A personal loan is a flexible source of financing. You can obtain personal loans from banks, online lenders, or credit unions. And, once you’ve been approved for a loan, you can use the money you receive for any purpose you want.
If you’ve decided getting a personal loan makes sense for your situation, you’ll just need to make sure you go through the right steps to apply for one. This guide can help you through the process so you get the right loan to meet your needs. Just follow the six easy steps described below.
Image source: Getty Images.
1. Decide how much you want to borrow
Taking out a loan can help you to accomplish important goals, such as starting a business or improving your home. You can also use a personal loan to refinance higher interest debt if you’re able to qualify for a low-rate loan and use the proceeds to repay lenders you currently owe.
But, you still have to pay interest on a personal loan, which means you don’t want to borrow more than you need to. The first step in the process is to carefully consider how much debt you want to take on so you can apply only for the amount you absolutely require.
Personal loan lenders have different minimum and maximum loan amounts, so go in knowing how much you need and choose a lender that won’t require you to borrow too much or restrict you to borrowing too little.
2. Check your credit report and score
In order to qualify for a personal loan, you need to have at least a fair credit score -- but the better your credit score, the more favorable the terms of your loan will be. It’s important to know what your credit score is before you start applying for loans.
Once you’ve got an idea of what your score is, you’ll know whether you should apply for loans with lenders that require great credit or whether you need to look around for a lender that’s more lax in its qualifying requirements. Or, you may decide to work on improving your credit before borrowing.
You’ll also want to check the information on your credit report, as this information can sometimes contain inaccuracies. You don’t want to be denied a loan or pay more because of a credit report mistake, so use AnnualCreditReport.com to pull up your credit report for free and make sure there are no errors.
If you find a mistake, you can dispute it with each of the three major credit reporting agencies (Equifax, Experian, and TransUnion). It can take 30 days or more for a dispute to be resolved, so start checking your credit score as soon as you decide you’re going to apply for a personal loan.
3. Understand your loan options
When you know how much you’ll borrow and have an idea of what kinds of loans you can qualify for, you’ll soon be ready to start shopping around among different lenders. But, before you do, it’s helpful to make up your mind about what kind of loan to shop for.
Most personal loans have fixed repayment terms, so you pay a set amount each month in order to pay off the loan within a predetermined number of years. The longer your repayment timeline, the lower your monthly payments but the more total interest you pay over time. You’ll want to have an idea of how long you want your loan term to be before you begin shopping for a loan.
You’ll also need to decide if you want a fixed or a variable rate loan. You’ll likely be offered a lower starting interest rate on variable rate loans, but the rate is tied to a specific financial index such as the LIBOR index. As the financial index moves, your interest rate can move -- and can sometimes go up. When your rate rises, your monthly payment increases so you can still pay off the loan on time.
A fixed rate loan, on the other hand, would provide you with more predictability because your rate never changes and your monthly payment is the same for the life of the loan. You should consider whether you’re willing to accept a slightly higher up-front rate to eliminate the risk of rates rising.
4. Get your financial paperwork together
When you apply for a loan, you’ll need to provide details on your income and your employment. Depending upon the lender, you also may need to provide information about assets you own and other debt you have.
It’s helpful to have all of your financial paperwork together before you begin the application process so you won’t have to stop to find details the lender asks for. Some of the financial documents you may want to gather include recent pay stubs, tax returns, bank statements, and statements from credit cards or other loans.
5. Shop around for loans with good terms
Now that you know what you’re looking for -- and you have the documents your lender is likely to request -- it’s time to actually start shopping for financing.
Technology has made it easy to shop for loans because most lenders allow you to get pre-approved online, and most also provide info on rates and terms on the internet. Compare loan offerings among at least three different lenders, and potentially more, to find the one offering the most affordable interest rate with the loan term you’re looking for.
Some lenders allow you to submit your information and get a personalized rate quote before actually applying for a loan. The key is to find out whether you will be subject to a hard credit inquiry or a soft inquiry. A hard inquiry stays on your credit report for two years and too many hard inquiries reduces your credit score. Ideally, you’ll find lenders who will give you personalized loan rates by doing a soft inquiry, which doesn’t show up on your credit report.
When you provide information to lenders about your financial info and get details on the loans you’d likely be approved for, you can see which lender offers the best deal. Don’t just focus on monthly payments -- make sure you look at the big picture including the repayment timeline, whether there are any fees associated with the loan, and the amount you’d be allowed to borrow.
And, make sure you compare apples to apples. If you’re looking at one loan offering a fixed rate and another offering a variable rate, this isn’t a good comparison because one provides predictability and the other doesn’t.
6. Submit an online or paper application
After you’ve picked the loan you want, you’ll need to formally apply. Most lenders allow you to submit an application online. Or, if you’re borrowing from a local bank or credit union, you may submit a paper application directly to a loan officer at the financial institution.
You’ll need to provide your Social Security number and financial info to apply. In many cases, you’ll receive a decision within a few minutes of submitting an online application. Sometimes, the lender may require a little more info from you, including proof of the income you’re claiming you earn.
If you’re denied a loan, you’ll need to decide whether to try to improve your credit and apply again or whether to try a different lender. If your loan is approved, you’ll receive your money -- usually within a few days -- and can use it for anything you’d like. Then, you’ll just need to get to work on paying the loan back ASAP.
Getting a personal loan is easy
As you can see, applying for a personal loan doesn’t have to be hard. You just need to understand the different kinds of loans available to you, make sure you have the credit to qualify, and shop around among different lenders to find the best loan for your financial situation.