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.
A personal loan can be a helpful resource when you need to pay for large or unexpected expenses. But to make the most of one, it’s best to have a reliable plan to pay it off.
If you have decided to apply for a personal loan, consider all of the factors that go into taking a loan, including your financial standing, the lender you use, and how you will pay it off. Follow our eight-step guide to walk through the process.
- Decide How Much to Borrow
- Check your credit score.
- Consider your options.
- Choose your loan type.
- Shop around for the best personal loan rates.
- Pick a lender and apply.
- Provide necessary documentation.
- Accept the loan and start making payments.
What information to have before applying for a loan?
Before you begin the process of applying for a personal loan, gather all the documents and information you need along the way. Doing so will allow you to move through each step of the process efficiently and get your funds as quickly as possible.
The items you may need include the following:
- Personal identification, such as a driver’s license, Social Security card or passport.
- Proof of income, such as W-2s, paystubs or filed tax returns.
- Employer’s information, including the company name, your manager’s name and the phone number.
- Proof of residence, such as a utility bill with your name and address or a lease agreement.
How to get a personal loan in 8 steps
There are many reasons to get a personal loan, like an unexpected hospital bill or a necessary car repair. If you’ve decided that a personal loan is the right type of financing for you, follow these eight steps to apply.
1. Decide How Much to Borrow
Remember that when you borrow money, you don’t just pay back the original loan. Except for that 0% card, paid off on time, you also pay interest or “rent” on the money you borrow. There’s no reason to pay interest on the money you don’t need, so only borrow what is necessary. On the other hand, if you borrow less than you need, you may be forced to turn to more expensive loan sources at the last minute.
Finally, make sure you can afford the payments on the amount you do borrow. There’s nothing worse than overextending yourself financially if the best thing would have been to wait a while until your finances improve.
2. Check Your Credit
As personal loans rely heavily on your creditworthiness, check your credit scores and obtain updated credit reports from each of the three major credit reporting agencies—Equifax, Experian, and TransUnion—before you apply.
None of these actions, referred to as soft inquiries, will impact your creditworthiness or credit score. That only happens when you apply for a loan and the lender makes what’s known as a hard inquiry.
You can obtain a free credit report from each of the major reporting agencies once per year by visiting AnnualCreditReport.com. Many credit card and loan companies provide a free monthly credit score from one or more of the major credit reporting agencies.
Services such as Credit Karma offer free credit scores, credit reports, and other financial services. Some, like Credit Karma, are actually free. Others offer a free trial then charge an ongoing fee. You can also pay for your credit score from credit reporting agencies or from other online vendors.
3. Consider your options
Depending on your creditworthiness, you may need a co-signer to get approved for a personal loan with a decent interest rate. If you can’t find a co-signer, or the lenders you’re considering don’t allow co-signers, you may have the option to get a secured personal loan instead of an unsecured one.
Secured loans require collateral, such as a vehicle, a house, or cash in a savings account or certificate of deposit, in exchange for more favorable terms. If you fail to repay the loan, the lender can seize the collateral to satisfy the debt.
You’ll also need to think about where to get a personal loan. With traditional banks, for instance, you may have a hard time getting approved if you have bad credit. Some online lenders, however, specialize in working with bad-credit borrowers, and some credit unions have short-term loans that serve as cheap alternatives to payday loans.
If you don’t meet the typical qualifications and your purchase can wait, take some time to build up your credit score so you can qualify.
- Takeaway: If you don’t meet the qualification requirements for a decent rate, and you need a loan right now, a co-signer, a bad-credit loan or a secured loan could improve your chances of approval.
- Next steps: If you don’t think you’ll get approved, research your loan options or reach out to a family member or friend with good financial health about being your co-signer.
4. Choose your loan type
Once you know where your credit stands and you’ve considered your options, determine which type of loan is best for your situation. While some lenders are flexible in terms of how you use the funds, others may only approve loan applications if the money will be used for specific purposes.
For example, one lender might let you take out a personal loan to fund your small business, while a different lender might not allow you to use borrowed funds for business purposes at all. It’s generally smart to find a lender that is comfortable loaning you money for the exact reason you need it.
You can search the personal loan marketplace for different types of loans, such as:
- Debt consolidation loans: Debt consolidation is one of the most common uses for personal loans. By taking out one loan to cover your existing debt, you decrease the number of payments you have to worry about each month and receive one (potentially lower) interest rate.
- Credit card refinancing loans: Some companies, like Payoff, specialize in loans for people looking to pay off credit card debt. Because personal loan rates are often lower than credit card rates, a loan may be a good way to clear your credit card balances and pay them off over a longer period.
- Home improvement loans: A home improvement loan may be a good option if you’re looking to pay for a large renovation up front without taking out a secured home equity loan.
- Medical loans: Because medical expenses are often unpredictable, a personal loan may be a good way to decrease the immediate financial burden and pay debt down over a number of years.
- Emergency loans: Emergency loans are useful for a number of purposes. A car breakdown, a smaller medical expense or a burst pipe may be good reasons to take out this type of loan.
- Wedding loans: Weddings and vacations can be pricey, which is why many people turn to personal loans to pay for them. This spreads payments out over a number of years, so you don’t need to worry about paying for a special occasion all at once.
5. Shop around for the best personal loan rates
Avoid settling for the first offer you receive; instead, take some time and shop around for the best possible interest rate. Compare several types of lenders and loan types to get an idea of what you qualify for.
You can generally find personal loan offers from banks, credit unions, and online lenders. If you’ve been a longtime account holder with your bank or credit union, consider checking there first. Often, showing that you’ve made positive financial choices for years means your bank or credit union may be willing to look past recent credit missteps or give you a better rate.
