8 Steps to Applying for a Personal Loan
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Whether you’re seeking to consolidate high-interest debt or cover a major purchase like a wedding, a personal loan can be an affordable financing option. As an unsecured loan, you don’t need to provide collateral to qualify, but lenders will heavily consider your credit. If you’re interested in applying for a personal loan, these steps can help walk you through the process.
- 1. Determine whether a personal loan is right for you
- 2. Check in on your financial health
- 3. Decide how much you need and can borrow
- 4. Apply for prequalification with several lenders
- 5. Compare loan offers and choose a lender to apply with
- 6. Gather documents and formally apply
- 7. Wait for approval or denial
- 8. Begin making payments
- Bad credit? What to consider as you apply
1. Determine whether a personal loan is right for you
Before you apply for a personal loan, it’s important to understand what you need the funds for, and whether this type of financing would be worthwhile. You can typically find personal loans for $1,000 to $50,000 or more through banks, credit unions and online lenders.
Personal loans can be used for a variety of purposes, such as:
- Debt consolidation and refinancing
- Major expenses
- Home improvements
Average APRs on personal loans range from 7.63% to over 100% depending on factors like the lender you use and your credit and financial health. If your credit is damaged, you can expect high-cost loan offers, should you qualify at all. That said, a personal loan may not be an affordable option for everyone. A credit card or secured loan could be a better alternative to consider. The prequalification process for a personal loan can help you determine the kinds of terms you may qualify for and help you decide how to proceed.
You should also consider whether it’s worthwhile to take out a loan in the first place. For example, although personal loans can be used for medical expenses, you should first explore payment options with your provider; they may offer an interest-free payment plan. For vacation costs, you might instead save up money over time rather than borrow to meet costs.
2. Check in on your financial health
Before you apply for a personal loan, take stock of your financial situation. Lenders look at several factors when considering approval for a personal loan, including:
- Credit score
- Credit history
- Debt-to-income (DTI) ratio
Your credit score is a good indicator of how well you’ve managed credit in the past and can be found through free credit monitoring services such as My LendingTree. The higher your score, the more attractive you look to lenders. Often, you can easily find out what credit score is needed for a personal loan by a specific lender by checking their website or calling their customer service line. In general, a credit score of 600 or higher will give you access to most lenders.
If your credit score is lower than you’d like, your credit report can reveal negative marks affecting it. You can obtain a free copy of your credit report through AnnualCreditReport.com. Look for and dispute errors on your credit report, such as inaccurate account information. Fixing such errors can improve your credit, making you a more attractive applicant.
Lastly, your DTI ratio is the relationship between your monthly debt payments and your income. Total the monthly payments of your credit cards, auto loans, student loans and housing and divide that by your pretax gross (before tax) monthly income. That is your DTI ratio.
3. Decide how much you need and can borrow
Before applying with lenders, it’s important to establish how much you need to borrow, and to get an idea of what your monthly payments could look like. This will help you avoid taking out more debt than you need and getting caught with a loan you can’t afford.
Play around with a loan payment calculator to see how the amount you borrow, as the term length and APR will affect monthly payments and the total loan cost. You might decide that a shorter-loan term with higher monthly payments but a lower overall cost is more worthwhile than a longer-term loan with lower monthly payments, for example. Or you may establish a range of APRs you’re comfortable with.
As you do the math, take your monthly budget into account. Ask yourself questions such as:
- What is the bare minimum I need to borrow?
- What monthly payments can I afford now?
- How long do I want to be in debt?
- How much interest am I comfortable paying over time?
The answers can help you gauge what loan terms would work best for your needs and your unique financial situation.
4. Apply for prequalification with several lenders
Prequalification allows you to explore lenders and the loan terms they could offer you — all without affecting your credit score. Although prequalifying with a lender doesn’t guarantee approval, it can help you to compare lenders and get a pulse on what to expect when you do formally apply.
When checking lender rates, you’ll be asked for basic information such as:
- Social Security number
- Loan purpose
Lending marketplaces like LendingTree allow you to fill out a single form to prequalify with multiple lenders at once, depending on your eligibility.
