How to Get A Personal Loan in 5 Easy Steps
Need cash to cover emergency car repairs or to buy a new furnace for your home? Or maybe you’d like to cover the costs of your wedding or a long-awaited vacation without resorting to using your high-interest-rate credit cards.
Personal loans are unsecured — meaning you don’t have to put up collateral to secure one — but some lenders do offer secured personal loans, too. These versions are backed by some form of collateral, usually your home or car. If you default on your payments, lenders can take possession of your home through the foreclosure process or repossess your car, much like they can do with mortgage loans or auto loans.
With an unsecured personal loan, there is nothing for lenders to take back. And that has a downside — because lenders take risks when issuing these loans, the interest rates they charge for them is higher. In fact, personal loans tend to be more expensive than auto loans, student loans or mortgages.
On the plus side, personal loans are flexible — you can use the funds for anything. They are also consistent — if you take out a personal loan with a fixed interest rate, you’ll make the same payment each month until you’ve paid back the entire loan.
The key is to make sure you understand the fees and interest rates your lender is charging. A good number to look at is your annual percentage rate, or APR. This can help you determine the complete cost of your loan, including your interest rate and any origination fees your lender charges. You want this number to be as low as possible.
5 steps to getting a personal loan
Like all financial products, personal loans have requirements. Follow these five steps to get a personal loan:
1. Gather information and check your credit score.
Why is your credit score important when applying for a personal loan? Lenders will look at several factors when considering whether to approve you for a personal loan. This includes your debt-to-income ratio — how much of your gross monthly income your monthly debts consume — and your employment status.
The most important number when applying for a personal loan is your three-digit, FICO credit score. This number tells lenders how well you’ve managed your credit in the past and whether you have a history of paying your bills on time. If your score is high, lenders will be more likely to approve you for a personal loan — and give you a lower interest rate because you’re considered less of a risk for defaulting on your loan.
Lenders generally consider a FICO score of 740 or higher as excellent. Scores under 640 will make it more difficult to qualify for a personal loan and you’ll pay a higher interest rate on the one you get.
How to check your credit score
You should check your credit score before you apply for a personal loan. You’re entitled to one free copy of your credit report every 12 months from each of the three nationwide credit reporting companies — Experian, Equifax and TransUnion. Order online from the only authorized website for free credit reports, annualcreditreport.com, or call 1-877-322-8228.
You can also access your credit score for free from several consumer websites, such as LendingTree.com. Your bank or credit card provider might also provide you with your free credit score, too.
Can you qualify for a personal loan with bad credit?
Yes. Every lender is different, but you can qualify for a personal loan even with a low credit score. Just know that the lower your score, the higher your interest rate will be.
“With bad credit? You can still a personal loan,” Michael Foguth, founder of Foguth Financial Group in Brighton, Mich., said. “But you will be talking about interest rates that are 20 percent to 30 percent higher. But when people are taking out personal loans, they are often in a tough spot. The interest rate sometimes gets pushed to the background. They’re more interested in getting the money they need.”
What can you do if your credit score is too low? If your score is so low that you can’t qualify for a personal loan — or the interest rates attached to the ones you can get are too high — you have two choices.
Consider a cosigner: A cosigner may help your personal loan application. Keep in mind that your cosigner will be responsible for making payments on the personal loan if you don’t — and that if you default you’ll ding not only your credit score but your cosigner’s, too.
Cosigners take big risks. And you run the risk of damaging your relationship with your cosigner if you don’t make your payments on time. That said, lenders might be more willing to give you a personal loan if your cosigner has a strong credit score because they know they can rely on that person making the payments if you don’t.
Take time to improve your credit: If possible, be patient, especially if you aren’t facing an immediate financial emergency. Joe Toms, president of lender FreedomPlus in Tempe, Ariz., recommends consumers boost their credit scores by making on-time payments and paying down their credit card debt. That way, if they do apply for a personal loan, they’ll qualify for lower interest rates.
“If you have a credit score below 640 or 620, you are going to pay much higher rates. There is nothing you can do about that,” Toms said. “There is a more critical question you should be asking, though: ‘Do you need more debt or should you take the time and effort to restructure your financial health?’ Taking out high-interest-rate loans is like a hamster wheel: You never get off it.”
