How To Get a Personal Loan: 5 Steps To Help You Find the Best Loan for Your Borrowing Needs
Updated March 21, 2024 at 4:48 pm
As credit card interest rates continue to rise, consumers have been turning to personal loans more often—both to consolidate high-interest credit card debt and as a more affordable method of financing. Between Q1 2022 and Q1 2023, unsecured personal loan balances increased by over 25% according to a TransUnion report.
Before you apply for a personal loan, it’s helpful to understand what lenders require from loan applicants and the details you should look for as well. Each lender sets its own qualification standards that you must satisfy to be eligible for financing. Yet the overall process for getting a personal loan tends to be similar across the board. The five steps below can help you prepare for future personal loan applications and learn how to find loan options that make the most sense for you.
What Is a Personal Loan?
A personal loan is money you borrow from a creditor like an online lender, bank or credit union. This type of loan is called an installment loan because you repay the cash you borrow, plus interest and possible fees, in payments called installments.
In general, most personal loans feature fixed interest rates that stay the same throughout the life of the loan. The monthly payment amounts on most personal loans are fixed as well. Thanks to this structure, you don’t have to worry about any surprises when it comes to planning your budget.
Another notable feature that personal loans have to offer is their flexibility. Borrowers can use most personal loans for a variety of purposes. Home improvement projects, big-ticket purchases and debt consolidation are some of the expenses you may be able to cover with this type of financing. Still, it’s important to check with each lender to see if there are any restrictions regarding loan usage. Certain lenders may not let you use your loan proceeds for education expenses or business purposes, and other restrictions may apply as well.
How To Apply for a Personal Loan
Recommended Steps:
- Review your credit
- Calculate desired loan amount and payment size
- Compare loan options
- Get prequalified
- Fill out an official loan application
Time To Complete: Varies
1. Review Your Credit
Checking your credit report and credit score is one of the first steps a lender typically takes when you apply for a personal loan. Therefore, it’s wise to review your credit and find out where it stands before you start the loan shopping process.
You can claim free credit reports from all three credit bureaus—Equifax, TransUnion and Experian—once a week via AnnualCreditReport.com. Further, many credit card companies give customers free access to their credit scores as a courtesy. Both myFICO and Experian offer FICO Scores to consumers as well (free and fee-based options are available).
There’s no standard minimum credit score you must earn to become eligible for a personal loan. Each lender sets its own eligibility criteria. Yet, with a higher credit score, you may increase your odds of qualifying for a loan and improve your chances of getting a better loan offer as well.
If you discover that you have a good credit score, you may have access to more attractive loan options with lower interest rates and fees. A fair or bad credit score could mean that your personal loan options are more limited. With bad credit, you might need a cosigner to qualify for financing, or you might decide to work on improving your credit before you apply for a loan.
2. Calculate Desired Loan Amount and Payment Size
It’s also important to make a few calculations before you fill out any personal loan applications. First, you’ll want to do the math on how much money you need to borrow. From there, it’s important to calculate the maximum payment size that will fit comfortably into your monthly household budget and make sure to stay below that amount when you take out a new loan.
A personal loan calculator can help you estimate your monthly loan payments based on the amount you plan to borrow. Knowing your credit rating can also give you an idea of the types of loan offers to expect. (Again, good credit can save you money on a personal loan.) But you’ll have to wait until the prequalification process (see below), to get a clearer picture of the annual percentage rate (APR), fees and terms that lenders may offer you.
3. Compare Loan Options
Next, you may be ready to start comparing your loan options. As you shop around for a personal loan, it’s wise to pay the following details:
- Credit score requirements
- Interest rates and fees
- Loan amounts offered
- Repayment terms
- Funding speed
- Loan availability (may be limited to certain states)
- Customer reviews
Make a list of the loan options that seem like they might be the best fit for you based on your situation.
4. Get Prequalified
Some lenders may allow you to see if you prequalify for a personal loan before you fill out an official loan application. Although you don’t have to complete a full loan application during the prequalification process, you should be prepared to provide the lender with some basic details including:
- Personal information (name, address, Social Security number and date of birth)
- Income and employment information
- Desired loan amount
The prequalification process lets you review your estimated interest rate and monthly loan payment, typically with a soft credit inquiry.
