When you’re in a financial pinch, the thought of getting a loan from a lender might sound daunting or downright scary. After all, a personal loan is a debt you’ll likely carry with you for years and could cost you some serious money in the long run.
Whether you’re looking to consolidate your debt or need extra funds for an unexpected expense, it doesn’t have to be an intimidating process. Knowing how to get a personal loan and where to find them can help you feel more confident when you need to apply for a loan.
6 steps to get a personal loan
Getting a personal loan involves more than just an application. There are steps before and after submitting the loan application that you should be aware of to make sure you’re choosing the best loan for your situation. Here are six steps to getting a personal loan.
1. Determine how much you need
The first step to getting a personal loan is knowing how much money you actually need to borrow. This is important because if you borrow too little, you might have to go through the entire process to get another personal loan. Not only does this eat up valuable time if you’re dealing with an emergency, but too many credit inquiries can adversely affect your credit score.
On the other hand, borrowing too much money is also risky. Having extra cash in-hand might entice you to overspend, and the interest paid on the loan will be higher overall.
To get a clear sense of how much to borrow, calculate the cost of your anticipated expenses and subtract any available savings you’ve set aside. Make sure you still have separate funds put aside for the mortgage or rent, bills, and daily essentials, such as groceries and gas.
Many lenders have a minimum or maximum loan amount, so knowing how much money you’d like to borrow helps filter out loans that don’t meet your financing needs.
2. Review your credit
Just because you apply for a loan doesn’t mean you’ll get approved for one. Requirements and criteria vary between lenders, but most reputable institutions will review your creditworthiness before deciding to loan you money.
One of the biggest steps when figuring out how to get a personal loan is to know where your credit profile stands. A stronger credit score earns you a better chance of getting approved for a personal loan and may open doors for lower interest rates.
There are many different types of credit scores out there, but according to the Fair Isaac Corporation, FICO credit scores are used to determine over 90% of lending decisions. You can request your FICO score through credit bureaus Experian and Equifax as well as from myFICO.com.
In addition to knowing your FICO score, you should review your credit report. When looking at your report, carefully read through all of the information to make sure it’s accurate. This includes your personal information, the credit accounts listed, their statuses and amounts, and any negative information, such as delinquencies and bankruptcies.
Although finding errors on your report is generally uncommon, it’s not impossible. Go to AnnualCreditReport.com to request a free credit report from each of the three credit bureaus — Experian, Equifax, and TransUnion. You’re entitled to a free report every 12 months. Do your due diligence in setting your application up for success by correcting any mistakes on your credit report.
Some lenders offer personal loans for bad credit, but since you’re considered a high-risk borrower in this situation, these loans may have exorbitant interest rates, extra fees, unfavorable terms, or require collateral.
If you don’t have strong credit, it might be a good idea to wait until you’ve taken steps to improve your credit profile. Taking the time to improve your credit score can help you get a favorable approval decision, plus better rates and terms in the future.
3. Shop for personal loan rates
Once you’ve determined that you might be a good candidate for a personal loan, it’s time to compare interest rates. Finding the best personal loan starts with getting a sense of the rates that different lenders can offer you.
When you’re shopping around for rates, it’s important to compare apples to apples. This means you’re assessing rates for a personal loan with the same repayment period and similar fees.
The lower the rate, the less you’ll spend on interest charges over the life of the loan. Conversely, a longer repayment period can help you lower your monthly payments but might result in paying more in interest over time.
Prequalifying for a loan
Seeing if you prequalify for a loan can help you avoid lowering your credit score while also giving a better idea of what rates you qualify for. Prequalifying for a loan involves providing the lender with some basic personal information, such as your name, Social Security number, income, and current debt.
The lender uses this information to perform a soft credit check, also referred to as a soft pull or soft inquiry. In doing so, it can provide you with an estimated personal loan rate. While prequalifying for a loan doesn’t guarantee your approval, this can be a useful way to get an idea of the rates you may qualify for without dinging your credit.
