A personal loan can be a great way to get the cash you need to consolidate debt or finance a home improvement project — as long as you have a reliable plan to pay it off.
Here are the eight steps needed to get a personal loan:
- Run the numbers.
- Check your credit score.
- Consider your options.
- Choose your loan type.
- Shop around for the best personal loan rates.
- Pick a lender and apply.
- Provide necessary documentation.
- Accept the loan and start making payments.
Whether you’re interested in borrowing from a bank, credit union or online lender, the process is mostly the same. But getting a loan the smart way requires a little extra research and care to make sure you get the best offer available.
Why get a personal loan?
A personal loan allows you to consolidate high-interest debt, finance unexpected expenses or fund smaller home improvements. A personal loan is often a good alternative to something like a credit card; the average interest rate on a two-year personal loan is around 9.5 percent, according to the Federal Reserve, compared to the average credit card interest rate of about 16 percent.
Depending on your creditworthiness and the lender you borrow from, you could receive the funds within a few days, which is ideal for time-sensitive needs. They also can be unsecured, so you don’t have to put up your home or property as collateral and won’t risk losing anything due to delinquency.
However, it’s important to remember that personal loans aren’t free. Applying for one is only a good idea if you can afford to pay back both the principal and interest in the long run.
How to get a personal loan in 8 steps
If you’ve decided that a personal loan is the right type of financing for you, start with these eight steps.
1. Run the numbers
The last thing you or lenders want is for you to take out a personal loan and not be able to afford to pay it off. While lenders typically do their due diligence to make sure you have the ability to repay the debt, it’s smart to run your own numbers to make sure it’ll work out.
Start by determining how much cash you’ll need, keeping in mind that some lenders charge an origination fee, which they deduct from your loan proceeds. Make sure you borrow enough to get what you need after the fee.
Then use a personal loan calculator to find out what your monthly payment will be. This can be difficult if you don’t know what kinds of rates and repayment terms lenders will offer, but you can play around with the numbers to get an idea of what the loan will cost you and decide if your budget can handle it.
Takeaway: Before you apply for a personal loan, figure out how much cash you’ll need and what monthly payment you can afford.
Next steps: Use Bankrate’s personal loan calculator to estimate your monthly payments.
2. Check your credit score
Most lenders will run a credit check to determine how likely you are to repay your loan. While some online lenders have started to look at alternative credit data, they will still typically look at your credit score.
Most of the best personal loans require that you have at least fair credit, but good and excellent credit will give you the best chance of getting approved with a good interest rate.
If your credit score is lower than you expected, get a copy of your credit report from AnnualCreditReport.com to see if there are any errors. If you find mistakes, contact the major credit reporting agencies (Equifax, TransUnion and Experian) to get them corrected.
If your credit score is low for other reasons, you may still have a chance to get a loan. But the interest rates and fees may be too high to make it worth it, so take steps to improve your credit before applying.
Takeaway: The better your credit score, the more likely you are to get approved for a loan and the lower your interest rate could be.
Next steps: Check your credit score and history. If your score is lower than the qualification requirements, take steps to improve your score.
3. Consider your options
Depending on your creditworthiness, you may or may not need a co-signer to get approved for a loan with a decent interest rate. If you can’t find a co-signer, you may have the option to get a secured personal loan instead of an unsecured one.
Secured loans require collateral, such as a vehicle, home or cash in a savings account or certificate of deposit, in exchange for more favorable terms. If you fail to repay the loan, the lender can seize the collateral to satisfy the debt.
You’ll also need to think about where to get a loan. With traditional banks, for instance, you may have a hard time getting approved if you have bad credit. Some online lenders, however, specialize in working with bad-credit borrowers, and some credit unions have short-term loans that serve as a cheap alternative to payday loans.
Takeaway: If you don’t meet the qualification requirements, a co-signer, a bad-credit loan or a secured loan could improve your chances of approval.
Next steps: If you don’t think you’ll get approved, research your loan options or reach out to a family member or friend with good financial health about being your co-signer.
4. Choose your loan type
Once you understand where your credit stands and you’ve considered your options, determine which type of loan is best for your situation. While some lenders are flexible in terms of how you use the funds, others may only approve loan applications if the money will be used for certain specific purposes.
For example, one lender might be fine with you taking out a personal loan to fund your small business. Yet the next lender might not allow you to use borrowed funds for business purposes at all. It’s generally smart to find a lender that is comfortable loaning you money for the exact reason you need it.
You can search the Bankrate Personal Loan Marketplace for different types of loans, such as:
- Debt consolidation loans: Debt consolidation is one of the most common uses for personal loans. By taking out one loan to cover your existing debt, you decrease the number of payments you have to worry about each month and receive one (potentially lower) interest rate.
- Credit card refinancing loans: Some companies like Payoff specialize in loans for people looking to pay off credit card debt. Because personal loan rates are often lower than credit card rates, a loan may be a good way to clear your credit card balances and pay them off over a longer period.
