While there’s no universal ‘good time’ to take out a loan, there are times where it may make more financial sense. Aside from individual finances alone, you also need to consider the current economic climate and interest rates to decide if it’s a good time for you to take out a personal loan.

Key takeaways

  • The best time to get a personal loan will look different for every borrower.
  • Interest rates are historically high, so unless absolutely necessary it may be best to hold off on applying.
  • It may be a good time to take out a personal loan if you have an excellent credit score, are in good financial health and prequalify for a competitive interest rate.

When to get a personal loan

Despite the turbulent economic climate and historically high interest rates, some consumers are more well suited financially for a personal loan than others. Factors like your credit score, annual income and credit history are often used by lenders as requirement criteria.

If you fall into the following financial categories, a personal loan could be a good tool to fund your next purchase, project or life event.

You have a very good credit score or above

According to the FICO credit model — the scoring that most lenders use — a very good score is anything above 740. While lenders may accept a lower score, it’ll be harder to get approved right now and if you do, you’ll likely get stuck with a high rate.

You have an established repayment history

Given that lenders are tightening requirements to avoid risk, a long history of positive loan and credit repayment is likely going to be required. Your credit report includes every reported payment you’ve made, missed or were late on for up to the past seven years. If your credit history is thin or shaky at best, a lender is more likely to pass on your application right now.

You have a low debt-to-income ratio

Your debt-to-income (DTI) ratio is the percentage of your monthly debt payments divided by your gross monthly income. Lenders often see higher DTI as potential default risk, and some lenders or banks require a DTI below a certain percentage. However, if yours is below 36 percent, you’re among those who may want to consider a personal loan.

Your annual income is steady and sufficient

Some institutions require a minimum income for approval, but not all lenders have a specific amount requirement. Generally, the higher your income, the more likely you are to get approved and most lenders allow for the applicant to input multiple streams of income as long as they provide the proper documentation to back it up.

You prequalified for competitive rates

Many lenders offer prequalification, which allows you to check your predicted rates and approval odds before applying. Prequalifying doesn’t impact your credit and allows you to easily compare lenders. If you’re offered the lowest — or very competitive — rates, then you may want to take advantage of that offer.

When to not take out a personal loan

Due to the rate hikes, borrowing isn’t necessarily discouraged all together, but it’s advised that borrowers take a good look at their overall financial health and loan alternatives before jumping into another potentially high-cost monthly payment.

It may not be the best time to take out a personal loan if:

  • You don’t meet the minimum financial requirements for most lenders.
  • The lenders you do qualify with charge high interest rates.
  • You’re denied approval or offered sky-high rates when prequalifying.
  • There’s not a lot of wiggle room in your monthly budget.
  • You have a thin or young credit history, but a high score.
  • You don’t have a creditworthy co-signer to boost approval odds or lower potential rates.
  • Your income is inconsistent or you’re currently unemployed.

Why it may be difficult to get approved for a loan right now

Before even considering your financial situation, approval odds and potential interest rates, it’s crucial to understand how inflation is affecting the consumer lending market altogether and what this means for borrowers.

Federal Reserve hikes rates 10 consecutive times, likely leading to default

The Federal Reserve raised rates in 2022 and 2023 with the aim of cooling down inflation, and did so at a historically fast pace. As of June 21, 2023, the average personal interest rate is 11.06 percent; for reference, the average rate in 2021 was 9.38 percent.

In 2023 alone, the unsecured personal loan default rate is expected to rise from 4.10 to 4.30 percent; this is likely caused by increased borrowing costs and the potential for a recession. That being said, even if you do get approved right now there’s a high likelihood that you’ll qualify for a much higher interest rate than if you were to wait for the Fed to lower rates.

Banks and lenders tighten approval requirements

According to a Federal Reserve April 2023 report, banks and online lenders have pulled back on loan approvals in general in response to the unfavorable and uncertain economic outlook and an expected deterioration in the credit quality of their existing loan portfolios.

For borrowers, this means that loans will not only be much more expensive than they have been in recent years, but that the approval requirements have — or likely will soon — become much more stringent as lender’s pull back on who can borrow to avoid risk.