A personal loan is a great way to fund large purchases, like home renovations or a wedding. It's also a good solution for consolidating your debt.
But not all loans are created equal. When analyzing several different interest rates, origination fees, loan terms and loan amounts, shopping for a loan can quickly become overwhelming.
It doesn't have to be. Our 8-step guide walks you through the whole process of getting a personal loan, from researching to getting pre-qualified to securing approval.
What Information You'll Need to Apply for a Loan
Before starting the personal loan application process, gather up a few important documents. No online lender, bank or credit union will approve a loan without proper documentation:
- Identification: You will need some form of ID. This can be your driver's license (or state ID), passport or Social Security card.
- Proof of income: Lenders want to know that you are poised to make monthly payments on time. You can typically offer proof of income in the form of pay stubs, tax returns or even bank statements if you receive direct deposit.
- Proof of residence: Verify your address with a lease agreement or utility bill with your name and address on it.
- Employer info: Some lenders may want to verify employment, so have your employer's phone number on hand, just in case.
While you will supply this documentation, lenders will also do a hard credit inquiry, meaning they will have full access to your credit history when making their decision. We'll touch more on credit score and credit history â€" and the difference between hard and soft inquiries â€" below.
How to Get a Personal Loan: 8 Easy Steps
As long as you have good or excellent credit, getting a personal loan should be an easy process. Fair or bad credit borrowers may have to search a little harder to find a lender that will approve personal loans without unreasonable interest rates and repayment terms.
Regardless of your credit history, our 8-step guide for getting a personal loan is a great place to start:
1. Consider Alternatives
Foremost, determine if a personal loan is actually the best option for you. While these loans typically come with lower APRs than credit cards, the interest rate can still be high, and taking on unnecessary debt can be dangerous.
What are you hoping to use your loan for? If you are planning to fund a wedding, take a vacation or buy a vehicle, tread lightly. It's better to have the money upfront for recreational purchases like vacations, and you'll often find better rates for specific purchases like cars and boats with an actual auto loan or boat loan.
In general, we recommend personal loans for three purposes:
- An investment: Taking out a loan for a home renovation or home repair will likely pay for itself in the long run with increased value to your property. Similarly, if you are unable to obtain a small business loan to launch a new venture, a personal loan is an alternative way to invest in your future.
- An emergency: If you do not have enough money in your emergency savings fund, a personal loan is a good option for tackling medical expenses, vehicle repairs and other emergencies. Of course, it's better to save for these ahead of time, but if you have struggled to build up a robust enough savings account, personal loans are a good alternative.
- Consolidating debt: Rather than consolidate your debt onto a single credit card, which likely still carries a high interest rate, consider paying off all your credit card debt with a debt consolidation loan. You won't have to juggle multiple due dates, and debt consolidation loans typically offer lower APRs than credit cards. Take note, however, that unlike credit cards, where you can just make a minimum payment, monthly payments for debt consolidation loans are set in stone. You must make the full payment, each month, or risk defaulting.
A Note on Home Improvement Loans
Personal loans are not your only choice for financing home renovations. In many cases, they are not even the best option. Explore other options â€" a home equity loan, home equity line of credit (HELOC), cash-out refinance or FHA 203(k) rehab loan â€" to determine the best fit for your needs.
If you've considered all the options on the table and a personal loan still seems like the best fit, you're ready to move onto the next step.
2. Review Your Finances
Personal loans are a big commitment. You're on the hook for monthly payments for a set number of years. In that sense, these loans are a lot like a car payment or mortgage payment. Miss enough of them, and you'll see serious drops on your credit score (plus owe late fees). Eventually, lenders may send your loan to collections and might even be able to garnish your wages and place a lien on your assets.
Sit down with your monthly budget and determine how much of a monthly installment you can afford. Set a max amount based on your income and expenses, and don't accept any loan offer with a monthly payment that exceeds this.
