9 Steps to Get a Personal Loan

In most cases, securing a personal loan is straightforward if you have a good credit score and proof of income. However, there are specific steps you can take to select the right personal loan and boost your chances of approval. These steps may vary based on whether you’re seeking a loan for debt consolidation, home improvements, medical expenses, or a wedding.

Consumers often opt for personal loans because they offer quick access to cash for various needs. Whether you need funds for an unexpected hospital bill, an emergency car repair, or to finance essential home renovations, understanding how to get approved for a personal loan can streamline the application process.

Check your credit score before diving into the numbers. Personal loan annual percentage rates (APRs) can vary significantly, from just below 8 percent up to 35.99 percent, primarily based on your credit score. A score of 800 or higher puts you in the excellent-credit category, while a score of 580 or below is typically considered bad.

Securing a loan with bad credit can be challenging, resulting in higher APRs and larger payments. Lenders may offer smaller loan amounts or require quicker repayment.

Conversely, a high credit score improves your chances of securing a low personal loan rate and a larger loan amount. You’re also more likely to qualify for longer repayment terms, up to seven years, compared to the standard five-year term for those with lower scores.

Tip: You can often check one or more of your credit scores for free through your credit issuers.

Next steps:

  • Pay your bills on time: Payment history significantly impacts your credit score.
  • Keep credit card balances low: Pay off or reduce credit card balances. High credit utilization lowers your score.
  • Avoid opening new accounts: Applying for new credit can slightly lower your score. Limit new applications if possible.

Before taking out a loan, determine exactly how much you need to borrow. This decision will impact your interest rate, monthly payment, and the total origination fees charged by the lender.

Once you’ve settled on your loan amount, use a personal loan calculator to run some numbers. Experiment with longer terms to lower your monthly payment or shorter terms to pay off the balance quickly.

Tip: Include fees in your loan amount calculations. Personal loan lenders may charge origination fees up to 10 percent of the amount you borrow, typically deducted from your loan funds. By padding your loan amount before you apply, you can avoid having to reapply for additional funds to cover these costs later.

Next steps: Visit the websites of various personal loan lenders to get an idea of the rates and terms they offer. Use their rates with a personal loan calculator to get the most accurate estimate of your monthly payment.

Once you decide on the amount you want to borrow, you need to understand what it takes to get approved by a personal loan lender. Each lender has different approval requirements and collects various documents to assess the risk of lending to you.

Personal Loan Qualification Requirements

Credit Score and Report: Most personal loan lenders require fair credit, but options are available for those with bad credit. Lenders also review your credit history for major issues like prior bankruptcies or judgments.

Debt-to-Income Ratio: Lenders evaluate your monthly credit payments compared to your monthly income, known as your debt-to-income (DTI) ratio. A high DTI ratio might prevent you from being approved for the amount you want.

Income: Your income indicates to lenders your ability to repay the loan. Higher and more stable income increases your chances of approval. Some lenders allow co-signers to help boost your approval amount.

Collateral: While most personal loans are unsecured, some lenders offer secured loans, which require collateral like a car or jewelry. Secured loans may have slightly lower rates, but you risk losing the collateral if you default.

Tip: A stable income, high credit score, and low DTI ratio improve your chances of approval. Some lenders also consider educational background or employment history.

Next Steps: Research lender requirements ahead of time to choose loans you have the best chance of getting approved for.

Documents to Gather for a Personal Loan Application

You’ll need to provide documentation to verify the information on your application. Some lenders verify information electronically, but most require you to provide:

Proof of Identity: Accepted documents include your birth certificate, certificate of citizenship, driver’s license, passport, Social Security card, or state-issued ID.

Income Verification: You can provide a pay stub, bank statements, tax returns, or 1099 forms if you’re self-employed.

Proof of Address: Lenders need to confirm your address. Acceptable documents include utility bills, lease or rental agreements, property tax bills, or credit card statements.