5. Fill Out an Official Loan Application
After comparing personal loan offers, you may be ready to choose the option that makes the most sense for your situation and apply. Many lenders will allow you to submit your official loan application online. If you’re applying for a personal loan from a credit union or community bank, however, you might have to visit a local branch to complete the application.
On your loan application, you may need to provide details about your personal identity (e.g., name, Social Security number, date of birth), income and employment, your desired loan amount, and how you plan to use the funds you borrow. The lender may also request additional documents alongside your application, including:
- Proof of income (pay stub, W-2s, etc.)
- Proof of residence (driver’s license, utility bills, etc.)
If the lender approves your application, be sure to read the fine print before you accept the loan terms. It’s important to make sure you’re comfortable with the loan amount, payments, interest rate and other loan details before you finalize the loan documents.
Which Is the Best Personal Loan for Me?
If you’re considering a personal loan for yourself, trying to choose the right loan option can be difficult. But instead of feeling overwhelmed by a long list of potential loan options, try focusing on the loan factors that matter most to you. When you pay attention to the loan details that are important to you, it’s easier to narrow down the best personal loan choice for your situation.
Interest Rates
If you’re like most people, the most important detail you’ll want to consider when choosing a personal loan is the cost. In general, all lenders charge interest on personal loans. Most lenders also reserve their lowest interest rates for applicants with higher credit scores.
Credit Requirements
Keep in mind that just because a lender advertises a low interest rate or low fees doesn’t mean you’ll be eligible for that offer. A personal loan with a lower interest rate might seem desirable on the surface, but if the lender requires a minimum credit score that you can’t satisfy, that loan offer probably isn’t the right fit for you.
Fees
On top of interest charges, some lenders may charge various fees to their personal loan customers as well. Origination fees on personal loans often range between 1% and 8% of the amount you borrow. These fees often come off the top of your loan proceeds. If you take out a $50,000 personal loan and the lender charges a 5% origination fee, the cost would be $2,500. As a result, lender fees have the potential to add to your overall loan costs to a significant degree.
Maximum Loan Amounts
Another detail to consider when choosing a personal loan is how much the lender will let you borrow. If you want to borrow $50,000 but a lender only issues personal loans up to $40,000, for example, you would probably be better off searching for a different financing option.
Of course, there’s no guarantee you’ll be eligible for a lender’s maximum loan amount. Details like your debt-to-income ratio, your credit and other factors may impact the amount of money a lender is comfortable loaning you. Nonetheless, it’s important to select a lender that at least offers loan amounts that are high enough to meet your borrowing needs.
Minimum Loan Amounts
On the other end of the spectrum, you might be in a situation where you want to borrow only a small amount of money. Yet if a lender only issues personal loans of $5,000 and up (or some other amount that’s higher than you need), you might feel forced to borrow too much money. This is another example of a loan that might not be well suited for your situation.
Frequently Asked Questions
How Do You Qualify for a Personal Loan?
To qualify for a personal loan, you’ll need to satisfy the lender’s borrowing criteria. In general, you must meet a minimum credit score requirement, have a debt-to-income (DTI) ratio that’s acceptable to the lender and be able to prove income and employment to meet the lender’s standards. Specific loan requirements vary from one lender to the next. So, it’s important to research what it takes to qualify for a personal loan with individual lenders before you apply for financing.
Can You Get a Personal Loan With Bad Credit?
It may still be possible to qualify for a personal loan with bad credit, but you’ll typically receive less attractive loan offers when you’re in this position. As a result, you may have to pay higher interest rates and fees, and you might qualify for smaller loan amounts than you would if you applied for a personal loan with a good credit score.
What Is a Good Interest Rate for a Personal Loan?
According to the Federal Reserve, the average interest rate on a 24-month personal loan was 11.48% in May 2023. Therefore, if you qualify for an interest rate that’s lower than average, some might consider that to be a good rate. It’s also worth noting that the best interest rates on personal loans tend to be reserved for borrowers with excellent credit scores.
Editorial Disclosure: Opinions, reviews, analyses and recommendations expressed here are author’s alone, not those of any bank, credit card issuer, hotel, airline, or other entity. This content has not been reviewed, approved or otherwise endorsed by any of these entities.
