If you need cash to cover a large expense, taking out a personal loan may make sense. But if you’ve never used this type of product before, the process of securing your funds may seem a little daunting.
Don’t worry. We’ll share everything you need to know about how to apply for a personal loan. That way, you can get the money you need quickly.
1. Decide what type of personal loan you need
Many personal loans can be used to finance anything you want. However, some personal loans are designed to cover specific purchases. Examples include, but aren’t limited to:
- Wedding loans.
- Home improvement loans.
- Emergency loans.
- Debt consolidation loans.
Plus, some personal loans restrict how the money can be spent. For instance, due to regulatory red tape, many lenders explicitly state that loan funds can’t be used to cover college tuition.
So, keep the loan’s purpose in mind as you research your options. That way, you get the best financial product for your needs.
2. Figure out how much you need to borrow
Before you start applying for funding, you need to determine how much you need to borrow. This task is a balancing act, says Leslie Tayne, personal founder and principal attorney at Tayne Law Group, P.C., a legal office specializing in debt relief.
You need to borrow enough to cover the intended expense so you won’t have to take out another loan later. However, you don’t want to borrow more than necessary. Every dollar you accept from the lender increases your debt.
Don’t forget that many lenders charge an origination fee to process your loan. The fee is typically calculated as a percentage of your loan amount, and it’s taken from the funds before they’re deposited into your bank account.
For example, if you borrow $10,000 and the origination fee is 5%, you’ll only receive $9,500. However, you’ll still need to repay $10,000. So, if your lender imposes this fee, you must apply for enough cash to cover it and your planned purchase.
Find out how much you can afford with our personal loan calculator.
3. Review your credit report
You can get a free copy of your online credit report from each of the three major credit bureaus as often as once a week. You’ll just need to visit AnnualCreditReport.com and follow the instructions.
“It can be helpful to review your credit [report] before applying for a personal loan to ensure there aren’t any negative marks or errors that could cause you to be denied or charged a higher [interest] rate,” Tayne says.
If you spot an error while reviewing your reports, you can dispute it and get any incorrect information removed.
Helpful tip: Consider reviewing your credit score at this stage, too. This information can help you rule in or rule out certain loans based on their credit score requirements.
4. Compare personal loan lenders and pre-qualify
Now it’s time to shop around for your loan. You may want to research options from online lenders, credit unions and traditional banks. That way, you can have a well-rounded look at what’s available on the market.
Some lenders publish loan eligibility details online, which can give you a sense of whether you’d qualify. You might also be able to pre-qualify for a personal loan on the bank’s website. If so, you’ll answer a few questions about your desired loan and provide some personal details.
The pre-qualification process generally takes a few minutes to complete. It won’t harm your credit score as long as the lender only performs a soft pull on your credit.
As you pre-qualify for various personal loans, keep track of details like:
- Amount.
- Repayment term.
- Interest rate.
- Fees (including a prepayment penalty).
- Monthly payments.
- Potential perks (such as sending money directly to your creditors with a debt consolidation loan).
That way, comparing your options and choosing the best personal loan is easy.
Remember: You’re not guaranteed to get the loan you want at this stage. “You’ll still need to go through the full application process and provide documentation to back up the information you originally shared,” Tayne says. “If there are any discrepancies, you may be approved for a different offer or not get approved at all.”
5. Gather documents and apply
Once you’ve determined which loan is right for you, you must officially apply for it. While some lenders may still use paper-based applications that you need to fill out in person, many have embraced a digital process.
Here’s how to apply for a personal loan online:
- Fill out the required forms on the bank’s website.
- Submit requested supporting documentation (typically a driver’s license or passport, proof of address, employer contact information, pay stubs, bank statements and tax returns).
- Wait for the lender’s decision.
You may receive a same-day approval. However, if the bank needs additional information from you or its process is slower, you’ll likely have a longer wait.
Pro tip: If you plan to apply for multiple personal loans to compare your official offers, it’s wise to submit all applications within two weeks. This strategy is known as rate shopping, so the applications should only appear on your credit report as one hard inquiry instead of multiples.
6. Receive your funds
Once your application gets approved, you must sign the official paperwork to accept the loan. Be sure to read all of the fine print before signing. You can typically expect to see the money hit your bank account within a week — though Tayne says some lenders may disburse funds within a day or two.
7. Prepare for repayment
Ask your lender when your first payment (and subsequent installments) will be due. Then, decide if you want to set up automatic payments (if available).
If you don’t want to go that route, you might want to set a payment reminder on your phone or in your calendar. That way, you’ll never miss a payment.
