Loans

How to Apply for a Personal Loan in 6 Steps

A personal loan can come in handy whether you’re looking to refinance or consolidate high-interest debt or need emergency funds to cover a costly home repair. Because it’s an unsecured loan, you don’t need collateral to get a personal loan.

Lenders will, however, rely more heavily on your credit health and other financial information to determine your eligibility for funds. If you’re in the market for a loan, here are the steps you can expect to follow.

1. Decide how much you need to borrow, and can afford to repay

2. Check your credit score and report

3. Prequalify and compare lenders

4. Gather personal loan documents and information

5. Formally apply for your loan

6. Get approved and close on your loan

How to apply for a loan with bad credit or no credit

1. Decide how much you need to borrow, and can afford to repay

Personal loans are installment loans, which means you’ll repay them over a scheduled period of time. As they also come with fixed interest rates, it can be easy to determine how much it’d cost for you to repay your loan.

Before you apply, however, you should have an idea of how much you can afford to borrow — that means taking a hard look at your current finances to see how large of a monthly payment you can make each month.

The following factors will affect your monthly payments:

  • APR: This is your cost for borrowing and it includes extra charges such as origination fees. Each month, you’ll be charged interest on your remaining balance.
  • Repayment term: Your loan will be repaid over a set number of months, usually 12 to 60 months. The longer you’re in repayment, the lower your monthly payments, but the more you’ll pay in interest. The reverse is also true.
  • Borrowing amount: Since you’re charged interest on your balance each month, it’s important to only borrow what you need.

Interest can have a big effect on your total loan cost. (More on that below.) Since personal loans are unsecured, your credit will play a big role in whether you’re approved for a loan and what rates you see.

2. Check your credit score and report

Lenders look at several factors when considering your application, including the amount you want to borrow and your finances (for example, you may be asked how much you make and whether you own property). But another important component of your application is your credit score.

Your credit score doesn’t just help your lender determine your interest rate —  it also helps them decide whether or not to approve your application. That’s because your score indicates to lenders how trustworthy you are with credit.

You can check your credit score and credit history for free once a year from each of the three major credit bureaus through AnnualCreditReport.com. You can also check your score for free using My LendingTree.

There are many different kinds of credit scores. But often, when someone refers to your credit score, they’re referring to your FICO score, the score most commonly used by lenders. Here’s how it’s graded using that scale:

  • 800+: Exceptional
  • 740-799: Very good
  • 670-739: Good
  • 580-669: Fair
  • <580: Poor

Your credit score can have a big impact on monthly payments and total loan cost, so sometimes it can make sense to first improve your credit before pursuing a loan.

If your credit score is lower than expected, it’s a good idea to dig into your credit history. You may find mistakes, such as unrecorded payments or even evidence that identity theft has occurred. Dispute any errors you find immediately.

3. Prequalify and compare lenders

Once you know how much you can reasonably borrow, what your credit looks like, you can begin seeking out lenders. Many banks, credit unions and online lenders offer personal loans. One way you can find lenders quickly is by using LendingTree, though you may also search locally. As a lending marketplace, LendingTree allows you to prequalify and see offers from up to five lenders.

When you apply for prequalification for a personal loan, you’ll get to see the types of loan terms lenders may extend to you. Applying for prequalification only requires you to complete a simple application and submit to a soft credit check, which won’t affect your credit score. However, keep in mind that prequalification doesn’t guarantee approval when you formally apply with a lender.

Once you’ve collected a few loan offers, compare lenders on factors like:

  • APR: This includes your interest rate and is a good indicator of your cost of borrowing.
  • Loan terms: While a short term loan will minimize interest charges, you’ll see higher monthly payments. The inverse is true with a long term loan.
  • Borrowing limits: Remember, you should only borrow as much as you need, and only what you can reasonably afford to repay.
  • Fees: Keep an eye out for origination fees (a charge for taking out the loan). Prepayment penalties, meanwhile, punish you for paying off your loan early.

4. Gather personal loan documents and information

Once you’ve chosen a lender you’d like to formally apply with, it’s time to gather necessary documentation for your application. In general, lenders will want to see documentation that supports the personal and financial information you provide.

This type of documentation includes:

  • Proof of identity and address: A picture ID, such as your license or non-driver identification, should suffice, but you can also consider using documents such as a U.S. passport and utility bill.
  • Proof of income: Download or scan your two most recent pay stubs. If the loan process takes more than a couple of weeks, be prepared to furnish updated copies. If you’re self-employed, you should be prepared to provide an updated bank statement.
  • Last year’s tax return: Some applicants may need to furnish their latest income tax return. Self-employed applicants will need to furnish their most recent Schedule C, which acts as a profit and loss statement.
  • Statements, estimates or other proof of use of proceeds: Some lenders may require credit card statements or other personal loan documents that demonstrate how you plan to spend loan proceeds.

5. Formally apply for your loan

When you submit a formal application for a personal loan, the lender you chose will conduct a hard credit inquiry, which will have a small and temporary impact on your credit.

Filling out your personal loan application shouldn’t take more than a few minutes, since you’ve done the hard work already. You’ll be expected to:

  • Provide your full name, address, Social Security number and employment and income information.
  • Let your lender know how much you want to borrow and for how long
  • Deliver or upload certain documents, such as your photo identification and last paystub
  • Visit a local branch, in rare cases, to complete your application
Tip: If you want to compare multiple offers, consider applying for several personal loans at once. Even though applying for new credit can temporarily lower your credit score, bunching personal loan applications can minimize the impact of applying for multiple loans at one time.

6. Get approved and close on your loan

Many personal loan lenders can make a lending decision within a couple business days, and release funds soon after, if you’re approved. In many cases, your lender can deposit your loan proceeds directly into your checking account, but you may be able to request a check or, if you’re consolidating debt, have your creditors paid off directly.

It’s important to note, though, that your lender might offer you different terms than what you originally requested. For example, you might ask for $50,000 and a 60-month repayment term but only be offered $30,000 over 48 months. If this happens, then you’ll want to reevaluate whether or not you still want — and can afford — the loan.

How to apply for a loan with bad credit or no credit

Trying to get a personal loan when you have bad credit or no credit is difficult, but not impossible. Adding a creditworthy cosigner to your application may help you get approved, for example. However, the cosigner would need to be comfortable with being equally responsible for repaying the loan, meaning their credit will also take a hit if you fall behind on payments.

If a cosigner isn’t an option, there are other options to consider, such as:

  • Using a credit card: Credit card issuers sometimes offer low- or no-interest offers to existing customers or individuals they wish to extend credit to. Be mindful that these offers may come with deferred interest — this means that if you don’t repay your balance by a certain date, you could be charged interest from the original purchase date.
  • Secured loan: If you own a paid-off car or another valuable asset, you could use that as collateral for a secured personal loan. Collateral can help you get approved if your credit score isn’t high enough to qualify for an unsecured loan.
  • Borrow from a friend or family member: You might consider borrowing from someone you’re close to; doing so could minimize or eliminate interest charges. Just be sure you’re certain you can pay off the loan on time to avoid causing any friction.

If you need to apply for a loan with bad credit or no credit but can’t get approved, you may consider focusing on improving your credit before borrowing. Doing so can increase your odds of being approved for a competitive loan and help reduce your cost of borrowing in the future.