10 questions to ask before you take out a personal loan

Personal loans can provide an affordable alternative to credit cards and help you finance life's big purchases while saving on interest. 

Increasingly, personal loans are growing in popularity, with roughly 20.2 million borrowers in the U.S. according to the online lending marketplace Lending Tree.

It's critical that you have a clear repayment plan, whether you're looking to take out a personal loan to consolidate debt, finance a home improvement, fund your next big trip or pay for a cross-country move.

Below, CNBC Select offers 10 questions you should ask yourself to make sure you're well-prepared for a new personal loan.

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The first step in choosing a personal loan is knowing how much you need. The smallest personal loan sizes begin at around $500, but most lenders offer a minimum of $1,000 to $2,000. If you need less than $500, it might be easier to save up extra cash in advance or borrow the money from a friend or family member if you're in a pinch. 

For borrowers looking for smaller loans, PenFed, a federal credit union, provides a wide range of personal loan options, and customers can borrow as little as $600 or as much as $50,000.

When you take out a personal loan, the cash is usually delivered directly to your checking account. But if you're using a loan for debt consolidation, a few lenders offer the option to send the funds directly to your other creditors and skip your bank account altogether. 

If you prefer a hands-on approach or are using the money for something other than paying off existing debt, have the funds wired to your checking account.

A Happy Money personal loan may be a good choice if you're looking for a personal loan to finance debt consolidation. Happy Money allows you to deposit the money you borrow into your linked bank account or directly to your creditors.

You'll have to begin paying the loan company back in monthly installments within 30 days. Most lenders provide repayment terms between six months and seven years. Both your interest rate and monthly payment will be impacted by the length of the loan you choose.

Your interest rate depends on a number of factors, including your credit score, loan amount and your term (length of time you'll be paying the loan back). Interest rates can be as low as 5.99% and as high as 29.99% or more. Typically, you'll get the lowest interest rate when you have a good or excellent credit score and you choose the shortest repayment term possible. 

According to the Fed's most recent data, the average APR for 24-month personal loans is 11.23%. This is often well below the average credit card APR, which is why many consumers use loans to refinance credit card debt.

Personal loan APR is most often fixed, which means it stays the same for the life of the loan.

When you apply for a personal loan, you have the opportunity to choose which repayment plan works best for your income level and cash flow. Lenders will sometimes provide an incentive for using autopay, lowering your APR by 0.25% or 0.50%.

Some people prefer to make their monthly payments as low as possible, so they choose to pay back their loan over several months or years. Others prefer to pay their loan off as quickly as possible, so they choose the highest monthly payment.

Choosing a low monthly payment and a long repayment term often comes with the highest interest rates. It might not seem like it because your monthly payments are so much smaller, but you actually end up paying more for the loan over its lifetime. 

As a general rule, borrowers should aim to spend no more than 35% to 43% on debt, including mortgages, car loans and personal loan payments. So if your monthly take-home pay is $4,000, for instance, you should ideally keep all total debt obligations at, or under $1,720 each month.

Mortgage lenders in particular are known for denying loans to people with debt-to-income ratios higher than 43%, but personal loan lenders tend to be a bit more forgiving — especially if you have a good credit score and proof of income. If you think you can temporarily handle higher payments in order to save a lot on interest, you may be able to stretch this ratio a bit to take on a higher monthly payment.

It's harder to be approved with a debt-to-income ratio above 40%, and stretching yourself too thin could lead to cash flow problems. You should only do this as a temporary measure and if you have some kind of safety net, such as a partner's income or an emergency fund.

Personal loan lenders may charge a sign-up, or origination, fee, but most don't charge any fees other than interest.

An origination fee is a one-time upfront charge that your lender subtracts from your loan to pay for administration and processing costs. It's usually between 1% and 5%, but sometimes it's charged as a flat-rate fee. For example, if you took out a loan for $10,000 and there was a 5% origination fee, you would only receive $9,500 and $500 would go back to your lender. It's best to avoid origination fees if possible.

See our top picks for personal loans:

Select's list of the best 5 personal loans

Before you start applying for personal loans, it's important to know your credit score to make sure you can qualify. Most personal loan lenders are looking for applicants to have a good credit score, particularly online banks. However, if you have an existing relationship with a bank, you may get approved for a favorable deal if you have a good history of paying bills on time and honoring the terms of your past loans and accounts. 

