Best Ways to Get a Personal Loan
Trying to cover an expense may be stressful, but getting a personal loan doesn’t need to be. The best ways to get a personal loan depend on how much preparation you do before submitting an application. This can include increasing your credit score, cutting down on your current debt and budgeting how much you need in advance.
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How to get a personal loan in 6 steps
The process of getting a personal loan is generally straightforward. Some of the best and safest ways to get a personal loan include doing your research on lenders and preparing any required documents ahead of time.
1. Check your credit score and credit report
Both your credit score and your credit report play a role in determining your creditworthiness, which is how likely lenders believe you will repay your debts. These factors can also indicate what loan amounts, interest rates and terms that lenders may be willing to offer you.
Your credit scores — FICO Score and VantageScore — are calculated using the activity on your credit reports. You can check your credit reports for free from the three major credit bureaus at AnnualCreditReport.com.
Unfortunately, it’s not uncommon for errors to appear on credit reports. This could lead to a negative impact on your credit scores. If you come across mistakes on your credit reports, you can file a dispute with both the reporting creditor and credit bureaus.
2. Calculate how much you can borrow
Budgeting out how much debt you can afford can go a long way in helping you make sure you can repay your loan. You can determine what amounts, terms, interest rates and minimum monthly payments you can afford by using a personal loan calculator.
In particular, you’ll want to pay attention to a lender’s annual percentage rates (APRs). This number shows how much it will cost you to borrow money. It includes both the interest rates and fees you’ll pay.
Knowing how much you can afford to borrow is important since if you default on a loan, it can be detrimental to your credit score and bring about legal troubles.
3. Gather necessary documents
After you submit your application, lenders will need to verify information such as your income, employment, identity, residence and other debts you may have. This allows the lender to determine whether you meet the personal loan requirements and to ensure you are who you say you are.
Gathering these documents ahead of time can help speed up the loan application process. Here are a few documents lenders may request:
- Government-issued identification such as a driver’s license, passport or birth certificate
- A rental or mortgage agreement
- W-2s from the last several years
- Recent pay stubs
- Bank statements
4. Prequalify for a loan
Prequalifying for a personal loan allows you to see what potential offers you may get from lenders without a hard credit check, so you won’t hurt your credit score. While many lenders offer this service, not all do, so it’s important to check their websites before applying for a loan.
Prequalification allows lenders to get a basic understanding of your creditworthiness so they can decide whether to offer you a loan. Keep in mind, this does not guarantee you’ll receive a loan or that you have to accept one. If you prequalify for a loan, you can view potential interest rates, fees, terms and amounts.
5. Compare loan options
Like picking out a new car, you’re going to want to shop around and compare personal loan offers. It’s important to pay particular attention to details like interest rates, fees, repayment terms, customer reviews, unique features and how much lenders are willing to offer.
One common charge you may come across is an origination fee. These are one-time administrative fees that typically come out of the total balance of your loan. For instance, if you take out a $5,000 personal loan that comes with an 8% origination fee, you’ll be charged a $400 fee and only receive $4,600.
Another feature you’ll want to take into account is whether you want a short or long-term loan. Short-term loans will come with higher monthly payments but you’ll pay less on interest. Long-term loans have lower monthly payments but you’ll pay more over the life of the loan in interest.
6. Accept your loan agreement
During the final stages of getting a personal loan, the lender you choose will run a hard credit inquiry. This allows creditors to see the details of your credit history. It can cause your credit score to drop by up to five points and can stay on your credit report for up to two years.
To receive your funds, you’ll need to sign a personal loan agreement with your lender, ensuring you will repay the loan and follow your lender’s terms and conditions. During this part of the process, it’s important to read and understand the fine print in your contract.
Once the paperwork is signed, your lender will either send a check in the mail or deposit the money into your bank account. It can take several days to receive your loan funds and the timeline can vary based on your lender and bank.
Where to find a personal loan
Many types of lenders offer personal loans, though the application process and requirements will vary with each.
Bank loans often come with low interest rates, few fees and flexible repayment terms. This option may be best for those with good to excellent credit as banks tend to have higher credit requirements.
Keep in mind that some banks may require that you visit a branch in person in order to complete the personal loan application process. Some banks, such as Wells Fargo Bank, may also require that you be a current customer with a bank account in order to qualify for a loan.
Credit unions come with a variety of benefits such as rate caps and few (if any) fees. Credit unions are governed by the National Credit Union Administration (NCUA) and can’t charge more than 18% APR on personal loans. Personal loans from other types of lenders can have APRs as high as 36%.
To get a loan from a credit union, you’ll typically need to become a member. Membership requirements vary depending on the credit union. For instance, PenFed Credit Union requires that you open a savings account with them and deposit $5, whereas Navy Federal Credit Union requires that you have military affiliation.
While online lenders tend to have higher APRs and fees than banks and credit unions, they are also typically more flexible toward consumers with less-than-perfect credit. This type of lender may be a good fit for consumers with bad or fair credit.
Since the entire process is online, you won’t have to visit a physical branch like you may have to with some banks or credit unions. The application and funding process may also be faster than with other types of lenders.
Peer-to-peer (P2P) lending is when consumers submit loan applications to a lending platform but instead of that company funding the loan, the individual investors do. After you submit a loan application and are approved, the lending platform passes along your information to its investors who then decide whether or not to give you a loan.
P2P loans work like traditional personal loans — lump sums, fixed interest rates and set repayment terms — but are not very common. Prosper, for instance, is one of the few P2P lenders left on the market.
Payday loans vs. personal loans
Payday loans are small, short-term loans — typically up to $500 — that don’t require credit checks. They come with predatory features like nearly 400% APR and repayment terms of just two to four weeks.
These loan features can make it challenging for borrowers to repay. Some borrowers end up having to take out more payday loans to cover the cost of their original payday loan.
Personal loans are different from payday loans because the former are typically capped at 36% APR and repayment terms can range from 12 to 60 months or longer. Another option, payday alternative loans, come with a maximum APR of 28% and are offered solely by credit unions.