How to apply for a personal loan with no credit
Millions of Americans are “credit invisible,” which means they don’t have a credit history or credit report with the three major credit-reporting companies. Having no credit poses similar challenges as having bad credit, Tayne says. “Without a credit history, you’re considered a risky borrower, so you will face high rates and fees if you’re approved at all,” she adds.
However, you can increase your chances of approval by applying with a co-signer with excellent credit or pursuing a secured personal loan. When you include a co-signer, the bank will consider their credit profile, too.
A secured personal loan is backed by collateral you own, such as a car. If you default on the debt, the lender can take the collateral to recoup its costs.
“If you already have a relationship with a community bank or credit union, it may be worth meeting with a loan officer to see what options are available,” Tayne says. “Having established bank accounts in good standing may persuade them to work with you despite lacking a credit history.”
How to apply for a personal loan with bad credit
A poor credit score is generally one that falls below 580. If your score is on the lower side, it could be difficult to qualify for a personal loan. “But it is still possible,” Tayne says. “There are some lenders that specialize in providing bad credit loans, though the interest rates and fees are much higher to offset the risk.”
Another way to apply for a personal loan with bad credit is by adding a co-signer or putting up collateral. These steps help reduce the lender’s risk, which may help you qualify for the loan and receive better loan terms.
Pros of a personal loan
Some of the main benefits of a personal loan include:
- Flexibility: You can use the funds for nearly any purpose.
- Fast approval and funding: You may be able to get your money in a few days if you apply online.
- Affordability: Often, personal loans have lower interest rates than credit cards.
Cons of a personal loan
Some of the primary drawbacks of a personal loan include:
- Potential fees: If your lender tacks on additional costs, like an origination fee, your loan could become an expensive way to borrow money.
- Potentially high interest rates: You may not receive a competitive interest rate if you have poor or fair credit.
- Possible collateral requirements: You may have to opt for a secured loan if you have poor or no credit.
Frequently asked questions (FAQs)
The minimum credit score required to get a personal loan varies by lender. However, a score of at least 580 is typically required to prequalify. Some lenders even offer bad credit loans with scores as low as 300, but interest rates on these loans can be higher so always make sure you compare lenders first.
You can get approved for a personal loan by having good credit and sufficient income. If you lack either of those things, you can work to improve your financial standing. Or, you can apply with a co-signer or try to obtain a secured personal loan.
The easiest personal loans to get approved for are typically secured personal loans. That’s because the lender has something of value it can take if you default on the debt.
The time it takes to receive funds for a personal loan varies by lender. However, you may be able to get your money within a day or two once your application is approved.
As an expert in personal finance and lending, I bring years of experience in guiding individuals through the process of obtaining personal loans and managing their finances effectively. My expertise is grounded in both practical experience and in-depth knowledge of financial principles. Here's a breakdown of the concepts covered in the article you provided:
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Types of Personal Loans: Personal loans come in various forms, such as wedding loans, home improvement loans, emergency loans, and debt consolidation loans. Some loans may have specific purposes, while others offer more flexibility.
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Determining Loan Amount: It's essential to calculate precisely how much you need to borrow to cover your expenses while minimizing debt. Understanding origination fees is crucial, as they affect the amount you receive.
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Reviewing Credit Report: Checking your credit report for errors or negative marks is necessary before applying for a personal loan. Your credit score influences loan eligibility and interest rates.
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Comparing Lenders and Pre-qualification: Researching multiple lenders, including online platforms, credit unions, and traditional banks, helps in finding the best loan options. Pre-qualification allows you to assess eligibility without impacting your credit score.
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Document Preparation and Application: Gathering required documents and applying for a loan can often be done online. Completing forms and providing supporting documentation are standard procedures.
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Receiving Funds: Upon approval, signing loan agreements and understanding the disbursem*nt timeline is essential. Funds can typically be expected within a few days, though some lenders may offer quicker processing times.
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Repayment Planning: Setting up repayment schedules, including payment methods and reminders, ensures timely loan repayment and avoids missed payments.
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Special Circ*mstances: The article also addresses scenarios such as applying for personal loans with no credit history or with bad credit. Strategies include using co-signers or collateral to increase approval chances.
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Pros and Cons of Personal Loans: Understanding the advantages and disadvantages of personal loans helps individuals make informed decisions about borrowing.
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FAQs: Common questions regarding credit score requirements, approval criteria, loan types, and disbursem*nt timelines are addressed to provide clarity to borrowers.
With this comprehensive understanding of personal loans, borrowers can navigate the borrowing process confidently and make informed decisions aligned with their financial goals.
