Personal loans are unsecured loans that can be used for a variety of expenses and typically have lower interest rates than payday loans or high-interest credit cards. Lenders approve consumers for personal loans based on their creditworthiness. Before you apply for a personal loan, it’s important to know what to expect. Here’s how to get a personal loan in five simple steps.
1. Check Your Credit Score and Calculate Your Debt-to-Income Ratio
Kyle Enright, president of Achieve Lending, said credit score requirements will differ by lender. “In general, the higher the applicant’s credit score, the lower the interest rate offered,” he said. “For Achieve’s personal loans, borrowers should have a minimum credit score of 620, for example, but there are many lenders who will lend to a consumer even with a poor credit score.” Enright said in these cases, interest rates will be high.
Enright also said that some lenders will require borrowers to have a certain number of years of credit history.
“Lenders will also look at debt-to-income ratio,” said Enright. “Higher DTI ratios can mean higher risk of not repaying a loan. To calculate, add up all monthly debts — payments for rent or mortgage, student loans (even if they are on pause), personal loans, vehicle loans, credit cards, child support, alimony — and divide by total monthly income. At Achieve, for instance, we look for a debt-to-income ratio of 45% or lower.”
2. Decide Whether You Need a Co-Signer or Co-Borrower for Your Loan
Enright said that if you don’t have good credit, a co-signer or co-borrower with very good credit, low debt and a good income can improve your chances of getting a loan.
“A co-signer is responsible for making payments if the primary borrower does not make payments,” he said. “This is different from a co-borrower (also known as a co-applicant), who shares ownership of the loan. As such, they have responsibility for making payments with the other co-borrower. If considering a co-borrower or co-signer on your loan, it’s important to confirm with the lender upfront which term applies.”
3. Research Lenders and Choose One
The next step is to research lenders to see which one is the best match for you.
Enright offered these tips for choosing a personal lender.
Look For a Lender Committed to Evaluating Your Individual Situation
Enright said a good lender will tell you if a personal loan is not the right move for you and will be able to make a recommendation in your best interest.
Consider the Kind of Communication the Lender Offers
“Some lenders provide only online capability, with no human interaction,” said Enright. “Most potential borrowers benefit by working with a lender that has loan consultants who will work with them to determine the best terms and rates.”
Consider Fees and Rates
“It can be very helpful to find a lender who will discuss fees openly, and work with a borrower to calculate overall interest savings,” said Enright. “In terms of rates, average annual rates on personal loans can range from just over 8% to 30% or more — depending on the borrower’s credit score and profile. There are usually origination fees, too, which will vary. Ask about late fees and/or early repayment fees.”
Find Out If the Lender Offers Any Discounts
“Discounted rates are sometimes available to borrowers with a specified amount of retirement savings, or for situations with a co-borrower,” said Enright. “If a borrower is using funds from the loan for debt consolidation, some lenders will provide a discount if they send the payments to creditors directly.”
Consider the Terms Offered
Enright said that terms of 36-60 months are common for personal loans. However, some lenders also offer 24-month terms.
Keep in mind that the longer the loan term, the more interest you’ll pay overall.
Consider the Speed of the Loan Process
If you’re in need of the money sooner rather than later, such as in an emergency situation, the speed of the loan process matters.
“Every situation is different,” Enright said, “but approval and loan funding can be completed in as little as three days.”
4. Gather Documentation and Apply for the Loan
The following documentation is needed to apply for a personal loan:
- Written application. “As with most loan products, applicants for personal loans will need to provide personal identifying information, the purpose of the loan and income verification (pay stub or equivalent),” said Enright.
- Personal identification information. In general, you’ll need to provide two forms of government-issued ID, such as a Social Security card and a driver’s license.
- Checking account information. “The consumer will need to provide a checking account routing and account number where they want the funds to be deposited, so they can make sure to have this information available,” said Enright. “With some lenders, if a consumer is getting a loan to consolidate and pay off credit card debt, there also is an option to have the lender pay their creditors directly. The funds are sent by ACH.”
5. Review and Accept the Loan
It’s important to review the loan’s rate and terms on the final paperwork before accepting the loan. The rate and terms might have changed if you were pre-qualified for the loan.
Personal Loans: Take Time To Make the Right Choice
Even though going through the steps of getting a personal loan isn’t difficult, it is a process. It’s important to take the time to review your credit and also research lenders to find one that’s the best match for your financial goals and situation before you apply.
FAQHere are answers to some of the most frequently asked questions about personal loans.
- Do lenders restrict how you can use personal loan funds?
- Enright said that a borrower can use the proceeds from a personal loan for almost anything. However, he said one of the most popular uses for personal loans is to consolidate and pay off credit card debt.
- What is the easiest way to get a personal loan?
- The easiest way to get a loan is to find an online lender who has flexible income and credit score requirements. Online lenders often have less restrictive income and credit score requirements to qualify for loans.
- How do you get a loan for the first time?
- Getting a loan, whether it's the first time or not, requires the same process: check your credit score, research lenders, pick a lender, apply for the loan and accept the loan.
- How do you qualify for a loan?
- To qualify for a loan, you'll need to at least meet the lender's credit score and income requirements.
- What do you need to get a $5,000 personal loan?
- To get a $5,000 loan, you'll need to have good credit, proof of income and a low debt-to-income ratio. It is possible to get a $5,000 loan with a lower credit score, but the rates and terms will not be as favorable as they would be with a higher credit score.
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- Experian. 2023. "7 Things to Know Before You Apply for a Personal Loan."
- LendingClub. 2021. "A Comprehensive Guide on How to Apply for a Personal Loan."