How to Apply for a Personal Loan: 6 Steps
You can use a personal loan to cover anything from home improvements to unexpected expenses. But how do you get a loan? Below you’ll find a step-by-step guide to walk you through the process of applying for a loan from start to finish.
1. Create a budget
To find the best personal loan for you, you should know how much money you need and how much you can afford to spend each month on your loan. You can make a budget to calculate your monthly payment. Here’s a simple formula to help you get started:
Monthly income after taxes – Total monthly expenses = Amount you can put toward debt
You can find your monthly income after taxes on your pay stub. To calculate your total monthly expenses, review your bank and credit card statements. Don’t just review one month’s worth of expenses — go back at least three months to make sure you’re getting an accurate picture of your monthly spending.
2. Find your credit score
Lenders use your credit score to determine your creditworthiness, or how reliable you’ll likely be in paying back the loan in full and on time. The higher your score, the more likely they’ll be to approve you for a loan and to offer you good terms, like a low interest rate.
You can get your free credit score with LendingTree Spring. Want to improve your score? You can even test out scenarios, like paying off existing debts, to see how much they’ll raise your score.
3. Research multiple lenders
Personal loan lenders offer different interest rates, fees, loan amounts and term lengths, so it’s important to do your research before you apply for a loan. You can find this information online for most lenders, but if your local bank or credit union doesn’t list its personal loan rates on its website, it may be worth your time to give them a call.
Here are the factors you should consider as you research loans online:
Interest rates
Look for lenders that advertise low interest rates. The lower your rate, the less you’ll pay to take out your loan. Keep in mind that lenders typically reserve the low end of their listed range for borrowers with excellent credit. And make sure the high end of the range is below 36% — that’s the highest rate that experts consider to be affordable.
Fees
Personal loans often come with fees. The more fees you can avoid, the better. Here are some common fees to watch out for when you’re reading the fine print on a lender’s website:
- Origination fees: These are fees you pay to take out a loan. Lenders typically take the origination fee from your loan up front, reducing the amount of money you actually get. For instance, if a lender charges a 10% origination fee on your $2,000 loan, you’ll only get $1,800 up front ($2,000 x 0.10 = $200; $2,000 – $200 = $1,800). When you take out your loan, calculate how much you’ll get after origination fees to ensure that the loan amount covers your expenses.
- Late fees: Some lenders charge a fee when you don’t make a payment on time. Late fees are fairly common, but it’s important to know how much you’ll owe if you miss a payment.
- Prepayment fees, or prepayment penalties: These are fees you might owe for paying off your loan early. Some lenders charge these penalties to recoup the money they lose in interest on your loan when you’re not making additional payments.
Loan amounts
Make sure that your lender offers the amount you need. If you want a small personal loan but a lender only offers loans that start at higher amounts, keep looking. It’s best not to take on more debt than you need. You can also consider getting a cash advance, applying for a 0% introductory APR credit card or asking a family member for a loan.
When you’re calculating the amount you need for your loan, make sure to factor in the origination fee, since lenders typically take this fee from the loan before they give it to you.
Term lengths
Whether you’re looking for a short-term loan or a long-term loan, you’ll likely find a lender that offers the term length you need. Keep in mind that although your monthly payments will be lower with a longer term length, you’ll pay less in interest over a short-term loan.
Recommended credit
Some lenders list their personal loan requirements, telling borrowers exactly what they look for when they consider whether to approve or deny a loan application. Lenders can specify a minimum credit score or credit type, like good credit or excellent credit. They can also list a minimum income or debt-to-income ratio.
If your credit or income isn’t high enough, consider getting a loan with a cosigner or securing your loan with some form of collateral, like a savings account or jewelry.
Lender reputation
Vetting your lender to make sure it doesn’t engage in predatory lending practices is important, and it’s easier than ever to do some thorough research on the internet. First, make sure that your loan isn’t a payday loan, as these can be difficult to pay back.
You should also check with the Consumer Financial Credit Bureau to ensure that there haven’t been any recent enforcement actions against your lender. To get a sense of the average consumer’s experience with a lender, read reviews on Trustpilot.
4. Apply for prequalification
Once you have a few lenders in mind, it’s time to apply for prequalification. Prequalifying for a personal loan allows you to see whether you’re likely to be approved and to check your rates with a soft credit check, which won’t affect your credit score.
To prequalify, you’ll fill out a short application on a lender’s website. Typically, you’ll need to provide personal information like your name, Social Security number, address and date of birth. You’ll also need to specify the amount you need, your preferred loan term and the purpose of the loan. Finally, you’ll likely need to provide information about your income and employment.
If you want to avoid the hassle of filling out several applications, you can get up to five loan offers by completing one form through the LendingTree marketplace. Checking your rates won’t affect your credit score.
5. Compare your offers
Once you have a few offers in hand, it’s time to compare your personal loan options in order to choose the best one. Here are some factors to consider when choosing your loan:
- Look at the interest rates. The loan with the lowest interest rate and origination fee will be the least expensive to take out. Use a personal loan calculator to estimate the interest and total cost you’ll pay for each of your loan offers. Compare the results and find the offer that requires you to pay the lowest amount in interest.
- Make sure that each loan offers enough money to cover your expenses after you account for the origination fee (if there is one).
- Estimate your monthly loan payments. Use a loan calculator to estimate your monthly payment for each loan, and make sure that it’s within your budget.
If you’re not happy with your loan offers, you can lower your interest rates by taking the time to improve your credit score. In fact, a recent LendingTree study found that raising your credit from fair to very good could save you upwards of $22,000.
6. Submit your loan application
Now that you’ve chosen a loan offer, it’s time to formally submit your personal loan application. At this stage, your lender may ask for documentation like W2s or pay stubs to verify your income and employment.
After you submit your application, your lender will check your credit history with a hard credit check, which will result in a small dip in your credit score. When the lender is done checking your credit, it will send you a final loan offer. The rates should be similar to the ones you received when you prequalified.
Once you accept your final loan offer, you should receive your funds according to the lender’s timeline, which could be anywhere from a few hours to several business days. If you’re looking for fast cash, consider lenders that specialize in quick loans.