare total cost of loan, not just monthly payment - a lower monthly payment with a longer term often costs significantly more in total interest
- If consolidating credit card debt, ensure the personal loan APR is meaningfully lower than your current card rates (at least 3-5% lower to justify origination fees)
- Factor in your debt-to-income ratio - lenders typically want this below 40%, meaning your total monthly debt payments shouldn't exceed 40% of your gross monthly income
Understanding Your Personal Loan
Monthly Payment
Your fixed monthly payment stays the same throughout the loan term. Unlike credit cards with variable minimum payments (typically 1-3% of balance), you'll always know exactly what you owe. This predictability is one of the main advantages of personal loans over revolving credit.
Total Loan Amount
This includes your borrowed amount plus any origination fees. Some lenders deduct the fee from your loan proceeds (you borrow $10,000 but receive $9,500 after a 5% fee), while others add it to your balance (you borrow $10,000 and owe $10,500 after the fee). Ask which method your lender uses before signing - it affects how much cash you actually receive.
Origination Fees
These upfront fees (typically 1-8% of the loan amount) are how lenders make money beyond interest, especially on shorter-term loans where they earn less interest. A $10,000 loan with a 5% fee means you either receive $9,500 or owe $10,500. Online lenders tend to charge higher origination fees but may offer lower APRs, while credit unions often charge no origination fee but slightly higher APRs. Always factor this into your comparison shopping - a loan with 10% APR and 5% origination fee may cost more than one with 12% APR and 0% origination fee if you pay it off quickly.
Interest Costs vs Credit Cards
Personal loans typically have lower APRs than credit cards (10-15% vs 18-25% for average credit), and you'll pay them off faster with fixed payments instead of minimum payments. This is why they're popular for debt consolidation. For example, $10,000 in credit card debt at 20% APR paid with minimum payments takes 15+ years and costs $12,000+ in interest. The same amount on a 3-year personal loan at 12% APR costs about $2,000 in interest and you're debt-free in 36 months.
Secured vs Unsecured Personal Loans
Most personal loans are unsecured (no collateral required), which is why rates are higher than mortgages (3-7%) or auto loans (4-8%). You're paying a premium for the lender's risk. Some lenders offer secured personal loans where you pledge savings accounts, CDs, or other assets as collateral - these typically offer 3-5% lower APR. However, if you default, you lose your collateral. Only consider secured loans if you're extremely confident in your ability to repay.
Personal Loan Tips
- Check your credit report before applying at annualcreditreport.com - errors like incorrect late payments can lower your score by 50-100 points and increase your rate. Dispute errors before applying to ensure you get the best rate possible.
- Pre-qualify with multiple lenders using soft credit checks - this won't hurt your score and lets you compare offers. Only do the full application (hard inquiry) with your top choice. Sites like Credible, LendingTree, or NerdWallet let you compare multiple lenders at once.
- Credit unions often beat banks on personal loan rates by 2-4% - membership requirements are usually easy (live in certain area, work for certain employer, or join an association). Some credit unions offer rates as low as 6-8% for excellent credit.
- Avoid payday loans, title loans, and cash advances at all costs - APRs often exceed 400% (not a typo), trapping you in a debt cycle. A $500 payday loan costs $75 every two weeks just to roll over. After a year, you've paid $1,950 in fees and still owe the $500.
- If consolidating credit card debt, cut up your cards after paying them off or freeze them - 70% of people who consolidate with personal loans run up new credit card balances within two years, ending up with both the loan payment and new card debt. This defeats the entire purpose.
- Watch out for prepayment penalties - some lenders charge 2-5% of the remaining balance if you pay off your loan early. This can negate savings from refinancing or paying it off with a bonus. Always ask about prepayment penalties before signing.
- Consider a 0% balance transfer credit card instead if you have good credit (680+) - 0% APR for 12-18 months can beat personal loan rates if you can pay it off during the promotional period. Just watch out for 3-5% balance transfer fees and don't miss the end of the promo period when rates jump to 20%+.
- Never take a personal loan for investments, crypto, or gambling - the guaranteed interest cost (10-15%) will likely exceed any potential returns. Even the stock market's historical 10% return doesn't beat a 15% loan rate, and gambling has negative expected value.
- Beware of "no credit check" or "guaranteed approval" personal loans - these are predatory with rates often above 100% APR and fees that add 20-50% to your balance. If you can't qualify for a traditional personal loan, look into credit counseling instead.
- Read the fine print on monthly fees and late fees - some lenders charge $5-15/month in "administrative fees" or "insurance fees" that add hundreds to your total cost. Late fees can be $25-50 per incident and some charge "returned payment fees" of $30-40.