- Home improvement loans: A home improvement loan may be a good option if you are looking to pay for a large renovation upfront without taking out a secured home equity loan.
- Medical loans: Because medical expenses are often unpredictable, a personal loan may be a good way to decrease the immediate financial burden and pay down debt over a number of years.
- Emergency loans: Emergency loans are useful for a number of purposes. Car breakdowns, smaller medical expenses or a burst pipe may be good reasons to take out a personal loan.
- Wedding loans: Weddings and vacations can be pricey, which is why many people turn to personal loans to pay for them. This spreads payments out over a number of years, so you don’t need to worry about paying for a special occasion all at once.
Takeaway: Find a lender that offers loans designed for your specific needs.
Next steps: Search the Bankrate personal loan marketplace to find the loan that is ideal for you and your borrowing situation.
5. Shop around for the best personal loan rates
Avoid settling for the first offer you receive; instead, take some time and shop around for the best possible interest rate. Compare several types of lenders and loan types to get an idea of what you qualify for.
You can generally find personal loan offers from the following financing sources:
- Credit unions.
- Online lenders.
If you’ve been a longtime account holder with your bank or credit union, consider talking to it first. If you’ve shown that you’ve made positive financial choices for years, your bank or credit union may be willing to look past some recent credit missteps.
Some online lenders also allow you to get prequalified with a soft credit check, which won’t impact your credit score. This can be a great way to view offers without any commitment.
Lenders that don’t offer a prequalification process will typically run hard credit inquiries as part of the loan application process. To limit the effect of hard inquiries on your credit score, it’s best to do your rate shopping within a 45-day period to count them as a single inquiry for credit-scoring purposes.
Takeaway: Don’t settle for the first offer you receive. Compare several lenders and loan types and check for a prequalification option before applying to avoid an impact on your credit.
Next steps: Shop around and compare offers, rates and fees to find a loan with competitive rates.
6. Pick a lender and apply
After you’ve done your due diligence, pick the lender with the best offer for your needs. Then start the application process.
Depending on the type of lender, you may be able to do the entire application process online, or you may need to do part of it at your local bank or credit union branch.
Every lender is different regarding what information it’ll need on the application, but you’ll typically need to provide your name, address and contact information, the reason for the loan and income and employment information.
You’ll also share how much you want to borrow and may get a few different options to proceed with after a soft credit check. You’ll also have a chance to review the complete terms and conditions for the loan, including fees and your repayment period. Read through the fine print carefully to avoid hidden fees and other pitfalls.
Takeaways: All lenders have different qualification requirements and may ask for different information, but typically a personal loan application can be completed online.
Next steps: Come prepared to your application with details about your financials and the reason for your personal loan.
7. Provide necessary documentation
Depending on the lender and your credit situation, you may need to provide some documentation after you submit your application. For example, you might need to upload or fax a copy of your latest pay stub, a copy of your driver’s license or proof of residence.
The lender will let you know if it needs any documentation from you and how to get it to the right person. The faster you provide the information, the sooner you’ll get a decision.
Takeaways: Be prepared to present all of the documentation necessary during the application process.
Next steps: Gather pay stubs, proof of residence, driver’s license information and W-2s in advance to speed up the application process.
8. Accept the loan and start making payments
After the lender notifies you that you’ve been approved, you’ll need to finalize the loan documents and accept the terms. Once you do this, you’ll typically get the loan funds within a week — but some online lenders get it to you within one or two business days.
Now that you have the loan, note when your first payment is due and consider setting up automatic payments from your checking account. Some lenders even offer interest rate discounts if you set your account to make autopayments.
Also think about adding extra money to your payments each month. While personal loans can be cheaper than credit cards, you’ll still save money on interest by paying off the loan early.
Takeaways: You could receive the funds as early as one to two business days after getting approved and accepting the loan terms. Once you’re approved, start considering how you’ll pay down your balance.
Next steps: Create a plan to pay off your loan: Consider automatic payments and think about paying off your balance faster to save money on interest.
How to qualify for a personal loan
When you apply for a personal loan, your income, credit score and debt-to-income ratio are taken into account. While the qualification requirements will vary based on the lender, there are a few good practices you can adopt to increase your chances.
- Improve your credit score: Good credit can make it easier to qualify for a personal loan at a lower interest rate.
- Pay down your debt: If you have existing debt, paying your bills on time and in full can have a positive impact on your credit score, which can increase your chances of approval. It also lowers your debt-to-income ratio, which helps you qualify.
- Enlist the help of a co-signer: If you don’t meet the qualification requirements, asking a friend or family member in good financial health to be your co-signer can increase your chances of approval.
Tips for applying for a personal loan
If you need a personal loan, finding the right loan and getting approved are just some of the factors you should consider. You also want to protect yourself and avoid common pitfalls along the way.
Make sure a personal loan offers you the best deal
Before you consider different personal loan options and start shopping for the best rate, it’s worthwhile to pause and make sure that a personal loan itself is the best fit for your situation.
