When you need a personal loan for credit card debt consolidation, home improvements, or other purposes, where do you go? Do you take the time to shop around or are you focused on getting money right away?
A personal loan is a money you borrow for just about any purpose, including debt consolidation, an unexpected medical bill, a new appliance, a vacation, or even a student loan. You pay the money back including interest in monthly installments over time, usually two to five years, most personal loans are unsecured, meaning they are not backed by collateral.
The interest you pay is expressed as an annual percentage rate (APR). The average APR on a personal loan is 9.41% as of June 2019, but it can range from 6% to 36% depending on your creditworthiness, including an examination of your income, debts, and credit score.
Comparison shopping is a good idea when you’re making a big financial commitment like taking out a loan. And online lenders have made applying for a personal loan fast and convenient.
Here’s how to comparison shop and apply for a personal loan.
- Check your credit
- Apply for prequalification
- Compare loan offers
- Close on your personal loan
1. Check your credit
Before starting the application process for any kind of loan, it’s a good idea to review your credit.
Credit history and credit scores are among the financial factors lenders will generally consider when reviewing your loan application. Your credit history can affect whether a lender will approve you for a loan and the interest rate it offers you. Good credit can typically make it easier to get a loan and a favorable interest rate.
Lenders may also consider your debt-to-income ratio when considering you for a loan which is the total of all the debt payments you must make each month divided by your gross monthly income. This ratio helps lenders understand how well you’ll be able to manage repayment if they give you a personal loan.
2. Apply for pre-qualification
Once you’ve checked your credit, you’re ready to apply for prequalification.
Pre-qualifying for a personal loan gives you a preview of estimated rates, monthly payments, and terms before you submit your application. Most online lenders and some banks let you pre-qualify on a desktop or mobile device.
Will pre-qualifying affect my credit score?
No, pre-qualifying for a personal loan includes a soft inquiry, which doesn’t affect your credit score.
What do I need to pre-qualify for a personal loan?
To pre-qualify, you’ll need to provide information such as:
- Loan purpose. Unsecured personal loans can be used for almost anything.
- Requested loan amount. Lenders typically offer personal loans from $1,000 to $50,000.
- Preferred monthly payment. Personal loans usually have monthly payments spread over two- to seven-year terms.
- Personal and financial information. This could include your name, email address, date of birth, address, income, Social Security number and education.
You’ll typically provide some basic information:
- How much you want to borrow
- How you’ll use the money
- Your annual income
- Your employment status
- The last four digits of your Social Security number
How long will it take to pre-qualify?
Pre-qualifying can take a few seconds or minutes after you submit your information. If you qualify for a loan offer, a new page will appear showing your potential rates and terms.
You may also receive an email from the lender with contact information for customer service and a list of the next steps to help you complete the application.
You can also search for loan options without getting prequalified.
3. Compare loan offers
Once you submit your information, you may receive some information if you prequalify, such as …
- Loan amount you may qualify for
- Estimated monthly payment amount
- Estimated interest and fees
- Estimated annual percentage rate, or APR
- Loan term
Again, it’s important to remember that these are potential offers and tentative rates and terms. You’ll get definitive information about the loan a lender’s willing to offer you only after you formally apply directly with the lender.
Things to consider
When you’re reviewing your loan options, be sure to compare …
- APR: This is how much it will cost you to borrow money, including the interest rate and any potential fees. Learn more about APR and why it’s important.
- Loan term: Generally, loans with a longer term have a lower monthly payment. But they could cost more in interest in the long run.
- Origination fee: Some lenders charge this fee for making a loan.
All of these factors can affect the total cost of your personal loan.
Once you comparison shops and choose an offer, you can complete your loan application.
Remember, prequalification doesn’t guarantee that you’ll be approved for a loan. You’ll still need to submit additional information to the lender in order to complete your application.
What do I need for my loan application?
You’ll need to provide some or all of the following:
- Proof of identity, including a government-issued ID, recent utility bill or lease agreement.
- Proof of address.
- Proof of employment status.
- Education history, including the highest degree you’ve earned and graduation date.
- Income details, including bank statements or pay stubs, and proof of additional income like retirement, alimony or child support.
- Social Security number if it wasn’t submitted during pre-qualification.
Finalizing your loan approval will typically result in a hard credit inquiry — this may affect your credit scores, but shouldn’t do any long-term damage.
5. Close on your personal loan
Once you’ve submitted your loan application, the lender will review it, decide whether to approve you for the loan and send you final loan documents if you’re approved. These documents typically detail the terms of your loan, including the interest rate, length of the loan, the loan amount, and your monthly payments.
Once you’ve reviewed the details, you’ll sign the documents and your funds will be deposited into your account. With online lenders, this can happen quickly, sometimes in as little as a day.
How will my loan application affect my credit score?
Submitting the formal loan application triggers a hard credit inquiry, shaving up to five points off your FICO score and possibly remaining on your credit report for just over two years.
How long will it take for my application to be approved?
If everything checks out, you could get same-day approval. If the lender requests additional documents, approval may take longer.
How long will it take to get funded?
After you are approved and sign the loan agreement, how quickly you receive the money will likely depend on the type of lender you choose. Many online lenders can provide same-day funding, while some banks may have the money to you in five days or sooner.
Know Your Rights Under Regulation Z
In 1968 the Federal Reserve Board (FRB) implemented Regulation Z which, in turn, created the Truth in Lending Act (TILA), designed to protect consumers when making financial transactions. Personal loans are part of that protection. This regulation is now under the auspices of the Consumer Financial Protection Bureau (CFPB).
Subpart C–Sections 1026.17 and 1026.18 of the TILA require lenders to disclose the APR, finance charge, amount financed, and a total of payments when it comes to closed-end personal loans. Other required disclosures include the number of payments, monthly payment amount, late fees, and whether there is a penalty for paying the loan off early.
Check Out the Details
Now that you know you are prequalified, it’s time to prequalify the lender. Go through information and disclosures in your preapproval letter and revisit the website to look for the following:
- Expected Loan Amount, APR, Monthly Payment, and Loan Term. It may or may not be exact, but it will give you something with which to compare other preapproved loans.
- Fees and Penalties. Will this loan have an origination fee? If so, how much? What are the penalties or fees for late or missed payments? Are there any other charges?
- Type of Interest. Is the interest rate fixed or variable? Do I have a choice, and, if so, what’s the difference in rates?
- Unsecured or secured. Will this be an unsecured or secured loan? For a secured loan, what is required collateral?
- Automatic Withdrawal. Are automatic withdrawals of monthly payments mandatory or optional? If optional, will I get a lower interest rate if I agree to automatic withdrawals?
- Arbitration. In the event of a conflict, is arbitration mandatory, or can I take the lender to court?
- Prepayment Penalty. If I pay my loan off early, will I pay a penalty?
- Fine Print. There’s always fine print, even in preapproval letters. Look for anything not answered above or anything you hadn’t thought of.
Once you receive funding, expect your first loan payment to be due within 30 days. If you’ve opted into automatic bank payments, the funds will be debited from the bank account you provided. Add your monthly payment amount to your budget to stay on top of your debt repayment.