How to get a personal loan: 7 easy steps

Whether it’s for big purchases, special events, or unexpected expenses, personal loans can fund your needs. This guide breaks down the 7 steps on how to get a personal loan to make your loan application easier.

Applying for a personal loan doesn’t have to be confusing no matter what you need it for. But before anything, it’s important to understand what you can expect. This is to help you prepare and avoid unpleasant surprises along the way.

What is a personal loan?

Personal loans are a convenient option that supports your expenses. Depending on the lender, you can use the funds for a variety of purposes — home renovation, weddings, vacations, debt consolidation, and more.

You can borrow a lump sum from different sources, like traditional banks, credit unions, and online lenders. Remember though that some may have restrictions on where you can use your personal loans, like investments, real estate, education, etc.

When applying, keep note of the annual percentage rate (APR), type of interest, and whether the loan is unsecured or secured.

The APR is the total cost of your loan when it considers the interest rate and other charges, like origination fees. Meaning the higher the APR, the more expensive your loan is. This can depend on your financial situation and lender.

You also need to choose between fixed and variable interest rates. In a nutshell, a fixed loan has a locked interest rate for the loan term while a variable loan’s rate fluctuates over time.

Then, a secured loan requires collateral, like a house, car, bonds, and any valuable asset. An unsecured loan, however, doesn’t need collateral.

Types of personal loans

There are many types of personal loans based on different lenders. Usually, here are the ones you may encounter:

Type of personal loan	Purpose
Debt consolidation loans	Combine several debts into one loan with a single interest, preferably a lower rate.
Secured personal loans	A loan backed up by collateral, such as your savings account or CD.
Unsecured personal loans	With an unsecured personal loan, you don’t need to put up any assets to get approved.
Personal line of credit	You have access to your funds any time you need. It comes with a predetermined limit, but interest is only charged on the amount you withdraw.
Medical loan	This helps you cover your medical expenses.
Buy now, pay later loan	This allows you to make a purchase upfront and pay for it later, typically in equal installments.
Payday loan	A short-term but very high-cost loan that is usually paid on your next payday.
Credit card cash advance	If you have a credit card, you can take a cash advance against your available credit line. Usually, you need to pay cash advance fees and high interest.

How to get a personal loan

1. Figure out how much you need to borrow.

The ultimate step before applying for a personal loan is to crunch numbers. Why do you need a loan in the first place, and how much do you need?

Then, factor in your financial situation — how much do you earn, and how much do you spend? By doing so, you can avoid borrowing more than what you can afford and incurring extra fees.

When you take out a loan, remember that you are not only paying the principal loan amount. You also need to pay interest for borrowing money unless you apply for certain loans, such as 0% credit cards.

Let’s say you plan to get a $5,000 loan; you should also consider the interest rate and other fees linked to the loan. So, that $5,000 may actually cost you $5,600. That said, make sure you can manage your monthly loan payments.

Strike the right balance between borrowing what you need and avoiding unnecessary costs to minimize your interest payments. To help you estimate your monthly payments, you can use a personal loan calculator.

2. Check your credit score.

Another critical step before applying for a personal loan is checking your credit score. How did you handle past loans? How do you manage your current debts? Lenders review your credit history to assess your application based on your creditworthiness.

Usually, personal loans require at least fair credit, ranging between 580 and 669. But good or excellent credit above 670 gives you the best chance of approval with competitive interest rates. If you have a low credit score, you can still get a loan, but your interest rates and fees may be higher.

FICO	VantageScore
Exceptional: 800-850 Very good: 740-799 Good: 670-739 Fair: 580-669 Poor: 300-579	Excellent: 781-850 Good: 661-780 Fair: 601-660 Poor: 500-600 Very poor: 300-499

In case you’re not unaware, you can get a free copy of your credit report from AnnualCreditReport.com. Every year, you have one free credit report from the three major credit reporting agencies (Equifax, TransUnion, and Experian). Then, make sure you review your credit report and address any errors to avoid hurting your score.

3. Assess your options.

After you assess your financial position, it’s time to check your options. If you have fair to excellent credit, you may get favorable rates and terms. So, this can make your application simpler.

How about if you have no credit or poor credit? You may consider having a guarantor or a co-signer to help you. A guarantor is a friend, relative, or third party who needs to pay your loan if you default. On the flip side, a cosigner is someone who’s partly responsible for your loan.