Considering that home equity loans are secured by your home, whereas personal loans are generally not secured, your interest rate is likely to be more favorable when you tap into home equity. Keep in mind that by pledging your home to back the loan, you’re accepting considerably more risk in exchange for a potentially lower rate.
Be careful with credit card consolidation
Using a personal loan to pay off credit card debt on more than one account and consolidating the payments is one of the most popular uses of personal loans. If you can secure a lower interest rate on your personal loan than you were paying on your credit cards, this strategy has the potential to save you a lot of money in interest.
Use this debt consolidation calculator to calculate how much money credit card consolidation might save you.
However, if you’re taking out a personal loan to consolidate expensive credit card debt, you should be careful. You can sabotage your money-saving efforts and potentially hurt your credit scores if you rack up fresh credit card debt again once you pay off the old cards.
Read the fine print
You should review the complete terms and conditions for any loan, including its fees and repayment period. This can help you avoid hidden costs and other pitfalls.
Be sure to ask the lender for a full disclosure of all the loan terms and read the fine print. There are differences in the terms offered by different lenders.
In particular, make sure the monthly payment and repayment terms work for you. There also could be fees for late payments, applications, returned checks, credit insurance and more.
The lender is looking to generate a steady stream of interest payments from you over the term of the loan, so also check for any prepayment penalties in the event that you want to pay off your loan early.
Watch out for origination fees
Before you apply for a new personal loan, pay close attention to whether the lender charges origination fees. While some lenders seem to offer lower interest rates, you might find that they also tack on an origination fee that effectively hikes the overall cost of your loan.
It’s possible that you could be better off with a lender that offers a higher rate than others but doesn’t add on any origination fees. A loan comparison calculator can help you compare interest rates, origination fees and other fees to find and compare the true cost of financing between different lenders.
Think carefully about automatic withdrawals
Some online lenders offer borrowers incentives to provide access to their bank accounts for automatic withdrawals of their monthly payments. For example, you might qualify for a discount if you sign up for automatic monthly payments.
If you’re comfortable scheduling automatic withdrawals (and have set up your monthly budget to support them), it’s fine to take advantage of this convenient and possibly cheaper payment option. However, if you have an inconsistent pay schedule or other challenges that might make keeping up with automatic withdrawals a problem, you may want to avoid such arrangements.
Some lenders may set up your personal loan terms to require automatic payments. If you prefer to pay online or by check, see if you have the option to opt out. If the lender requires automatic payments as a condition of borrowing, you’ll have to decide whether that’s a deal breaker for you.
Avoid predatory lenders
There are a few rules of thumb to avoid personal loan scams. For instance, if a lender guarantees approval or isn’t interested in your payment history, it’s likely not legitimate — even lenders specializing in bad-credit loans need to assess your creditworthiness to determine if the risk of lending to you is worth it. Reputable lenders will also have a physical address and will be registered in your state.
When searching for a personal loan, it’s also best to avoid what’s known as payday lenders. Payday lenders offer short-term loans that are due by the date of your next paycheck. They may be attractive if you need a loan quickly, but they are notorious for charging high interest rates, often upward of 400 percent of the loan amount.
Ask about repayment options
Find out what your options are in case you run into difficulties making your loan payments. Is there any potential to modify the terms of the loan? Will the lender allow you to enter a forbearance period or move a payment to the end of the loan under certain circumstances?
Also, is the lender open only to arbitration if any differences arise? Or can you go through the court system?
Hopefully none of these issues will apply to your situation. Still, it’s best to know the answers to these questions in advance.
Consider fixed vs. variable rates
Another choice you may be faced with as you shop around for the right type of loan is whether to choose a fixed or variable interest rate. Most personal loans feature fixed rates, but some lenders do offer adjustable-rate options.
Typically, you’ll start off with a lower rate on a variable-rate loan. But in exchange, you’ll also be taking on risk; as interest rates rise, your variable rate will rise as well. This can increase the amount of your monthly payments and impact the overall price of your loan.
With a fixed rate, your payments will remain the same for the term of the loan. This is true regardless of interest rate movements.
Now that you know how to get a loan and some of the pitfalls to avoid, the next question is whether you should get one. Personal loans can be an excellent way to consolidate and save money on higher-interest credit card debt. And if you’re borrowing to make some home improvements, you may be able to get some of the money back when you sell the home.
But it may not make sense to borrow money for something you don’t need. For instance, vacations can be fun, but you may end up regretting it if you’re still paying off your trip years later.
Take some time to determine whether getting a loan is right for your situation. Also consider some alternatives, such as 0 percent APR credit cards, that can help you save on balance transfers and new purchases alike.
Preparation is key
When considering a personal loan, do your research and know all your options. Be sure to read the fine print and don’t be afraid to ask a lender to clarify something for you.
Lastly, make sure to set yourself up for success. Get on an automatic payment plan if you can manage it and look for ways to pay off the loan early. This can positively impact your finances by raising your credit score and lowering your debt-to-income ratio.