4. Fill out an application
After you’ve whittled down your options, the next step is filling out the application. Depending on your lender, you may be able to fill out the application online or in person at a branch.
The information you provide on your application varies by lender, but generally you may be asked to share the following:
- Basic personal information, including your name, date of birth, Social Security number, permanent address, and email address
- Employment history, current employer’s address, and phone number
- Total income from all sources
- Significant recurring expenses, such as your mortgage or rent
- Your desired loan amount and term
You may also need to provide verifying documents to confirm the information you provided on the application. This could include your:
- Social Security card or state-issued driver’s license to verify your identity
- Tax returns, pay stubs, W-2s, or bank account statements to confirm employment and income
- Utility bills to verify your address
To avoid slowing down the application process, it’s a good idea to have these basic documents ready to show the lender on demand.
The application may also include language asking you to consent to a credit check. At this step in the process, the lender conducts a hard credit check to evaluate your credit history. This type of credit inquiry can temporarily affect your credit score but is necessary to proceed with getting a personal loan.
5. Add a cosigner, if necessary
If you don’t have a credit history or strong credit, another option that can help you qualify for a personal loan is adding a cosigner to your application.
A cosigner is someone who acts as a secondary borrower on the loan. They’re legally responsible for repaying the loan if you, as the primary borrower, don’t make the payments on time.
Ideally, a cosigner should be someone with good credit and a person you trust, such as a spouse, parent, or sibling. A lender will evaluate your credit and your cosigner’s to make its lending decision and determine the rate and loan terms it’s willing to give you. The goal of including a cosigner is to improve your chances of securing a competitive personal loan offer.
If you’ve decided to add a cosigner to your loan application, they likely need to provide the same information as you did on the form. This includes documentation of their personal, employment, and income details.
6. Wait for approval
If you’ve submitted an online application, the lender can often give you a decision within minutes. A paper application through a brick-and-mortar financial institution may take a few hours or a few days for your lender to review.
If the lender needs additional documents for verification, this may extend the approval process. Once you’re officially approved for the loan, the lender provides you with a loan agreement to read and sign.
Make sure you read the agreement thoroughly and ask a representative about anything unclear. At this step, if something doesn’t feel right to you, you’re not obligated to sign the agreement and can back out. But if everything looks correct and as you expected, you’ll sign the agreement, and the lender will release the funds.
Typically, you’ll get the loan amount in one lump sum. Lenders usually give you the option to have the money directly deposited into your bank account, but you can ask your lender about other disbursement options, like a check, if you prefer. It can take a few business days for the funds to reach your account, especially if your lender is a different financial institution than your receiving bank.
Where to get a personal loan
There are a variety of places to find a personal loan. Ultimately, which one you choose comes down to the loan details and what kind of lender you prefer. Common types of lenders include:
- Online lenders: Online lenders, such as SoFi, don’t have a physical branch or office. Their personal loan prequalifications, applications, and loan offers are all processed digitally.
- Peer-to-peer lenders: Peer-to-peer lenders, like Upstart, facilitate lending and borrowing without going through a financial institution or bank. These lenders partner with individual investors to fund their personal loans.
- Traditional banks: You can find personal loans at many local or national banks. These banks typically have multiple branches for in-person support, if you prefer working with a live loan officer.
- Credit unions: Credit unions also have brick-and-mortar branches but offer their services to a specific group, community, or region. These lenders tend to have a smaller member base compared to a big bank, so credit unions may offer better customer service.
Is a personal loan right for you?
Depending on your reason for seeking a personal loan, other options might be better for your needs. Alternatives such as a 0% APR (annual percentage rate) credit card or adding collateral to a secured personal loan may offer you a better deal.
If you’ve decided that a personal loan is the right choice, make sure you can afford the monthly payment and long-term cost before signing on the dotted line.