A personal loan allows you to pay for large items or unexpected expenses that you otherwise couldn’t afford. However, applying for a personal loan is a serious financial commitment, so it’s best to educate yourself about the process.
Read on to explore our step-by-step guide on how to get a personal loan, which includes valuable insights on how to determine how much you should borrow, identify potential fees, and understand how your credit score can affect your options.
What is a personal loan?
A personal loan allows people to borrow a set amount of money from a bank, credit union, or other financial institution. Borrowers are then obligated to repay the money, plus interest, within an agreed upon period of time.
When determining eligibility, loan providers consider a person’s creditworthiness as a key factor indicating his or her ability to repay the loan. Your financial situation will influence the loan amount you are eligible for, as well as the interest rate and repayment terms offered.
Unlike a mortgage or auto loan which has a specific lending purpose, a personal loan can be used for almost anything, including:
- Emergencies
- Student loans
- Weddings
- Home improvements
- Medical expenses
- Debt consolidation
- Important purchases
Most lenders require monthly loan payments from six months to seven years. However, these terms will vary depending on the lender and your credit rating.
How to get a personal loan in 6 steps
Step 1: Check your credit score and debt-to-income (DTI) ratio
Lenders evaluate your eligibility for a personal loan based on your credit score and debt-to-income (DTI) ratio.
Under the Fair Credit Reporting Act (FCRA), you have the right to check your credit report once a week for free. There are three major credit reporting bureaus: Equifax, Experian, and Transunion. Additionally, you receive a score from both FICO and VantageScore, which use data from these three credit reporting agencies.
While most lenders require a credit score of at least 580 for personal loans, if your credit score is lower, you may still qualify for a loan with less favorable interest rates and repayment terms. If your credit history isn’t as strong as you’d like, it may be helpful to explore ways to improve your credit score before applying for a loan.
Lenders also consider your debt-to-income (DTI) ratio when evaluating your creditworthiness. Your DTI is determined by comparing your monthly income to your monthly debts. Use Money’s debt-to-income calculator to calculate yours. The lower your DTI, the better, as most lenders prefer borrowers with DTIs of 40% or less.
Step 2: Gather your documents
When you apply for a loan you may be asked to provide:
- Proof of identity – Valid government-issued photo ID, birth certificate, military ID, citizenship certificate
- Proof of address – Recent utility bill, mortgage statement, copy of rental agreement
- Proof of income – Tax returns, bank statements, pay slips
Make sure you have the necessary documents before you start your loan search.
Step 3: Compare reliable personal loan lenders
You can turn to banks and credit unions for a personal loan, but there are also online lenders to consider. Minimum credit score requirements, loan repayment terms and initial interest rates vary, so be thorough in your search.
Check out our list of the best personal loans to get started. You can also ask for recommendations from friends and family who have taken out loans and had positive experiences.
Step 4: Prequalify for a personal loan
Once you’ve identified a few potential lenders, request prequalification through their online application. (If you prefer, you can also check to see if the lender offers prequalification by phone or in person.)
It is important to note that prequalification is not the same as applying for a loan. Unlike an official loan application, prequalification only requires a software credit check, which will not affect your credit score. Most lenders offer this option to allow borrowers to explore potential loan offers without any negative effect on their credit scores.
To prequalify for a personal loan, you will need to provide personal information such as your name, address, income, and desired loan amount. With most lenders, you will receive loan options within minutes of submitting your information.
Please note that whether or not you decide to proceed with the application process, you will likely receive communications via telephone or email from these lenders. (You may opt out of these communications by informing the representative who contacts you.)
Step 5: Review loan offers
Before committing to a loan offer, study the repayment terms, fine print and other information. Below you will find a checklist of details to check.
- Annual Percentage Rate (APR) – Compare the APRs of your loan offers.
- Fixed rate or variable interest rate – The fixed interest rate remains unchanged until the loan is repaid. A variable interest rate, however, may rise or fall depending on market conditions.
- Loan amount – Check your final loan amount and compare it to what you borrowed to see if fees were included in the total cost.
- Collection fee – Also called a document fee, this lender fee is added to your loan total. The cost varies, and some lenders charge no origination fee.
- Prepayment penalty – Few lenders charge a fee if you pay off the loan before the repayment period is up, but some do.
- Penalties for delays – Find out how much you will be charged if you are late with a payment.
- Refund Terms – Payments may be monthly or weekly and may require automatic debits to your checking account (also known as an autopay).
- Loan duration – The longer the loan repayment period, the more interest you will ultimately pay.
Step 6: Apply for a loan and get financing
After choosing one of your pre-qualified offers, proceed with the formal application online, in person or by telephone. Keep in mind that this step will result in a hard credit inquiry, which may cause your credit score to drop slightly. While many lenders offer quick loan approvals or denials (within minutes), some may take up to a week to make a decision.
If approved, you will receive a guaranteed offer. However, it may be different than what you received during prequalification, so be sure to evaluate all information carefully. If you have any questions or are not satisfied with the terms, please do not hesitate to contact a representative of the financial institution. Remember that you are under no obligation to accept any loan offer.
Funding is typically disbursed within five to seven business days via direct deposit into your bank account. However, there are some lenders that provide financing within 24 hours.
You should expect to start making monthly payments on your loan approximately 30 days after you receive your loan funds.
Frequently asked questions about how to get a personal loan
How to get a personal loan with bad credit
You can get a personal loan with bad credit, but the terms of the loan, especially the interest rate, will be less favorable. You can increase your chances by adding a co-signer with good credit (if the lender allows it). Additionally, if you have collateral to offer, you may be eligible for a lower interest rate with a secured loan.
What is a good interest rate for a personal loan?
A good personal loan rate is competitive with the national average, reported by the Federal Reserve. The average rate as of April 3, 2024 is 11.87% for a personal loan with a repayment term of 24 months. Note that the lowest rates are offered to borrowers with excellent credit.
How long does it take to get a personal loan?
Once approved and completed all necessary documentation, it takes five to seven business days to obtain a personal loan. However, this varies depending on the lender. Some lenders offer same-day or next-business-day financing.
What should you do if the lender rejects your loan application?
More on personal loans
Money’s top picks
Personal loan reviews
Learn more