Also, keep in mind that many lenders charge origination fees (these are sometimes labeled as 'processing fees' or 'closing costs,' depending on the lender and type of loan). If you move forward with a loan that includes this fee, you will need to have the cash on hand to pay that at signing. And, like interest, that's money you'll never get back.
3. Check Your Credit Score
Credit scores play a huge factor in the loan approval process. If you have a good or excellent credit score (good: 690 to 719; excellent: 720+), you can have your pick of the litter when it comes to loans. But if your credit score is on the fair to bad side of things (fair: 630 to 689; bad: 300 to 629) or you don't have enough credit history to generate a score, you will have more trouble securing a loan.
That doesn't mean it's impossible. Some lenders offer unsecured personal loans to borrowers with bad credit, but you should expect APRs as high as they come (up to 36%) and unfavorable loan terms. These lenders can command larger fees as well â€" to protect their risky investment.
If you need money now, like for a medical procedure or emergency home repair, move forward with a loan from a bad credit lender. But if you can wait a year or two (by postponing a vacation or waiting to redo your bathroom), take the time to strengthen your credit score before applying.
A Note on Loans for Bad Credit
Most personal loans are unsecured loans, meaning you don't offer any collateral. This is riskier to the lender, which makes it doubly risky for bad credit borrowers. If you are struggling to get approved for unsecured personal loans and even bad-credit loans, you can always try secured personal loans (meaning you'll need to offer up collateral, like a car). Another option is getting a co-borrower to sign on to your loan application.
4. Compare Lenders
The market is saturated with online lenders, banks and credit unions, all fighting for your business. That's a good thing â€" but it can be overwhelming. We recommend narrowing down your search by relying on expert lists of the best installment loans (we're partial to our own). Some sites also offer a personal loan calculator to help with your comparison.
But what should you be comparing? We recommend looking at personal loan rates (APRs), minimum credit score requirements, loan term and loan amount flexibility, fees (origination, late, prepayment), funding speed and any special features, like on-time payment rewards or unemployment protection.
A Note on APRs
Just because the minimum APR advertised is attractive does not mean it will be what you are offered. Only borrowers with strong credit scores qualify for those entry APRs, and qualifying for those low rates typically requires setting up automatic payments as well.
Lender Comparison at a Glance
| Online Lender | APR Range | Minimum Credit Score | |||
|---|---|---|---|---|---|
| Marcus by Goldman Sachs | 6.99% to 19.99% | 660 | GET DETAILS | ||
| SoFi | 5.74% to 21.78% | Not disclosed | GET DETAILS | ||
| LightStream | 2.99% to 19.99% | Not disclosed | GET DETAILS | ||
| PenFed Credit Union | 4.99% to 17.99% | 700 | GET DETAILS | ||
| Upgrade | 5.94% to 35.47% | 560 | GET DETAILS | ||
| LendingClub | 7.04% to 35.89% | 600 | GET DETAILS | ||
| Best Egg | 5.99% to 35.99% | 600 | GET DETAILS | ||
| Upstart | 3.09% to 35.99% | 300 (or no score) | GET DETAILS | ||
| Avant | 9.95% to 35.99% | 580 | GET DETAILS |
5. Get Pre-Qualified
When you apply for a loan, the lender will do a hard credit inquiry, meaning they will pull your credit report from the major credit reporting agencies. This negatively affects your credit score each time you do it, which can make it difficult to shop around with various lenders.
Luckily, many online lenders now let you get pre-qualified for a loan. This process uses a soft credit inquiry, which will not affect your credit score but still allows the lender to get enough information to offer you a rate. You will need to provide basic info like your name, date of birth and income. Many lenders will also ask why you are taking out a loan.
6. Review the Loan Details
If you successfully pre-qualify for any loans, read the fine print carefully before moving forward. Comb the documentation for information on fees (origination, late, prepayment). Check the monthly payment amount, ensure the loan terms and amount are agreeable and compare the APR against other offers.
