Life can get expensive, and it can happen all at once, or drip by drip. Whether it’s an unexpected cost or a planned big project you’d like to spread out over time, knowing how to get a personal loan can help you use it a tool to manage your finances.
If your roof caves in or your car breaks down, you feel immediate pressure on your savings account. Likewise, everyday expenses can slip out of your control, resulting in higher and higher credit card bills.
If you don’t have a sufficient emergency fund, or lack budgeting know-how, you could see your paycheck squeezed by high interest payments, seemingly never able to re-establish your finances.
That’s when a personal loan can come in handy.
With a bit of research, and a relatively quick application process, you can consolidate your debts with less interest costs and steadily work your way back to sanity.
Wondering how to get a personal loan? Here’s what you need to know:
How to get a personal loan in 7 steps
- Calculate your costs
- Check your credit score
- Shop around for the best rates
- Compare your options
- Pick a lender and apply
- Double-check fine print and requirements
- Get the final approval
What’s a personal loan?
A personal loan is an unsecured fixed-rate installment loan, generally ranging from $500 to $100,000, and collateral usually isn’t required to cover them.
The loan always has a set monthly payment and an end date when it will be paid off. Interest rates vary, depending on the lender and your creditworthiness. The most common uses of a personal loan are to consolidate credit card debt or pay for a big, one-time expense like a wedding, medical bills or funeral.
“Personal loans have become a more mainstream offering with dollar amounts that can go over $100,000 and at really competitive interest rates, well below what you would pay on a credit card,” says John Ulzheimer, a credit expert formerly with FICO and Equifax. “They seem to have evolved from just being low-dollar loans with high interest rates for people with bad credit to high-dollar options for people with good credit and high income.”
Why should I get a personal loan?
Chances are you’re unprepared for an expensive emergency, or you’re spending beyond your means.
Take emergency preparedness. Most Americans, for instance, wouldn’t pay for an unexpected $1,000 bill out of their savings, according to a Bankrate survey. More than 3 in 5 Americans would have to scramble, many of whom would take on more debt, if such an event did occur.
At the same time, 44 percent of Americans carry a credit card balance, according to the Federal Reserve, resulting in an average balance of $5,700. With an average APR of 16.7 percent, you’d pay hundreds, if not thousands, in interest before you paid off the debt.
Compare that to a low-rate personal loan. Let’s say you wanted to pay off that credit card bill in two years. With a credit card, you’d pay almost $1,000 in interest, compared with $360 with a personal loan charging 6 percent.
What do I need to do to get a personal loan?
As you think about how to get a personal loan to fit your financial needs, here’s a breakdown of what you’ll need to do:
- Calculate how much you need.
- Check your credit score and credit report to see whether your credit is good enough for a low rate.
- Shop for rates and requirements at typical banks, but don’t forget online lenders, who often have different requirements from banks.
- Ask the lender whether inquiring about the interest rate on a loan will impact your credit score.
- If you are a young borrower without a track record of borrowing, online lenders are often a better option because they may look at criteria like education and career.
- Once you choose a lender with favorable rates and requirements, contact that lender.
Consumers have a host of places to turn to for their personal loans. Banks and credit unions are common options and don’t necessarily require a trip to a local branch. Many streamline the application processes online. Other types of lenders, such as credit card issuer Discover, also have personal loan programs.
The application process is similar to any other type of loan. That includes a credit check to determine your risk of defaulting. Generally, a higher credit score translates to a lower interest rate.
Before applying for any loan, be sure to check your credit report for errors that might be dragging down your score. Get yours for free at myBankrate.
Lenders will also require proof of income.
Understanding the basics and knowing how to get a personal loan can help you navigate one of the many financial options available when dealing with unexpected or large expenses.