Sometimes, credit unions will offer lower interest rates on personal loans and work with borrowers who have fair or average credit scores. But you often need to become a member and sometimes you need to open a savings account before you can qualify for a loan.

For people who don't have a great credit history, Upstart accepts applicants who have insufficient credit history or don't have a credit score at all. You will likely pay higher fees and interest rates than if you had a good credit score, so be sure to clearly read the terms and conditions before you sign on for the loan.

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Some personal loan lenders, like LightStream, deliver funds electronically on the same day you are approved; Discover Personal Loans will deliver funds the next business day. Other lenders need up to 10 business days. If quick access to money is important for your situation, be sure to select lenders with fast delivery.

Personal loans are a form of installment credit, whereas credit cards are considered revolving credit. Having both types of credit in your profile will strengthen your credit mix.

Having a diverse credit mix is helpful  — but it's not everything. Some say that adding a new installment loan, like a car loan or a mortgage, can boost your score, but there's no sense in taking on debt (plus interest) unless you actually need it.

To maintain a good credit score, focus first on the top two most important factors: on-time payments and credit utilization.

While taking on an installment loan is not in itself going to boost your score a whole lot, using a personal loan to pay off revolving debt will cause the most noticeable increase in your credit score. Once your cards are paid off, keep your spending under 10% of your available credit and notice what a difference it makes.

Select now has a widget where you can put in your personal information and get matched with personal loan offers without damaging your credit score.

Personal loans are a great alternative to 0% APR credit cards, but like any financial product, they are most beneficial when you have a plan. When you've gone through the above questions, do a soft inquiry on the lender's website or on a third-party lending marketplace so that you can see your options without hurting your credit score. After you see what you prequalify for, only then should you follow through with a hard inquiry. 

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Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.

Paybox Bank migrates core to Avaloq

Vienna-based paybox Bank, a subsidiary of A1 Telekom Austria, is migrating its operations to the Avaloq Core Platform to drive the expansion of its business and to create a comprehensive suite of banking services.

paybox Bank offers credit cards as well as payment solutions for private and corporate clients. The bank is now planning to expand its product range and to use EU passporting to grow in Germany and Southeast Europe. paybox Bank is wholly owned by A1 Telekom Austria AG. Since its founding in 2000, paybox Bank has focused on innovative mobile commerce solutions and was one of the first banks to launch a comprehensive commercial near field communication (NFC) offering in 2007. With the Avaloq Core Platform, paybox can operate as an online bank in full compliance with regulations from Austria’s Financial Market Authority (FMA) and Germany’s Federal Financial Supervisory Authority (BaFin), while continuing to drive innovation in Europe’s financial sector.

Avaloq’s core banking platform, implemented by Synpulse, will automate and streamline the bank’s processes and workflows across the front, middle and back office. This ensures high straight through processing (STP) and service accuracy rates to enhance the efficiency of paybox’s operations and minimize payment reversals. The Avaloq Core Platform also offers flexibility and a fast time-to-market for new products and services, while facilitating seamless expansion into new markets.

Michael Wilhelm, Chief Operating Officer and Executive Board Member at paybox, said: “We are excited about our ambitious growth plans, which we are jointly developing with Avaloq and Synpulse. The Avaloq Core Platform will provide the necessary flexibility to enable us to expand into any client segment or business area in the future - and to quickly launch new solutions in response to market trends. As a leader in mobile payments and innovative credit card solutions, we aim to shape the future of digital finance in Europe. And thanks to this new partnership, we can rely on Avaloq’s expertise in banking to help us achieve our growth ambitions. We look forward to working closely with Avaloq in the years to come.”

Thomas Beck, Co-Chief Executive Officer at Avaloq, said: “Our core banking platform will form the backbone of paybox Bank’s operations, supporting fundamental processes such as client onboarding, payments and settlement. This will provide a strong foundation on which paybox can develop further propositional capabilities to enable enhanced digital engagement and to help deliver on clients’ financial objectives. At Avaloq, we constantly screen the market to keep our clients compliant with evolving regulations - including those from FMA and BaFin. We are proud to partner with such an innovative bank and to help drive the ongoing digital transformation in finance.”

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