Before you ask yourself how to get a personal loan, ask yourself whether you really want one. There's nothing wrong with some easily manageable debt. But is a personal loan the right choice for you at this point in your life? Might a credit card with a long, zero-percent introductory rate suit you better? Or, if you're a home owner, a home equity loan or home equity line of credit (HELOC) will almost always provide you with a better interest rate for longer-term borrowing.
You should consider those options, but the smartest choice may well be for you to get a personal loan. Unlike credit cards, these typically come with fixed rates, consistent monthly payments, a firm end date and fewer temptations to overspend – things that are very attractive to responsible borrowers. And, unlike with home equity products, you're not putting your home on the line if things go wrong, and you're not normally paying such high set-up fees or enduring such a long lead time before you get the money.
So let's assume you need one of these, and explore not only how to get a personal loan, but also how to get the best one.
1. Decide What You Need – How Much?
You're going to pay interest on this loan, so you don't want to borrow more than you have to. But, on the other hand, you need enough to meet your needs for the duration of the loan. What's the point of running up the balances on your credit cards when you have an opportunity to pay a much lower interest rate on those purchases within your personal loan?
If you're really keen to cut your borrowing costs, you might even think of consolidating some or all of your current credit card balances within that loan. Depending on the proportion of your credit limits you're using at the moment, that could give your credit score a worthwhile boost.
A big factor in making the loan affordable is its term (length in time). The longer it lasts, the more you're likely to pay in total interest charges. But you don't want to struggle to make monthly payments, so try to find that sweet spot where you're not paying more than you need, but you're comfortable you can easily meet your commitments.
2. Decide What You Need – The Loan
You should also think about the characteristics of the personal loan you want. If there's a serious chance you'll want to pay it back before its agreed end date, you want to avoid prepayment penalties and loans with "precomputed interest." Both those will make a loan that's paid back early more expensive than others without those terms. If you're unsure whether a loan you're considering has those provisions, ask your loan officer. Of course, if the only way you're going to repay the loan ahead of schedule is by winning the lottery, you needn't worry about this.
One last thing to think about before you apply is whether you want to insure your loan against death, unemployment or both. Unless you're likely to face unemployment soon, those are rarely good value, so don't let your loan officer railroad you into them. And if you do opt to insure the loan against unemployment, be sure you fully understand the circumstances in which it will pay out, along with any exemptions. Again, give your loan officer the third degree.
3. Check Your Credit Score
A poor credit score can see your application declined, and, even if you're approved, the lower your score the higher the interest rate you'll likely be charged. Nowadays, you can check your credit score for free online. The LendingTree free credit score service allows you to do that, to constantly monitor it and to get helpful advice about how to improve it – all without even supplying your credit card details.
Different lenders sometimes specialize in borrowers with different score levels. Some will only touch super-prime borrowers (definitions vary, but some say a FICO score of 740+), some are happy with prime (say, 640-740) and others don't mind subprime (maybe 639 and down), though few if any approve applicants with seriously bad credit. Knowing your score can help you target appropriate lenders.
The biggest single factor that determines your score is paying bills on time. But if you want to improve yours in a hurry, the quickest way to do so is to pay down credit card debt. Everything else being equal, the less you owe on your plastic as a proportion of your cards' credit limits, the higher your score is going to be. If possible, try to get your balances down to 30 percent of your limits, though the lower the better.
Providing you have the time and the ability, drive up your score before you apply for your personal loan. That can pay dividends.
4. Shop Around
Now you know what you want and what your credit score is, you can begin to shop around for the best deal. By all means, talk to your existing bank and credit union. You may get a good rate because they know you.
But there's no guarantee of that. So get quotes from multiple personal loan lenders as well, so you can compare interest rates and other aspects of the loans. You might save serious money by this comparison shopping, and at the very least you'll discover how much your bank or credit union values your loyalty.
Obviously, you're going to look at the annual percentage rate (APR) on your quotes first. But don't forget to check on those other characteristics of the loan mentioned earlier.
And pay attention to the lender's reputation. You don't want to go with one that has a record for stiffing its customers. So check out the ones you're thinking of going with before you commit. Good sources are the Better Business Bureau and your state's department of banking or financial regulation or its attorney general's office.
5. Prepare to Apply
When you make an application, expect to be asked to back up the information on your form with some paperwork. To save time later, gather together the documents you're likely to need now. These may include current or recent versions of some or all of the following:
- Proof of who you are – driver's license, passport, ID card or social security card
- Proof of where you live – mortgage statement, lease, utility bills or official correspondence
- Proof of income – Form W-2s (annual wage and tax summaries from your employer), pay stubs for the last few weeks or months, bank statements and tax returns
Especially if you're wanting to borrow a large sum, the lender might also want further information, including your employer's contact details, your social security number, details of your other debts and more.
Now you're set to go. Best of luck on finding the very best deal.