7. Complete the Application
When you have found the winning loan, move forward with the process. If you are pre-qualified, the offer likely has an expiration, so make sure you move quickly enough to lock in the rates discussed.
Some lenders can fund loans within one or two business days â€" and a few can even do same-day funding. Just make sure you've supplied all the correct bank information to expedite this process, and be on hand to provide additional documentation as needed.
8. Set Up a Payment Plan
To lock in an APR discount of 0.25% or even 0.50%, some lenders require you to set up automatic payments. These are helpful for ensuring you never miss a monthly payment, but they can also be dangerous if your checking account is ever low on funds.
Set up a monthly reminder to fund your checking account ahead of the autopay date if you are worried about overdrafting. (And while you're at, consider one of these banks that no longer charge overdraft fees.)
Assuming you signed onto a personal loan that does not charge a fee for paying it off early, consider making additional payments on the principal if your budget allows, especially if the interest rate is high. If you have other debt with higher interest rates (student loans, an auto loan, credit card debt), pay down that principal instead.
If the interest rate on your loan is lower than what you might earn on the stock market (and you're not risk-averse), it makes more financial sense to invest than to pay down the principal.
Personal Loan Terminology
When you're researching loan options, you might come across some new terms. Here's what they mean:
Secured Loan
A secured loan is one for which you provide collateral, such as your car or house.
Unsecured Loan
An unsecured loan is not backed by collateral. This poses a greater risk for the lender; thus, interest rates tend to be higher.
Origination Fee
Many lenders charge an origination fee, which serves as a processing fee or closing costs for the loan. These fees can vary depending on credit score but can sometimes be upwards of 8% to 10%.
Debt-to-Income Ratio
In addition to credit scores, lenders often consider an applicant's debt-to-income ratio (DTI). Expressed as a percentage (debt divided by income), this number demonstrates how much of your monthly income goes directly to paying off debt. For example, if your monthly income is $5,000 and your monthly debts are $2,000, your DTI is $2,000 / $5,000, or 40%.
Frequently Asked Questions (FAQs) About How to Get Personal Loan
Still have questions about loans? Here are some of the questions most commonly asked by readers â€" and the answers:
A lender will use more than just your credit score for an approval decision. They will also look at your DTI. Having a shorter loan term (e.g., three years instead of five) typically yields a more favorable interest rate, and having a co-borrower helps your chances of approval if you are struggling with bad credit.
Many lenders now perform a soft credit pull to see if you are pre-qualify. This will not affect your credit score. However, not every lender offers this, so review each lender's process carefully before entering in any information.
Most personal loans are unsecured, meaning they don't require collateral. However, some lenders do offer secured personal loan options.
There are several lenders who offer bad credit loans (Upstart and Avant are two of our favorites), but these come at a price: higher APRs, less favorable terms and more fees. Most financial professionals advise against payday loans even though they are easy to get approved for.
Each lender has its own criteria for determining loan eligibility. While most lenders do not publish each criterion, many do publish minimum credit score requirements. Salary requirements are not usually available on a lender's website. The lower your salary, the less likely you are to be approved â€" and if you are approved for a loan on a small salary, the actual loan amount is likely to be low.
You'll find some of the best personal loan rates, lowest fees and best loan amount and term flexibility by going with an online lender, but banks and credit unions can also offer competitive loans.
Timothy Moore covers banking and investing for The Penny Hoarder from his home base in Cincinnati. He has worked in editing and graphic design for a marketing agency, a global research firm and a major print publication. He covers a variety of other topics, including insurance, taxes, retirement and budgeting and has worked in the field since 2012.
This was originally published on The Penny Hoarder, which helps millions of readers worldwide earn and save money by sharing unique job opportunities, personal stories, freebies and more. The Inc. 5000 ranked The Penny Hoarder as the fastest-growing private media company in the U.S. in 2017.
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