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A personal loan through a traditional bank, credit union or online lender is worth considering. These unsecured debt products can help you get over a financial hump, cover an unexpected expense, pay down debt faster or make a big-ticket purchase.
There are several types of personal loans to choose from, including debt consolidation loans, home improvement loans, medical loans and wedding loans. Although the application process is relatively simple, you should know what to expect beforehand to avoid any surprises.
What is a personal loan?
A personal loan is a lump sum of money you can borrow from several places, including traditional banks, credit unions and online lenders. You repay the loan in fixed monthly installments, plus interest. Personal loans are generally unsecured, which means you don’t have to pledge any collateral, such as a bank account or car title.
Personal loan interest rates vary by lender — as of Jan. 25, 2023 — average rates range from 10.6 percent to over 30 percent. The rate you’ll receive, if you qualify, depends on many factors, like your credit score and debt-to-income (DTI) ratio.
You can use a personal loan for nearly any purpose, such as consolidating debt and funding home improvement projects. But some lenders don’t allow you to use funds to pay for post-secondary education expenses, real estate or investments.
- 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.
What information to have before applying for a loan
Before applying for a personal loan, gather all the documents and information you need along the way. Doing so will allow you to move through each step of the process efficiently and get your funds as quickly as possible.
The items you may need include the following:
- Two forms of personal identification, such as a driver’s license, state-issued identification card, Military ID, certificate of citizenship, Social Security card, birth certificate or passport.
- Proof of income, such as W-2s, paystubs, 1099s, bank statements and tax returns.
- Employer’s information, including the company name, your manager’s name and the phone number.
- Proof of residence, such as a utility bill with your name and address or a lease agreement, mortgage statement, proof of insurance (auto, home or rental), a property tax receipt or a voter registration card.
How to get a personal loan in 8 steps
There are many reasons to get a personal loan, like an unexpected hospital bill or a necessary car repair. If you’ve decided that a personal loan is the right type of financing for you, follow these eight steps to apply.
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.
Use a personal loan calculator to find out what your monthly payment will be. This can be difficult if you don’t know what 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, find out whether the lender charges an origination fee — and if it does, ask what the fee is. Figure out how much cash you’ll need after fees, and a monthly payment you can comfortably 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.
The best personal loans typically require that you have at least fair credit — usually between 580 and 669. Good and excellent credit above 670 will give you the best chance of getting approved with a competitive interest rate.
You can get a free copy of your credit report from AnnualCreditReport.com. It will provide a free copy of your credit report from all three credit bureaus every 12 months. Check to see if there are any errors on the report. 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: Checking your credit score will give you an idea of where you stand. 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 and you don’t need a loan immediately, work on improving it.
3. Consider your options
Depending on your creditworthiness, you may need a co-signer to get approved for a personal loan with a decent interest rate. If you can’t find a co-signer, or the lenders you’re considering don’t allow co-signers, you may have the option to get a secured personal loan instead of an unsecured one.
Secured loans require collateral, such as a vehicle, a house 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 personal 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 cheap alternatives to payday loans.
If you don’t meet the typical qualifications and your purchase can wait, take some time to build up your credit score so you can qualify.
Takeaway: If you don’t meet the qualification requirements for a decent rate, and you need a loan right now, 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 know where your credit stands and consider 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 specific purposes.
For example, one lender might let you take out a personal loan to fund your small business, while a different 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 monthly payments you have to worry about 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’re looking to pay for a large renovation up front 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 debt down over a number of years.
- Emergency loans: Emergency loans are useful for a number of purposes. A car breakdown, a smaller medical expense or a burst pipe may be good reasons to take out this type of 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 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 ideal loan for you and your borrowing needs.
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 lenders and loan types to get an idea of what you qualify for.
You can generally find personal loan offers from banks, credit unions and online lenders. If you’ve been a longtime account holder with your bank or credit union, consider checking there first. Often, showing that you’ve made positive financial choices for years means your bank or credit union may be willing to look past recent credit missteps or give you a better rate.
Some online lenders also allow you to get prequalified with a soft credit check, which won’t impact your credit score. Check with the lenders you are considering to see if they offer a prequalification process. Utilize this option to get a full understanding of the rates available to you.
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 45 days 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. Get prequalified if this is an option.
6. Pick a lender and apply
After you’ve done your research, 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. Alternatively, some lenders may require you to apply in person 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, income and employment information and the reason for the loan.
The lender will also request you share how much you want to borrow. It may then give you a few options to consider after a soft credit check. You’ll also have a chance to review the complete terms and conditions of the loan, including fees and your repayment period. Read through the loan agreement thoroughly to avoid hidden fees and other pitfalls.
Takeaway: All lenders have different qualification requirements and may ask for different information. Lenders may also require you to apply in person, while others let you complete the entire application online.
Next steps: Determine the application process for the lender you have chosen. Once you are ready to apply, gather all of the information you will need for the application and apply as directed.
7. Provide necessary documentation
Every lender is different regarding what you need to apply. Once you submit your application, your lender will likely ask you to provide additional documentation. 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.
Takeaway: Be prepared to present additional documentation as requested 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. Submit all requested documentation quickly to your lender to get your decision as soon as possible.
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.
When you are approved, start keeping track of when your payments are 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.
Consider paying extra each month. While personal loans can be cheaper than credit cards, you’ll still save money on interest by paying the loan off early. Adding even a small amount to your monthly payments can help you do so.
Takeaway: 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 make your monthly payments and pay your loan off. Consider automatic payments and think about paying extra each month to save on interest.
Tips for speeding up the process
If you’re looking for a personal loan, you likely want to get your hands on the money as soon as you can. These tips can help you avoid delays when applying for a personal loan:
- Check your credit report before applying. Know where your credit stands before shopping around for personal loans. Good credit can make it easier to qualify for a personal loan at a lower interest rate. Furthermore, spotting and correcting errors immediately is a simple way to avoid issues later on when you’re applying for a loan.
- Pay off debt. If you have debt and you don’t need the loan funds urgently, paying some debt off can raise your credit score and lower your debt-to-income (DTI) ratio, which can increase your chances of approval.
- Talk to your existing financial institution. Banks and credit unions might be more willing to consider a personal loan application from a customer with whom it’s had a positive, long-standing relationship.
- Get prequalified. Some lenders have a prequalification process that you can undergo without a hard credit check. You can also get an idea of what your loan rates and terms may be before you apply to determine if moving forward with the lender is worthwhile.
- Consider online lenders. Many online lenders offer next-day loan decisions, and funds may be deposited into your bank account within a few days after applying if you are approved.
- Pick loan funds up in person. If your lender has a brick-and-mortar location, ask if there is an option to pick funds up at the branch so you can get the money faster.
How to find the best personal loan rates
To find the best deal on a personal loan for your unique financial situation, compare rates, terms and fees from multiple lenders. You can do this by reviewing lenders’ websites individually or signing up for an online marketplace that allows you to prequalify for multiple loans at one time without impacting your credit.
If you’ve decided a personal loan is the right financing option, run the numbers to see if you can afford to take on debt. Then check your credit score so you have an idea of where you stand before applying. Typically, the higher your score, the better your approval odds and chances of securing a lower rate.
Afterward, explore your loan options and compare rates, terms and fees from multiple lenders to get the best deal for your unique financial situation. Once you’ve found the lender that best matches your borrowing needs, gather the required documentation and submit a personal loan application online or in person.