If you’re looking to cover an unexpected expense, consolidate debt, or simply finance a major purchase, applying for a personal loan may be a good option for you. But before you borrow money, it’s important to understand the personal loan application process.
When you know the steps to take, you can choose the loan that’s best for your financial situation. You’ll need to determine how much you need to borrow, compare lenders, and submit an application. Let’s dive deeper into the process.
- What is a personal loan?
- How to apply
- How to qualify
- Benefits of personal loans
- Drawbacks of these loans
- Frequently asked questions
What is a personal loan?
A personal loan is a loan you can use to cover a wide range of expenses, from home improvements to paying medical bills. Personal loans are typically unsecured, meaning they don’t require you to put up collateral, such as your home or car title.
If a lender approves your loan application, you’ll receive a lump sum of money that you’ll pay off in monthly installments with interest. Depending on the lender, interest rates on personal loans may be fixed or variable, but fixed rates are common.
Every personal loan has a set repayment term, meaning you must pay it off by a predetermined date. Personal loan terms generally range from one to five years, though some lenders offer even longer terms.
How to apply for a personal loan
Before applying for a personal loan, it’s important to understand the steps involved. You’ll typically need to do the following:
- Check your credit score. A good credit score can make getting approved for a loan much easier, while a low credit score may lead to a denial or a higher interest rate. Knowing your credit score ahead of time can help you plan.
- Determine your loan amount. The next step is to figure out how much money you need to borrow. Consider the expense you want to cover, and ensure any lenders you compare can provide enough funding — lenders have minimum and maximum loan amounts, and some may not offer loans large enough for your needs.
Secondly, though it can be tempting to borrow more than you need, avoid doing so, because you’ll end up paying more interest on your loan amount. - Understand personal loan details. When you take out a personal loan, you may see terms like “origination fee” and “prepayment penalty.” Be sure you understand everything about the loans you’re considering before you sign any contracts.
An origination fee is the cost of processing your loan application, and it’s typically a percentage of your loan amount that gets subtracted from your loan. So, if you need to borrow $20,000 and your origination fee is 1%, then $200 will be deducted from your loan amount. You’ll need to account for this when deciding how much money to borrow.
A prepayment penalty is a fee that some lenders charge for paying off your loan early, as a way to recoup their losses for interest that you would’ve paid.
If you run into any terms you don’t understand during the personal loan application process, contact the lender to get your questions answered. You can also find personal loan lenders that don’t charge fees — loans without fees can save you money in the long run. - Get prequalified. Compare at least three different lenders to find the most competitive rates and terms for your situation. Most online lenders allow you to prequalify for the loan (without affecting your credit) before applying by providing some basic information.
- Consider your borrowing options: If you can’t qualify for a personal loan — or a desirable APR — you might consider a cosigner, co-borrower, or secured loan.
- Complete the loan application. Once you select a lender that’s the best fit for you, it’s time to submit your loan application. You’ll need to provide detailed information about your income, assets, and debts. The lender will also likely ask for documentation like pay stubs and tax returns to verify your income. Once you’ve submitted all the necessary information, the lender will review it and determine whether or not to approve your loan.
- Get your funds. If your loan is approved, the lender will send you a loan agreement outlining the loan details. Read it carefully to ensure you understand the terms and conditions before closing. Once everything is finalized, the lender typically sends the funds directly to your bank account. This can take up to five or more business days, but some lenders offer same-day funding.
How to qualify for a personal loan
Before applying for a personal loan, it’s important to understand the criteria lenders use to determine whether or not you qualify. Each of the top personal loan lenders has its own eligibility requirements, but these are some of the most common factors personal loan lenders consider:
- Credit score: While the minimum credit score needed for a personal loan varies from lender to lender, you’ll usually have more options and qualify for more competitive rates with a score of 670 or higher.
- Steady income: Your income is also key when applying for a personal loan, as it can help lenders determine your ability to afford the loan payments. Lenders may look at your current salary and how long you’ve been employed. They may also consider how much money you have in savings as another way to repay your loan.
- Low debt-to-income (DTI) ratio: This ratio compares your gross monthly income to your monthly debt payments. Lenders generally prefer to see borrowers with a DTI below 36%, meaning your debt payments account for less than 36% of your income.
Benefits of personal loans
Personal loans can be a great way to cover unexpected expenses or consolidate debt. Here are some of the advantages:
- Borrowing flexibility: Unlike a mortgage or car loan, personal loans can be used for practically any purpose, from medical bills and home renovations to a furniture purchase.
- Can improve your credit score: Taking out a personal loan and making timely payments can help improve your credit score over time, making it easier to qualify for other types of loans and financial products in the future.
- Potentially low interest rates: Depending on your financial situation, some lenders may offer low interest rates — typically much lower than credit card rates — and low monthly payments that fit within your budget.
- Quick and easy access to funds: Personal loans may offer faster funding than other types of loans. Typically, you can get your funds within a few business days after signing the loan agreement. The money is also usually deposited directly into your bank account in a lump sum.
- No collateral required: Unsecured personal loans don’t require collateral, making them a great option for borrowers looking for funds without putting their home or other assets on the line.
Drawbacks of personal loans
Personal loans aren’t right for everyone. Here are some of the disadvantages that come with taking out a personal loan:
- Hard credit checks: Applying for a personal loan generally involves a hard credit inquiry, which is when a lender reviews your credit report. This can temporarily lower your overall credit score by a few points. While this drop is usually short-lived, it’s good to be aware of it if you’re also applying for a mortgage, car loan, or other financing in the near future.
- Fees: In addition to the loan’s interest rate, some lenders may also charge an origination fee for processing your application, as well as late fees and prepayment penalties. These fees will increase your total cost of borrowing and are represented by lenders’ quoted APRs. Shopping around for a personal loan lenders that have no or low fees — by comparing APRs — can save you a substantial amount of money.
- Borrowing amounts may be limited: Personal loans typically have minimum and maximum borrowing amounts, which could be an issue if you need more money than the lender can provide. For example, most Credible partner lenders set their maximum borrowing threshold at $40,000 or $50,000.
- Strict repayment terms: Personal lenders require borrowers to make timely payments or risk penalties. If you lose your job or face another financial hardship, staying on top of your repayment schedule can be tough.
- May be difficult to qualify for low rates: If your credit score isn’t great, there are personal loans for fair credit, but you might struggle to qualify for competitive interest rates. This will result in higher borrowing costs over time.
Personal loan FAQs
Here are the answers to some of the most commonly asked questions about personal loans to help you decide if one is right for you.
Will a personal loan affect my credit?
Taking out a personal loan can impact your credit, but the effects depend on what stage of the process you’re in and how well you manage the loan during repayment.
Initially, taking out a personal loan can lower your credit score by a few points due to the hard inquiry when you apply. Your score will usually bounce back after a few months.
Once you borrow a personal loan, making all your payments on time can positively affect your credit score, as it demonstrates that you’re capable of responsibly managing debt.
How much can I borrow with a personal loan?
The amount you can borrow with a personal loan depends on several factors, including your credit score, income, and other debt obligations. Personal loan amounts generally range from $100 to $50,000. However, some lenders may offer higher loan amounts — up to $100,000 or more, depending on your qualifications and borrowing purpose.
How long will I have to repay a personal loan?
Repayment terms vary depending on the lender and how much you borrow, but most personal loan terms range from one to five years. The longer the loan term, the lower your monthly payments will be, but you’ll likely pay more in interest over the life of the loan.