2. Get pre-qualified
What does this mean? To get pre-qualified for a personal loan you must send certain information to a lender who will determine if you are likely to qualify. If the lender thinks your income and credit are strong enough, they will quote you a fee and interest rate for loaning you the money. You can accept that quote and move ahead with your application or shop around for a better deal on a personal loan elsewhere.
Every time a lender checks your credit, it’s reported as an inquiry on your credit reports, and too many inquiries can damage your credit score. When you go through the pre-qualification process, your lender will check your credit using what’s called a “soft pull,” which has less of a negative impact on your credit score. A soft pull simply tells the credit bureaus that you are considering taking on a loan — and more debt — but not that you are actually applying for one, so it won’t hurt your credit score as much, Toms said.
If you decide to apply for a personal loan, however, your lender will perform a “hard-pull” on your credit, Toms said. This tells the credit bureaus that you are actually taking on a new loan and new debt, so a hard-pull has a greater impact on your credit score, he said.
3. Shop around for the best rates
It’s important for borrowers to shop a variety of lenders to find the best interest rates for their personal loans. Why? Because the interest rates attached to personal loans tend to be high.
Toms says it’s not unusual for borrowers with solid credit to qualify for interest rates as high as 15 percent when taking out a personal loan. Those with lower scores could see interest rates of 30 percent or more, Toms said.
Shopping around for the lowest rate, then, takes on more importance.
“Consumers have to understand what type of loan they are getting,” Toms said. “If you are going for a secured loan, like a mortgage, it will always have a lower interest rate. If it is an unsecured loan, you are dealing with a higher cost of capital. Consumers need to understand that going into it.”
You can shop for the best personal loan interest rates here. All you need to do is answer some questions and LendingTree can provide you a range of loan options.
4. Compare offers and accept one
Once you receive offers, compare them. Look at the interest rates lenders are quoting — and examine the APR quotes you get. The APR — your loan’s annual percentage rate — represents the total cost of your loan. The APR includes your loan’s interest rate as well as any origination fees your lender is charging, which is why that number is always higher than your interest rate. And that’s why it’s a more accurate representation of the total cost of borrowing money.
When you decide on a lender, you’ll need to submit to a hard credit check. This will have an effect on your credit score. You may also be asked for additional information and materials that you did not submit when applying for a pre-qualification.
What information you need when applying for a loan
Foguth says that the underwriting process for personal loans is similar to what borrowers go through when they apply for mortgages or auto loans. You’ll usually have to provide lenders with copies of paycheck stubs to verify your income and bank account statements to prove that you do have savings. You’ll also have to give your lender consent to pull your credit, Foguth said.
“You will be under more scrutiny because your loan is unsecured,” Foguth said. “Mortgages and auto loans are secured. They are backed by physical objects. The only thing backing up a personal loan is you. You’ll be under a finer microscope because of this.”
Lenders have different requirements when it comes to minimum credit scores, debt-to-income ratios, and annual incomes. Toms, for instance, said that FreedomPlus requires applicants make at least $30,000 a year, and have a minimum credit score of 640 and a debt-to-income ratio under 40 percent.
5. Receive your money
Once lenders receive your financial information and pull your credit, they typically make decisions quickly. Toms said it’s not unusual for lenders to approve applications within hours.
How fast you get your money will depend on your lender. Some advertise near-immediate funding, promising to deposit funds in your account within two to four hours of approval. To get your money quickly, you’ll have to allow lenders to deposit your funds in your account electronically.
Once you receive your money, you’ll pay back your loan through regular monthly payments. Make sure your loan doesn’t come with any prepayment penalties — if it doesn’t, you can pay it back before its term officially ends and save plenty in interest.
The bottom line
If you’re in a financial jam, a personal loan can help. But remember, these loans come with a price — higher interest rates. That’s why Foguth recommends consumers consider alternatives, including taking out a home equity loan, doing a cash-out refinance or borrowing from family members or friends.
“Any type of secured loan is better,” Foguth said. “If you have equity anywhere and you need cash, go take out a loan against that equity. That’s a far better option.”