Knowing how to get a loan, which terms or options you should look for and compare, and what lenders may look for can be helpful when you’re in a pinch. Whether you need the money to repair your car, have an unexpected medical emergency, think you could save money by consolidating high-interest debt, or have another want or need, a personal loan could help.
Although some lenders ask what you intend to do with a personal loan, and your interest rate could depend on the intended purpose, generally you can use a personal loan for almost anything.
What is a personal loan?
Personal loans are installment loans, which means you’ll receive a lump-sum of cash up front, and then repay the loan with a series of payments.
You may be able to borrow as little as $1,000, all the way up to $100,000 or more, depending on the lender. Repayment terms for personal loans tend to range from three to seven years, and the interest rates may vary from under 5% to about 36%.
If you want to learn how to get a personal loan, these seven steps will walk you through the preparation, comparison, and application process.
1. Review your credit
Your credit is an important factor in determining whether you qualify for a personal loan, and what interest rate you’ll receive. Your debt-to-income (DTI) ratio — your monthly debt payments divided by your monthly income — can also be a major factor.
Basically, the higher your credit score and the lower your DTI, the better. (I.e. the cheaper personal loans go to the most creditworthy borrowers). Lenders may have a minimum credit score requirement, which often ranges from 600 to 700, depending on the lender.
In addition to your credit score and DTI, lenders may have specific requirements relating to your credit history. For example, Lending Club requires that you have at least two revolving accounts (such as a credit card or line of credit) and no more than five hard inquiries on your credit reports from the previous six months.
With Credible, you can check and see if you’ll prequalify for a loan with a soft 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.
You may be able to check your credit for free by logging into your bank or credit card account, although not all financial institutions offer this perk. Alternatively, Discover provides free access to a FICO score, the type of credit score that most lenders use, even if you don’t have a Discover account.
You can review your credit repors and get a free VantageScore credit score, which may be different from a FICO score, through Capital One or Credit Karma.
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. Decide between a secured or unsecured loan
Personal loans are often unsecured loans that you qualify for based on your credit, income and outstanding debts. That’s why they’re also called signature loans — you get the money with the promise that accompanies your signature and don’t have to put up any collateral.
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. You may also be able to get a secured personal loan using a savings account or certificate of deposit (CD) as collateral, although those accounts will likely be frozen until you repay the loan. If you can’t repay the loan, the lender can take the collateral.
For those with good to excellent credit and a low DTI, an unsecured personal loan could have few fees and a low interest rate. Although unsecured loans may have a higher interest rate than some types of secured loans, such as a home equity loan or home equity line of credit, they could offer lower rates than other forms of consumer debt, like credit cards. It therefore could make sense to use a low-rate unsecured low to consolidate other higher-rate debts, such as credit card debt.
If you have poor credit, though, you may 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.
Although secured loans can be easier to qualify for, and may offer lower rates even for the most creditworthy, that doesn’t necessarily make a secured loan a better option.
Generally, you don’t want to take out a secured loan and take on the accompanying risk of losing your collateral. But a secured loan could be one of your few options during an emergency and might make sense when funding some low-risk investments.
It is 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. You may even get sued, and could wind up with a judgement against you and garnished wages. The same could also happen with a secured loan if your collateral doesn’t cover everything you owe.
3. Learn about variable- and fixed-rate loans
Another decision you’ll have to make is whether you want a variable- or fixed-rate loan.
The interest rate on a variable-rate loan depends 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.
The rate on a fixed-rate loan depends 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.
4. 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. There isn’t a single best place to get a personal loan because there are lenders that focus on a certain type of loan, such as secured loans backed by a car, while others solely offer unsecured loans. And each lender could have different eligibility requirements, fees, terms, and interest rates on their loans.
Some large traditional banks and smaller community banks offer personal loans. That could be a good option, particularly if you have an established relationship with the bank.
Credit unions, which are nonprofits, may offer more favorable rates and terms than banks. Credit unions tend to limit their membership to people who live in a specific area or work in a particular industry, but there are some that waive those requirements if you make a small donation to a charitable organization.
There are also online alternative lenders that offer unsecured and secured personal loans. They may have a streamlined application process, low interest rates and few fees. But there are also online lenders that target applicants who have bad credit and charge extravagant fees, so be cautious.
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.
You also want to compare which fees the lender have, and how much they charge. For personal loans, common fees include late payment fees and fees for unsuccessful payments. Origination fees, which could be 1% to 6% of your loan amount are also common, although 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.
5. Apply for prequalification
Some lenders let you apply for prequalification or preapproval. You’ll fill out basic information about yourself and the loan you want, and the lender will show you the approximate loan terms you qualify for based on the information. Best of all, you may be able to get prequalified with only a soft pull on your credit, which doesn’t hurt your credit score.
Since it won’t hurt your credit, there’s no harm in shopping around and comparing your options from several lenders — just make sure to double check that the lender is conducting a soft credit pull, not a hard credit pull. You can do this by reading the terms or calling the lender before submitting your information.
You can also use Credible to fill out a single prequalification form and see if you qualify for prequalified rates from multiple, verified personal loan lenders with a soft credit check.
Getting prequalified isn’t a guarantee that you’ll get approved. For instance, if you lose your job between when you prequalify and when you submit an application, you likely won’t be able to get the same loan terms, if you can qualify at all. But it is a good way to get a sense of the loans you can get at the moment.
If there are lenders that you think could be a good fit, but they don’t offer a soft inquiry prequalification, you may still want to apply to them individually and see if you qualify. However, start with the soft inquiry prequalification options and try to limit the number of hard inquiry applications you submit, as each hard inquiry could impact your credit score.
6. Consider all your options
Prequalification can help you determine the approximate terms you’ll be able to get on a personal loan, and you can then compare those to other funding options. You may find getting a personal loan is the best route, but you could also discover that a different type of financial product will be cheaper or betters suites your specific needs.
Perhaps opening a new credit card that has a 0% interest rate offer makes more sense than taking out a loan that has an origination fee. Some cards don’t charge interest on new charges for over a year and a half, and you could get away without paying any interest or fees as long as you pay off the debt before the end of the introductory period.
If you’re consolidating high-interest debt, you may also want to compare the pros and cons of using a personal loan versus a balance transfer credit card. Some balance transfer cards don’t have any balance transfer fees, although most charge 3% or 5% of the transferred amount, and they don’t charge interest on the transferred balances for a promotional period. The periods are often around 12 to 21 months, giving you time to pay off the balance without accruing interest, but less time than a personal loan could offer.
Credit cards may not be a good option if you need a large loan, though. Lenders may offer unsecured loans for $75,000 or more, and limits are often higher for secured loans. But getting a credit card with such a high limit could be more difficult. Credit cards also may have a higher interest rate than a personal loan, and if you can’t follow through with your repayment plan you might wind up carrying a high-interest balance.
When you’re considering taking out a personal loan for a discretionary expense, such as a vacation, you may want to rethink the decision altogether. Often, it’s best not to take on debt unless it’s necessary. You especially don’t want to take out a secured loan, and risk your collateral, without a pressing need.
7. Complete and submit the application
If you decide to move forward with a personal loan, you’ll have to submit a complete application. But taking out a personal loan can actually be a quick and easy process.
Whether you’re getting a personal loan from a bank, credit union, or alternative lender, to start the application process you may need share your personal and financial information. 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.
Depending on the lender, the entire application, the application can take just a few minutes to complete, and may be able to get get money electronically deposited into your bank account within a single business day. 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. Or, if you’re planning on consolidating other debts, you may be able to request that your personal loan lender send payments directly to your current creditors.