When to Use a Personal Loan
Personal loans can be a valuable tool when used appropriately. Here's when they make sense and when they don't:
Good Reasons for Personal Loans:
- Consolidating high-interest credit card debt - if your average card APR is above 18% and the personal loan rate is 12% or below, you'll save thousands in interest and pay off debt faster
- Emergency expenses when you have no emergency fund - medical bills, urgent home repairs (roof leak, broken furnace), or essential car repairs that prevent you from getting to work
- Home improvements that increase property value - kitchen/bathroom remodels, adding square footage, or necessary repairs. Though home equity loans may be cheaper if you have equity and good credit
- Major life expenses that can't be financed traditionally - weddings (though smaller is better), moving costs for a new job, or funeral expenses
- Consolidating multiple debts to simplify payments - if you have 5+ credit cards, 2 store cards, and a medical bill, one payment is easier to manage than eight
- Avoiding foreclosure or eviction - if a personal loan prevents you from losing your home, the interest cost is worth it (but address the underlying budget issue)
Bad Reasons for Personal Loans:
- Vacations or luxury purchases - if you can't afford to save $3,000 for a vacation, you can't afford the $3,500 it costs with loan interest. Save up instead
- Investments, stocks, crypto, or business ventures - too risky with guaranteed interest costs. If the investment fails, you're stuck with the loan. Use savings for speculative investments
- Gambling or paying off gambling debts - this enables the addiction. Seek help from Gamblers Anonymous instead of taking a loan
- Another loan to pay off personal loans - this is a debt spiral. If you can't afford your current loan, you can't afford another one. Seek credit counseling
- Expenses you could save for in 3-6 months - if you want a $2,000 laptop and can save $400/month, just wait 5 months instead of paying $200 in loan interest
- Keeping up with friends or "lifestyle creep" - borrowing money to maintain a lifestyle you can't afford is a recipe for financial disaster
Using Personal Loans for Debt Consolidation
Personal loans are most commonly used to consolidate credit card debt. Here's how to know if it makes sense for your situation:
Calculate Your Savings
Add up all your credit card balances and average APRs. If your average card APR is above 15% and the personal loan rate is below that, you'll save money. However, don't forget origination fees - a 5% origination fee on a $10,000 loan costs $500 upfront, which negates some savings.
Ensure the Loan Term Isn't Too Long
Consolidating $10,000 of credit card debt into a 6-year personal loan might lower your monthly payment from $300 to $200, but you'll pay more total interest than paying off the cards in 3 years. Run the numbers both ways - if you can afford the 3-year payment, don't stretch to 6 years just to lower the monthly amount.
Create a Plan to Avoid New Credit Card Debt
The biggest risk is paying off your cards, then running up new balances. Suddenly you have both the loan payment AND new card debt - you're worse off than before. Strategies: (1) cut up your cards after paying them off, (2) keep one card for emergencies only, frozen in a block of ice, (3) remove cards from online shopping sites, (4) address the spending habits that caused the debt initially.
Consider the Payoff Timeline
If you can pay off your credit cards in 12 months without a loan (for example, you got a raise or are getting serious about budgeting), the hassle and origination fees might not be worth it. Personal loans make most sense when you're facing 3-5 years of card payments and can cut that in half.
Factor in Origination Fees When Comparing
A credit card at 18% APR with no fees might be better than a personal loan at 12% with a 5% origination fee if you can pay it off in under 18 months. Use this calculator to compare scenarios with and without origination fees to see the break-even point.
Example Calculation
$15,000 in credit card debt at 20% average APR, paying $400/month = 56 months to payoff, $7,300 in interest. Same debt as a personal loan at 12% APR with 3% origination fee ($450) on a 48-month term = $400/month payment, $3,600 in interest + $450 fee = $4,050 total cost. You save $3,250 and are debt-free 8 months sooner. That's a good use of a personal loan.
How Personal Loans Affect Your Credit Score
Taking a personal loan impacts your credit score in several ways, some positive and some negative:
Short-Term Negative Impacts
Initial hard inquiry drops your score 5-10 points temporarily - this recovers within 3-6 months. If you apply to multiple lenders, each hard inquiry counts separately (unlike mortgages where they're grouped), so pre-qualify with soft checks first. A new account lowers your average account age, which can decrease your score by 10-20 points. If you have few accounts and short credit history, this hurts more.
Immediate Positive Impact from Debt Consolidation
If you're consolidating credit cards, your credit utilization drops dramatically, which helps your score. For example, if you had $10,000 in balances across cards with $15,000 total limits (67% utilization), paying them off with a personal loan drops your card utilization to 0%. Since utilization is 30% of your score, this can increase your score by 30-80 points within 1-2 months. Personal loans don't count toward utilization - only revolving credit (cards) does.
Long-Term Positive Impact from On-Time Payments
Making on-time payments builds positive payment history, which is 35% of your credit score. After 12-24 months of on-time loan payments, your score improves significantly. This is especially valuable if you had late payments on cards before consolidating.
Credit Mix Improvement
If you only have credit cards, adding an installment loan (personal loan) diversifies your credit mix, which is 10% of your score. This can add 10-20 points over time. Having both revolving credit (cards) and installment loans (personal loans, auto loans, mortgages) shows you can handle different types of credit.
Warning: Don't Close Paid-Off Credit Cards
After consolidating credit card debt with a personal loan, keep your credit cards open with $0 balance. Closing them reduces your available credit, which increases your utilization if you use any cards in the future. It also reduces your average account age. Keep the cards but don't use them - cut them up if necessary, but keep the accounts open for your credit score.
The Two-Year Rule
It takes about 24 months of on-time personal loan payments to see the maximum positive impact on your credit score. If you're planning to apply for a mortgage or auto loan in the next 6-12 months, be aware that the new personal loan might temporarily hurt your score. Plan major credit applications accordingly.