Do you know how to get a personal loan? Find out here about the steps you need to take to secure the financing you need.
Image source: Getty Images.
When you need to borrow money, a personal loan could be a good way to do it. Personal loans are made by banks, credit unions, and online lenders. You can use the money from a personal loan for anything you want, but personal loans are commonly used to repay higher interest debt such as credit card debt. You could also use personal loans for home improvement projects, covering unexpected expenses, or starting a company.
Personal loans have advantages over other kinds of debt. The interest rate is typically lower than the interest rate on a credit card, which makes it easier and cheaper to pay back a personal loan. Most personal loans are also unsecured debt, unlike a mortgage or a car loan. Unsecured debt means there's no collateral required to secure the loan, unlike with a mortgage which is secured by a house or a car loan secured by the vehicle. Since the debt is unsecured, you don't have to put important possessions at risk to obtain a personal loan.
But, while personal loans have undeniable benefits, there could be some downsides too. Since personal loans are usually unsecured, it can be harder to qualify for them than for a mortgage or a car loan and interest rates could be higher than for secured debts. The process of getting approved for a loan and obtaining your money can also be more complicated and time-consuming than the process of applying for a credit card.
If you think a personal loan may be the right choice to meet your borrowing needs, knowing how to get a personal loan is essential. The good news is, this guide will walk you through the six steps you need to take in order to obtain a personal loan.
1. Learn how personal loans work
Before applying for a personal loan, it's important to know how these loans work. Personal loans can be obtained from many different financial institutions, each with their own terms and conditions. But, there are some things all personal loans have in common.
Personal loans are loans for a fixed amount of money. They're different from credit cards or home equity lines of credit.
Home equity lines of credit and credit cards allow you to borrow up to a set amount, but you don't have to borrow the full amount. And as you pay back what you borrowed, you're able to borrow again. With a personal loan, on the other hand, you and your lender agree how much you'll borrow and you get only that amount in one lump sum payment. You don't get to borrow more as you make payments and reduce your loan balance.
The interest you pay on a personal loan is determined by the interest rate your financial institution charges. The rate could be fixed, which means the interest cost and monthly payments don't change for the life of the loan. Or, it could be variable, which means you start with a promotional rate that's usually lower than a fixed rate loan -- but the rate is tied to a financial index (such as the Prime Rate or LIBOR index) and could change over time.
With a variable rate loan, the interest rate, the total interest you pay, and your monthly payment could all go up or down depending upon the performance of the financial index your loan is tied to. Many people don't like this uncertainty, even if their initial rate is lower than if they'd opted for a fixed rate loan.
Whether you have a fixed or variable rate loan, your monthly payments on a personal loan are set to ensure you pay back the loan within the designated loan term. If you take out a five-year loan, your monthly payment equals the amount of interest and principal necessary to ensure your loan is paid off at the end of five years. So, with a variable rate loan, a change to your payment will be made if it's necessary to modify your monthly bill to ensure the loan's paid off by the end of the term.
You need to understand all this to know what kind of loan to apply for, and how much you can expect to pay towards your loan.
2. Check your credit score
Checking your credit is another preliminary step you must take before you apply for a personal loan.
When you check your credit, you pull your credit report from each of the three major credit reporting agencies -- Equifax, Experian, and TransUnion. You can obtain a copy of your credit report for free each year from AnnualCreditReport.com. You can also obtain your credit score online, although you may have to pay to get your score depending which service you use to get it.
When you get your credit report, you'll need to look carefully for any mistakes that could reduce your score. If you spot something inaccurate on your credit report that's hurting your credit, you'll need to dispute the incorrect info.
You should do this and get the problem resolved before applying for a personal loan, as you don't want to pay more for the loan than necessary or be denied a loan due to inaccurate negative information. It can take 30 days or longer for disputed information to be removed from your report, so it's a good idea to check your credit well before you begin shopping for a personal loan.
You should also check whether you have anything problematic in your payment history that could reduce your credit score. Late payments and maxed out credit cards, for example, could lead to disqualification from a personal loan or could make the interest rate rise so the loan is more expensive.
If you've been late on paying or owe a lot, you can improve your credit score by paying down debt and potentially writing a goodwill letter to your creditor to ask them to remove the record of late payments from your credit report. While there's no guarantee, some creditors will do you the favor if you've generally paid on time and you have been a good customer.