In case you can’t find a guarantor or a co-signer, you still have other options, like a secured personal loan. Your collateral can be your savings account, investment account, or even certificate of deposit. This can help you still secure lower interest rates and better terms.

Aside from those, also consider where you will apply for a loan. Try to shop around and check different lenders and their loan options. Taking your time to explore your choices helps you gain insight into what you qualify for. This, in turn, guides you in securing the best possible deal.

4. Get pre-qualified.

After checking different lenders and the best rates out there, filter those that you may qualify for. Next, turn your attention to getting pre-qualified or pre-approved. Check for lenders that offer prequalification or preapproval with a soft inquiry or soft credit check. This means it won’t affect your credit score.

Getting pre-qualified doesn’t guarantee you will get the loan. It shows, however, that you fit the general requirements of lenders. That said, you get a clearer picture of your chances and the rates you may secure.

You need to fill out an online form for the pre-qualification process. This typically involves providing information, such as your name, address, loan amount, and income. Depending on your lender, the results can take from seconds to a couple of days.

At times, some lenders don’t offer prequalification. If this is the case, they conduct hard inquiries that may impact your credit score. So, make sure you carefully check this on their website or with the lender before applying for a loan.

Remember that your goal is to find the best terms and conditions for your personal loan. Pre-qualifying with different lenders allows you to do that, so you can compare lenders and offers.

5. Compare offers.

Once you get prequalified, it’s now time to weigh the offers from different lenders. At this step, make sure you gauge the terms and conditions of each. In particular, check the loan offers, fees, penalties, type of interest, and overall terms.

For one, determine the possible APR and loan amount you may qualify from each. Keep in mind that the lower the APR, the lower your overall loan costs. Then, see how much they may let you borrow so that you get a grasp of your situation.

Other than your rates and loan, review the fees and penalties related to the agreement. For instance, do you need to pay an origination fee? Are you required to pay fees for early, late, or missed payments? If so, check how much they will cost you and if there are any other potential charges.

It’s important to carefully review the overall offer. For example, check if lenders automatically withdraw your payments from your account or if you have the option to do so. This way, you see to it that you apply for the most competitive loan for you.

6. Apply for the loan.

When you’ve thoroughly researched and compared your options, pick and apply to the lender with the best rates and terms for your personal loan. Remember that each bank or lender has different requirements and processes. Some may require in-person applications while others allow it done online.

In general, the formal application requires personal information and additional documentation if any. This may include your contact details, proof of identity, income, and employment, loan amount, and the purpose of the loan.

Here’s a tip: Prepare your additional documents ahead. This can involve your pay stubs, driver’s license, tax returns, W-2s, and bank statements. The earlier you complete your documents, the faster your application process may be.

7. Accept the loan agreement.

Your lender will carry out a hard inquiry to verify your credit history at this point of your application. This means your credit score may fall slightly, which goes on your credit report.

After that, when you get approved, carefully read and take in your loan agreement before signing anything. This details the terms and conditions of your personal loan, including your liability to pay the debt.

Once you’ve completed the paperwork, you will receive the funds. Depending on your lender and agreement, it may take some days before you get your loan. In some cases, it may be immediately available.

Where to get a personal loan?

There are several sources where you can get your personal loan. But here are some of the most common ways you can apply for one:

Banks

When asking for a loan, many borrowers first think of traditional banks. While banks may offer low rates and great features, they usually have stricter requirements — like high credit scores. This is why banks are better for people with good to excellent credit. In some cases, you can either apply online or in person depending on the bank and loan option.

Credit unions

On the flip side, credit unions usually provide loans for special situations. If you have bad credit, for instance, certain credit unions may have solutions tailored to help you get an affordable loan. Apart from that, typically, credit unions charge cheaper interest rates and minimal fees than regular banks.

Usually, you need to join a credit union before you can apply. Since the criteria vary per credit union, make sure you check the requirements to become a member.

Online lenders

Another option you have is to get a personal loan from online lenders. Though they tend to have higher APRs and fees than banks and credit unions, they are more accommodating. Even if you have low credit or income, online lenders may still entertain your application. Also, since the application is online, the process is commonly faster than other types of lenders.

Conclusion

Personal loans can be used for different purposes, but applying for one doesn’t have to be stressful. As long as you understand your situation and your options, you can confidently secure the loan you deserve. Just assess your needs and compare your choices so that you find the best personal loan rates for you.

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Frequently asked questions