Whether you need the money for a home improvement project, have a medical emergency, think you could save money by consolidating high-interest debt, or have other unexpected expenses, a personal loan could help.
If you want to learn how to get a personal loan, these seven steps will walk you through everything you need to know to prepare and go through the application process:
- Review your credit report
- Know the loan requirements
- Decide between a secured or unsecured loan
- Learn about variable- and fixed-rate loans
- Research fees
- Compare lenders
- Complete and submit your loan application
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1. Review your credit report
Your credit is an important factor in determining whether you qualify for a personal loan, and what interest rate you’ll receive. Typically, the higher your credit score, the better your chances of getting approved.
You might be able to check your credit for free by logging into your bank account or credit card account, although not all financial institutions offer this perk. AnnuelCreditReport.com also offers a free credit report to you once a year.
If you’re not faced with an emergency, it might make sense to take a few steps to raise your credit score before applying for a loan.
2. Know the loan requirements
In addition to your credit score, there are other requirements that you might need to meet in order to get a personal loan:
- Debt-to-income (DTI) ratio: All lenders look at your DTI, which is comprised of your monthly debt payments divided by your monthly income.
- Income and employment history: Some lenders have certain income requirements you (or your cosigner) will need to meet. Other might just
- Other credit history factors: Lenders might also have specific requirements relating to your credit history. For example, some lenders might require that you have at least two revolving accounts (such as credit card debt or a line of credit) and no more than five hard inquiries on your credit report within the last six months.
3. Decide between a secured or unsecured loan
Personal loans are often unsecured loans — meaning you don’t have to put up any collateral — that you qualify for based on your credit, income, and other factors. However, some lenders also offer secured personal loans, which do require you put up collateral. This could be your home if you take out a home equity loan, a vehicle for a title loan, or some other valuable asset. If you can’t repay the loan, the lender can take the collateral.
For those with good credit to excellent credit and a low DTI, an unsecured personal loan could have few fees and a lower interest rate. If you have poor credit, though, you might only be able to qualify for an unsecured loan with a high APR, sometimes over 30%. Or you might not be able to qualify at all.
Generally, you don’t want to take out a secured loan and take on the accompanying risk of losing your collateral. But in an emergency a secured loan could be one of your few options and might make sense.
It’s important to always keep in mind that failing to make payments on either a secured or unsecured loan could lead to late payment fees and hurt your credit. And even though you didn’t put up collateral, when you take out an unsecured loan and can’t pay it back, the lender may either send your account to its collections department or sell your debt to a collections agency. Be prepared to afford your monthly payments, so you don’t fall behind.
4. Learn about variable- and fixed-rate loans
Another decision you’ll have to make is whether you want a variable- or fixed-rate loan:
- Variable-rate loans: These depend on the applicant’s credit history, a benchmark rate that the interest rate is based on, and the lender’s margin. As the benchmark rate rises or falls, the interest rate on your loan and your monthly payment could rise or fall with it.
- Fixed-rate loans: These depend on similar criteria, but once you take out the loan your rate is locked in place, and won’t fluctuate.
While variable-rate loans offer a lower initial interest rate than fixed-rate loans, the potential for an increase in the future makes them a riskier option. A variable-rate loan could be a good choice when you can pay off the loan quickly or you think interest rates aren’t likely to increase by a lot during the term of your loan. But opting for a fixed-rate loan could be best if you want to limit your risk, keep your payments stable, or if you think interest rates may rise dramatically during your loan’s term.
5. Research fees
You should compare which fees the lenders have and how much they charge. For personal loans, common fees include late payment fees and fees for unsuccessful payments. An origination fee, which could be 1% to 6% of your loan amount, is also common — though some lenders offer personal loans without an origination fee.
You also want to find out if the lender charges a prepayment penalty, a fee for paying off your loan early. Although you might not plan on paying off the loan before the end of the term, you may find a higher-paying job, tighten your budget, or be gifted money in the future. When that happens, you don’t want to be punished for paying off your loan early.
6. Compare lenders
Choosing your lender is an important decision, as a variety of benefits and drawbacks depend on the lender in addition to the loan. Each lender could have different eligibility requirements, fees, loan terms, and interest rates on their loans.
When comparing lenders lender, look to see if they offer the loan amount, interest-rate type, and repayment periods that you want. Also check to see if the lender lists a minimum credit score requirement, as that may indicate your eligibility.
Credible makes it easy for you to compare multiple lenders in one place. You can see if you’ll prequalify for a loan with a soft credit inquiry, which doesn’t affect your credit score. Knowing where you stand ahead of time can help you determine whether a personal loan may be a good option. This helps you to ensure that you choose a lender who is a good fit, and avoid unnecessary hard inquiries.
7. Complete and submit your loan application
Credible’s prequalification process takes less than three minutes and can help you determine the approximate loan terms you’ll be able to get on a personal loan and allow you to compare your loan options.
If you decide to move forward with a personal loan, you’ll have to submit a complete application. For the loan application process, you may need share your personal and financial information with the lender (like your Social Security number). You could also have to verify your identification, address, or income with copies of a government identification card, utility bills, pay stubs, and tax returns.
Once you choose your lender and get approved, you might be able to get get money electronically deposited into your bank account as soon as the next business day (depending on the lender and your approval). However, some types of secured personal loans, such as a home equity loan, are more complicated and it could take several weeks to complete the entire application, verification, and disbursement process.
Once you receive the funds, you can use the money as you like, though, keep in mind, some lenders ask on the application exactly what you’ll be using the money on — if that’s the case, you’re expected to only use the funds for that purpose.
Jamie Young contributed to the reporting of this article.