You'll typically need at least fair to good credit to qualify for a personal loan -- unless you want a subprime loan at very high rates -- so it's worth taking the time to get your credit in order before you apply for a personal loan.
3. Decide how much you need to borrow
You'll also need to estimate how much you plan to borrow. Knowing the amount of money you need can help you narrow down your search only to lenders who would make loans in the designated amount. If you only want to borrow $1,000 and a financial institution won’t make loans for under $5,000, then you'd need to look elsewhere to find your loan.
It's also important for you to decide on your own what you want to borrow because you don't want to just take all the money a lender is willing to give you. The more you borrow, the more expensive it is to repay your loan, so keep borrowing to the minimum you need to accomplish specific financial goals.
4. Shop around for a personal loan lender
If you know what you need to borrow and think your credit is good enough to qualify for a loan on good terms, you're ready to start looking for a lender. Personal loans can come from big and small banks; from credit unions of all sizes; and from online-only lenders, so there's a plethora of options out there for you. To get the most favorable deal, you want to get quotes from as many personal loan lenders as you can.
When you start shopping around for a loan, some lenders allow you to do a soft credit check to find out what your rates would be if you actually applied for a loan. A soft credit check is one that isn't listed as an inquiry on your credit report so it won't damage your credit. Soft credit checks help you to decide whether to go through with applying for a loan from a particular lender, based on whether you're likely to qualify and what the terms of the loan are likely to be.
As you compare lenders, key things to consider include:
- Interest rate: The interest rate is the amount you pay to borrow money. A higher rate means that interest costs more, payments are higher, and the total paid back will be higher.
- Loan repayment term: This determines how long you'll have to pay your loan. A longer repayment term means your monthly payment is lower. But, since it takes you longer to pay the loan and you pay interest this whole time, your final costs will be higher if you stretch out your repayment timeline.
- Monthly payment: Monthly payment is determined based on how much you borrowed, interest rates, and how long you have to pay back the loan. You need to make sure the monthly payment is affordable.
- Loan fees: Some lenders charge an application fee or a loan origination fee. Some also charge prepayment penalties if you pay off your loan early. And, many charge you to obtain a copy of your credit score when deciding whether to approve you for a loan. Be sure to understand the fees before you apply.
- Qualifying requirements: While all personal loan lenders assess the risk of lending to you, some have more stringent qualifying criteria than others. You don't want to apply for a loan you're not likely to be approved for.
Be sure you're comparing loans with similar terms to decide which is the best deal. If one lender's offering a lower rate, but it's a variable rate loan, you may prefer a slightly higher fixed-rate loan if you'd rather have more certainty about what your payments will be.
5. Submit your loan application
After deciding which lender will offer you the best loan that you're likely to get approved for, it's time to submit your loan application. This can typically be done online with most lenders.
You'll have to provide some basic info in your application so the lender can decide whether to give you a loan or not. This includes your name, address, Social Social Security number, and details about your income.
The lender will check your credit and consider relevant factors, such as how much you earn, to decide if you're likely to repay the loan or not. The lender will either deny your loan or approve it, depending upon their underwriting process. If you're approved, your interest rate is also based on the lender's assessment of risk.
In some cases, you'll get a decision very quickly -- or immediately -- after submitting your loan application. In other circumstances, the lender may want more info from you or more time to assess risk before deciding whether to give you a loan. If the lender needs more details or further investigation into your financial situation, you may have to wait several days to hear back to find out if the loan is approved.
6. Wait for funding
Once your loan is approved, you'll have to agree to the terms including the interest rate and repayment schedule. Once you sign a promissory note indicating you'll pay back the loan, the lender will release the funds to you. You can use the money for anything you want, but be sure to make payments on time to avoid hurting your credit.
Getting a personal loan doesn't have to be hard
There are many personal loan lenders offering loans to people with all different credit scores. Even if you aren't a perfect borrower, you should be able to find a personal loan when you need the funds.
Just be sure that, no matter your situation, you only borrow what you need; you don't take a loan without understanding the terms; and you pay back the loan as due. If you follow this basic advice, getting a loan doesn't have to be hard.