Types of lenders you’ll encounter
As you seek out lenders to prequalify with, you’ll find there are three types:
- Banks: A traditional bank is a lending institution that has checking and savings accounts and physical bank branches, although today’s banks have online banking services. Traditional banks can have higher interest rates and stricter loan requirements but are a convenient option with the large number of physical locations they offer. They may also offer rate discounts to current customers.
- Credit unions: These nonprofit institutions often have specific membership requirements to join. Where you live, learn or work can affect membership eligibility. Credit unions may have comparable or slightly lower interest rates than traditional banks while also having local locations.
- Online lenders: These lenders don’t have brick-and-mortar locations; they operate entirely online. Often, savings from functioning only online are passed on to customers through lower interest rates. But you won’t have any opportunity for face-to-face interaction as you apply and manage your loan.
5. Compare loan offers and choose a lender to apply with
Once you’ve received a few loan offers, you can compare them by factors such as:
- APR: This rate includes the interest rate plus applicable fees, and is a better measure of loan costs than just the interest rate.
- Loan amount: Though personal loan amounts typically range from $1,000 to $50,000, you’ll find different lenders have different borrowing limits.
- Repayment term: This is how long you have to pay the loan back. Terms can range from 12 to 60 months.
- Fees: Some lenders charge an origination fee (think of it as a processing fee) that’s added on top of your balance or deducted before loan disbursement. Other fees to consider include prepayment penalties and late payment fees.
- Discounts: Most lenders offer a rate discount for automatic payment withdrawals.
- Time to funding: Some lenders offer funding the same day you’re approved. If you need fast cash, this will be an important factor to consider.
6. Gather documents and formally apply
After comparing loan offers and deciding on a lender, it’s time to submit a formal application. To do so, you should gather information and documents you may be asked for during the application process, such as:
- Personal identification, such as your driver’s license, Social Security card, passport, military ID, certificate of citizenship, etc.
- Proof of income, like pay stubs
- Bank account information
- Tax returns
7. Wait for approval or denial
Once you apply, it’s a waiting game. Some lenders will provide an answer within one to two days of submitting your final application, while some may take up to a week or more, depending on the information they need to complete your application. You may be required to provide more documentation so they can assess whether you are a good risk for paying back the loan.
Denied for a loan? What to do next
It’s not a good feeling when the lender denies your request for money that you need, but you can use that information to work on your credit and try again. Your lender will provide a letter that documents the reasons why you were denied the loan. Some of the reasons may include:
- Poor credit score
- Not enough income
- Poor DTI ratio
- Late payments on installment debt
Knowing why you were denied a loan can help you to focus your efforts on improving your financial situation and credit before applying again. For example, if you were denied because your credit score was too low, you may want to focus on making payments on time or trying to reduce your credit usage, which can help to raise your credit score. If you have poor credit but cannot wait to improve your credit score, you may want to find a creditor that specializes in personal loans for bad credit.
8. Begin making payments
Once your loan is signed and funds have been disbursed, it’s time to start paying back the loan. Make your payments on time for the designated amount; this shows the lender that you’re a smart and reliable borrower. If your loan doesn’t have prepayment penalties, you could try paying it off early to save money on interest charges.
Bad credit? What to consider as you apply
If you were rejected for a personal loan because of a bad credit score, you might consider seeking out and applying for a personal loan for those with bad credit. These personal loans have lower credit requirements, but in turn, you can expect higher interest rates and fees, as lenders are taking on more risk in providing you with an unsecured loan. You may also find that lenders aren’t willing to lend larger amounts of money.
A secured personal loan may be a good alternative
If you have been denied for an unsecured personal loan, a better loan option might be a secured personal loan or other secured loan product. These types of loans require collateral, such as your car, savings or other home. If you default on the loan, you could lose this collateral. On the flip side, the benefits of a secured loan may include a lower interest rate and larger loan amounts you may be able to borrow, since the lender has less risk of getting their money back.