Most lenders have secure portals on their websites where you can upload the requested documents.

Tip: Have these documents ready ahead of time to avoid delays in the approval process. Lenders won’t finalize your loan without the required paperwork.

Next Steps: Be prepared to take clear pictures or scan your documents. Ensure the images are legible, as lenders won’t accept unreadable documents.

A personal loan can be a versatile financial tool, providing quick cash for unexpected expenses or helping you achieve long-term financial goals. Before diving into different types of personal loans, consider how you can use the funds to enhance your financial situation.

Fast Funding vs. Future Planning

Fast Funding: One significant advantage of personal loans is their rapid funding — sometimes as soon as the next business day. This makes them ideal for urgent expenses like car repairs or replacing a home appliance.

Future Planning: Alternatively, if you’re preparing to buy a house and want to streamline your finances and improve your credit score, a personal loan for debt consolidation might be beneficial. Consolidating variable-rate credit card debt into a fixed-rate personal loan can stabilize your payments and potentially boost your credit score, making you eligible for better mortgage rates in the future.

Short Term vs. Long Term

Short Term: Personal loan terms typically range from one to seven years. Shorter terms often come with lower interest rates, but higher monthly payments. Ensure your budget can handle these payments, especially if your income is commission-based or irregular.

Long Term: Longer terms mean lower monthly payments, but higher overall interest costs. This might be suitable if you need to keep your monthly expenses low.

Debt Consolidation Considerations

Paying off revolving credit card debt is a great way to improve your credit score. If you don’t have the cash to do this outright, a personal loan can convert multiple credit card balances into a single installment loan, simplifying your payments and potentially lowering your interest rate.

Lump Sum vs. Line of Credit

Lump Sum: Personal loans provide a one-time disbursement with fixed monthly payments. This can be a stark change if you’re used to making minimum payments on a credit card.

Line of Credit: If you don’t need all the funds immediately, consider a home equity line of credit (HELOC). It allows you to borrow as needed, with payments based only on the amount you use. This is ideal for ongoing expenses like home improvements over several years.

Bad Credit Now vs. Better Credit Later

If your credit score is low due to high credit card balances, a personal loan for bad credit can help you pay off these debts and reduce your credit utilization ratio. Over time, this can improve your credit score, allowing you to refinance at better rates, which can lower your overall monthly payments.

Tip: Carefully evaluate your options to select the best personal loan type for your financial needs.

Next Steps: Verify your budget to ensure you can afford fixed payments, and avoid short-term loans if your income is variable.

Personal loan lenders offer various types of loans tailored to different needs. Some lenders are flexible with how you use the funds, while others may restrict them to specific purposes. Before applying, ensure you can use the loan for your intended purpose.

Different loan types come with different terms and interest rates. For example, home improvement loans usually have longer repayment terms compared to emergency loans, and debt consolidation loans often have lower starting APRs than general-purpose loans.

Different Types of Personal Loans

To make the most informed decision for your finances, consider all available personal loan options:

  • Debt Consolidation Loans: Used to combine multiple variable-rate debts, like credit cards, into one loan with a potentially lower interest rate and a single monthly payment.
  • Credit Card Refinancing Loans: These loans are designed for paying off credit card debt. Since personal loan rates are often lower than credit card rates, this option can save you significant interest over time.
  • Home Improvement Loans: Ideal for financing large renovation projects without using a secured home equity loan.
  • Medical Loans: Useful for spreading the cost of large medical expenses over several years, providing financial relief during medical emergencies.
  • Emergency Loans: Perfect for urgent expenses like car repairs, smaller medical bills, or emergency home repairs.
  • Event Loans: Though not recommended as a first option, personal loans can be used to finance weddings, vacations, or other significant events as an alternative to credit cards.

Tip: Review all your loan options to find a lender that best suits your needs.

Next Steps: Explore the Bankrate personal loan marketplace to find competitive loans that match your borrowing requirements.