Some online lenders also allow you to get prequalified with a soft credit check, which won’t impact your credit score. Check with the lenders you are considering to see if they offer a prequalification process. Utilize this option to get a full understanding of the rates available to you.
Lenders that don’t offer a prequalification process will typically run hard credit inquiries as part of the loan application process. To limit the effect of hard inquiries on your credit score, it’s best to do your rate shopping within a 45-day period to count them as a single inquiry for credit-scoring purposes.
Takeaway: Don’t settle for the first offer you receive. Compare several lenders and loan types and check for a prequalification option before applying to avoid an impact on your credit.
Next steps: Shop around and compare offers, rates, and fees to find a loan with competitive rates. Get prequalified if this is an option.
6. Pick a lender and apply
After you’ve done your research, pick the lender with the best offer for your needs, then start the application process.
Depending on the type of lender, you may be able to do the entire application process online. Alternatively, some lenders may require you to apply in person at your local bank or credit union branch.
Every lender is different regarding what information it’ll need on the application, but you’ll typically need to provide your name, address, and contact information, your income, and employment information, and the reason for the loan.
The lender will also request you share how much you want to borrow. It may then give you a few options to consider after a soft credit check. You’ll also have a chance to review the complete terms and conditions for the loan, including fees and your repayment period. Read through the loan agreement thoroughly to avoid hidden fees and other pitfalls.
Takeaways: All lenders have different qualification requirements and may ask for different information. Lenders may also require you to apply in person, while others let you complete the entire application online.
Next steps: Determine the application process for the lender you have chosen. Once you are ready to apply, gather all of the information you will need for the application and apply as directed.
7. Provide Necessary Documentation
Every lender is different when it comes to what you need to apply. Once you submit your application, your lender will likely ask you to provide some additional documentation. For example, you might need to upload or fax a copy of your latest pay stub, a copy of your driver’s license, or proof of residence.
The lender will let you know if it needs any documentation from you and how to get it to the right person. The faster you provide the information, the sooner you’ll get a decision.
Takeaways: Be prepared to present additional documentation as requested during the application process.
Next steps: Gather pay stubs, proof of residence, driver’s license information, and W-2s in advance to speed up the application process. Submit all requested documentation quickly to your lender to get your decision as soon as possible.
8. Accept the loan and start making payments
After the lender notifies you that you’ve been approved, you’ll need to finalize the loan documents and accept the terms. Once you do this, you’ll typically get the loan funds within a week — but some online lenders get it to you within one or two business days.
When you are approved, start keeping track of when your payments are due, and consider setting up automatic payments from your checking account. Some lenders even offer interest rate discounts if you set your account to make auto payments.
Consider paying extra each month. While personal loans can be cheaper than credit cards, you’ll still save money on interest by paying the loan off early. Adding even a small amount to your monthly payments can help you do so.
Takeaways: You could receive the funds as early as one to two business days after getting approved and accepting the loan terms. Once you’re approved, start considering how you’ll pay down your balance.
Next steps: Create a plan to make your monthly payments and pay your loan off. Consider automatic payments and think about paying extra each month to save on interest.
Factors that will affect your interest rate
Personal loan qualification requirements vary based on the lender, but there are a few criteria that many lenders look at to determine your interest rate offer.
- Your credit score: Good credit can make it easier to qualify for a personal loan at a lower interest rate. Lenders will review your score and your credit history for adverse marks, like late payments or delinquent and defaulted accounts.
- Debt-to-income (DTI) ratio: Your DTI ratio is the amount of your monthly debt divided by your monthly gross income. Generally, a low DTI ratio is a signal to lenders that you can manage monthly payments on a new personal loan.
- Loan term: Generally, loans with shorter repayment terms offer lower interest rates. A longer repayment term typically means a higher interest rate.
- Co-signer: If you don’t meet the lender’s qualification requirements, having a trusted family member or friend in good financial health be your co-signer can increase your chances of approval — potentially at a better interest rate.
If you have a low credit score and a high DTI ratio and don’t have a willing co-signer with good credit and stable income, you won’t be eligible for the lowest personal loan rates. However, a strong credit score and a low DTI ratio will attract the most competitive rates.
Can I prequalify for a personal loan?
If you want to know what your loan rates and terms may be ahead of the formal application, look for lenders that have a prequalification process. Prequalifying is a no-commitment option and will only use a soft credit inquiry, meaning your credit score won’t be impacted.
To see if you prequalify, you’ll need to answer a basic questionnaire with some personal information. Details may include your name, address, and Social Security number, your annual gross income, the loan amount you need, and your reason for seeking a loan.
Depending on the lender, a prequalification form might ask other preliminary questions. During this stage, you won’t be asked for additional documentation; the lender will ask for any required supporting documents after you’ve decided to move forward with an offer.
Tips for speeding up the process
If you’re looking for a personal loan, you likely want to get your hands on the money as soon as you can. These tips can help you avoid delays when applying for a personal loan.
- Check your credit report before applying. Know where your credit stands before shopping around for personal loans. Spotting and correcting errors immediately is a simple way to avoid issues later on when you’re applying for a loan.
- Pay off debt. If you have debt and you don’t need the loan funds urgently, paying some debt off can raise your credit score and lower your DTI ratio, which can increase your chances of approval.
- Talk to your existing financial institution. Banks and credit unions might be more willing to consider a personal loan application from a customer with whom it’s had a positive, long-standing relationship.
- Consider online lenders. Many online lenders offer next-day loan decisions, and funds may be deposited into your bank account within a few days after applying, if you are approved.
- Pick loan funds up in person. If your lender has a brick-and-mortar location, ask if there is an option to pick funds up at the branch so you can get the money faster.