Shop around and apply only with lenders that clearly list personal and financial approval requirements matching your needs. Compare multiple lenders and loan types to understand what you qualify for, and avoid settling for the first offer you receive.

If you have a longstanding relationship with your bank or credit union, inquire if they can offer you a better rate or any special perks or discounts.

Check for Prequalification Options

Many financial institutions allow you to check your predicted interest rates and eligibility before officially applying. This process, known as prequalification, is typically the first step and does not impact your credit score.

However, not all lenders offer prequalification. If this option isn’t available and the minimum eligibility criteria aren’t listed on the website, contact the lender directly for this information before applying.

Avoid Hard Inquiries

Most lenders will conduct a hard credit inquiry during the application process, which can temporarily lower your credit score by a few points. To minimize credit score damage, apply only with lenders you qualify for, especially if prequalification isn’t available.

If you need to apply with multiple lenders, do so within 45 days to ensure multiple hard checks are counted as a single inquiry on your credit report, reducing the negative impact.

Tip: Prequalify with several lenders and loan types before applying to limit the overall negative impact on your credit.

Next Steps: Review the rates and terms offered, and check the fine print for any usage limitations. Be aware of prepayment penalties and fees to select the best loan option for you.

Once you’ve selected the lender offering the most suitable terms for your requirements, you’ll commence the application procedure.

You might have the option to complete the entire application digitally. Alternatively, you may need to visit a local branch of your bank or credit union to apply in person. Typically, you’ll be asked to furnish basic personal details along with information regarding your income and employment.

During the application process, most lenders will expect you to specify the purpose of your loan. It’s important to note that the terms of your offer could be subject to change based on the documentation you provide. Therefore, it’s advisable to inquire with the lender about any potential alterations to your interest rate or loan amount subsequent to your initial application.

Tip: Whether you’re applying online or in person, allocate sufficient uninterrupted time for completing the application. Aim for at least thirty minutes to fill out the application form and carefully review the offered terms.

Next Steps: You’ll receive an opportunity to thoroughly examine the comprehensive terms and conditions of the loan, encompassing any applicable fees and your repayment schedule. It’s crucial to meticulously peruse the loan agreement to avoid any unexpected charges.

Each lender has its own set of paperwork requirements, and after submitting your application, you might be requested to furnish additional documentation. It’s essential to be ready with supplementary documents to facilitate the lender’s verification process and prevent any potential delays.

Tip: Anticipate potential requests for additional information during the application process. Keep relevant personal and financial documents readily accessible.

Next steps: Stay vigilant for any alterations to your terms stemming from the documents you’ve provided. If there are changes to your interest rate, loan term, or loan amount after your initial offer, seek clarification from your lender regarding these adjustments.

Once your documents are reviewed and approval is granted by the lender, you’ll proceed to finalize your loan by accepting the terms. Upon signing the loan agreement, you can expect to receive your funds within approximately a week, with some online lenders dispersing funds as quickly as one or two business days.

Stay organized by keeping track of your payment due dates, and consider automating your payments to streamline the process. Some lenders may even offer interest rate discounts for borrowers who opt for autopay.

Additionally, think about making extra payments each month, even if they’re small. While personal loans generally carry lower interest rates compared to credit cards, paying off the loan ahead of schedule can still save you money on interest.

Tip: Once approved and loan terms are accepted, funds could be in your account within one to two business days.

Next steps: Ensure timely monthly payments and aim to make additional payments whenever feasible. Simplify the process by enrolling in automatic payments or setting up reminders for due dates on your calendar.

Securing approval for a personal loan is straightforward, but taking proactive measures can enhance your chances of success. Familiarize yourself with your credit score and grasp the criteria set by lenders, as these factors can influence the outcome of your application. Prioritize research and comparison of lenders to identify the most favorable rates and terms tailored to your financial needs. By investing time in preparation and exploration, you pave the way for a smoother lending process and potential approval.