In a Nutshell
Applying for a personal loan can be a confusing process if you’re not prepared. Keep reading to learn how to apply for a personal loan and 6 key steps to make the process easier.Personal loans can be a great financial tool to help you pay for unexpected expenses, home improvements, large purchases or even debt consolidation. But it’s helpful to understand the process and know how to comparison shop before signing onto a new loan.
A personal loan is an installment loan. This means you’ll get a lump sum after closing on the loan, and then you’ll pay it off each month for a set time frame. Your monthly payment will be fixed, making it easier to factor into a budget because you’ll be paying the same amount each month.
Comparison shopping is a good idea when you’re making a big financial commitment like taking out a loan. And online lenders have made applying for a personal loan fast and convenient.
Rather than shopping around for personal loans by going directly to multiple lenders, you can use online marketplaces like Credit Karma to research and compare personal loan offers all in one place.
Here’s a breakdown of the process, including steps on how to comparison shop and apply for a personal loan.
- Step 1: Check your credit
- Step 2: Decide how much to borrow and calculate your budget
- Step 3: Research and compare lenders
- Step 4: Gather the required documentation
- Step 5: Complete and submit your application
- Step 6: Review and accept the loan offer
- Step 7: Receive funds and manage repayment
- FAQs about how to apply for a personal loan
Step 1: Check your credit
Before starting the application process for any kind of loan, it’s a good idea to review your credit. You can check your VantageScore 3.0 credit scores from Equifax and TransUnion on Credit Karma for free.
While credit history and credit scores aren’t the only thing lenders look at when reviewing your application, they’re important factors that lenders use to indicate how likely you are to repay your loan. Good credit can typically make it easier to get approved for a loan — and receive a more favorable interest rate.
Routinely checking your credit reports is a good idea to make sure all the information being reported is accurate. Inaccurate information may negatively affect your credit scores.
If you have poor credit, there are some things you can do to help improve your credit score. Paying on time and in full each month can help to strengthen your credit score. Your credit score won’t improve overnight, but keeping up with good habits will help your credit in the long run.
Step 2: Decide how much to borrow and calculate your budget
It’s a good idea to figure out how much you can afford to borrow before you take on new debt. By setting up a budget, you can get a good idea of how much you earn each month, where your money is going, and whether you can reasonably take on an additional expense.
Here’s how to figure out whether the loan payment fits into your budget.
- Determine how much you need to borrow. Knowing how much you need can help estimate what a monthly payment may look like. You can also use a personal loan calculator to see what your monthly payment could look like.
- Add up your monthly expenses. These include costs for such things as a rent or mortgage payment, utilities, phone bills, insurance premiums, credit card payments, groceries, gas and entertainment.
- Calculate your take-home pay.
- Subtract your monthly expenses from your take-home pay.
- See how much is left. Is it enough to cover a loan payment each month?
If the loan payment barely fits within your budget, then you might want to consider borrowing less money, requesting a longer loan term or finding a different way to pay.
Step 3: Research and compare lenders
Each lender may offer you different rates or terms depending on their approval criteria, which is why shopping around and prequalifying can be so helpful to find the right loan for you. Prequalification is an application process where a lender reviews the information you’ve shared and gives you a loan offer that you might qualify for. When you get prequalified, the lender will typically perform a soft credit inquiry, which won’t affect your credit scores.
When you’re reviewing your loan options, be sure to compare the following features of each loan:
- APR — This is how much it will cost you to borrow money, including the interest rate and any potential fees. Learn more about APR and why it’s important.
- Loan term — Generally, loans with a longer term have a lower monthly payment. But they could cost more in interest in the long run. Lenders may also only offer certain repayment terms. Make sure to find one that fits in with your budget and timeline.
- Origination fee — Some lenders charge this fee for making a loan.
All of these factors can affect the total cost of your personal loan. Some other factors that may differ between lenders are loan approval timing and funding speed. If you need your loan funded sooner than later, consider looking for loans that offer same-day funding.
You’ll want to weigh which factors are most important to you and choose a lender that best fits those needs.
Step 4: Gather the required documentation
The lender will tell you exactly what you need to submit. Some information might include …
- Monthly housing cost
- ID verification
- Social Security number
- Income verification
Finalizing your loan approval will typically result in a hard credit inquiry — this may affect your credit scores, but shouldn’t do any long-term damage.
Step 5: Complete and submit your application
Once you comparison shop and choose an offer, you can complete your loan application.
Remember, prequalification doesn’t guarantee that you’ll be approved for a loan. You’ll still need to submit additional information to the lender in order to complete your application. Formally applying for a personal loan generally requires a hard credit check, which can temporarily bring your credit scores down.
Step 6: Review and accept the loan offer
Once you’ve submitted your loan application, the lender will review it, decide whether to approve you for the loan, and send you final loan documents if you’re approved. These documents typically detail the terms of your loan, including the interest rate, length of the loan, the loan amount and your monthly payments.
Once you’ve reviewed the details and ensured the loan terms fit your needs, you’ll sign the documents, and your funds will be deposited into your account. With online lenders this can happen quickly, sometimes in as little as a day.
Step 7: Receive funds and manage repayment
Now that you’ve accepted your loan offer, the next step is receiving your personal loan funds. You may receive your funds the same day you’re approved or it may take a few days for your funds to be transferred, depending on your lender. Even if a lender offers same day funding, your bank may also take a few days to process the loan funds.
Once you have your funds, make sure you have a plan to make your monthly payments. Making your payments on time each month can help to build your credit. A good way to ensure you’re making payments is by setting up autopay for your personal loan, so you don’t have to remember to make payments each month.
Bottom line
With so many lenders offering personal loans, it’s in your best interest to shop around and find a lender that will offer you the best terms. People who shop and apply for personal loans online have the highest levels of overall satisfaction among personal loan borrowers, and the majority say they completely understand their loan applications, according to a J.D. Power consumer survey.
FAQs about how to apply for a personal loan
There are two types of personal loans — secured and unsecured. Unsecured personal loans aren’t backed by collateral. The lender decides whether you qualify based on your financial history. If you don’t qualify for an unsecured loan or want a lower interest rate, some lenders also offer secured loans. Secured personal loans are backed by collateral, such as a savings account or CD. If you’re unable to make your payments, your lender typically has the right to claim your asset as payment for the loan.
Creditors may review your credit reports and scores when you apply to open a new line of credit. This typically causes a hard inquiry, which may lower your credit scores by a few points regardless of whether you’re approved or declined.
Personal loans can be a good option for getting cash to help you to consolidate debt or pay for emergencies, like home or car repairs. But before you sign up for a loan, research your lender options — including banks, credit unions and online lenders.
The process for getting a personal loan from a bank may differ from bank to bank. Banks typically offer an in-person or online application process. Some may even offer both options. Approval and funding times may also vary depending on the bank. Some banks may offer same-day funding, and some banks may take a few days to get your funds transferred to your bank. Be aware that certain banks may only offer personal loans to existing and established customers.
How much you can borrow with a personal loan depends on the lender and your credit profile. Some lenders may offer personal loans up to $100,000. But large personal loans are not offered by every lender and may be harder to qualify for.
You can also borrow a relatively small amount in a personal loan. Some lenders offer personal loans as low as a few hundred to a few thousand dollars.
The application process for a personal loan generally doesn’t take very long if you have all of your documents handy. Once you apply, lenders then need time to review your application, which may take up to a week or longer.
Some lenders offer same-day financing upon approval, and some lenders may take a few days to transfer the funds. If you need the funds quickly, check any lender’s funding policy before applying.
*Approval Odds are not a guarantee of approval. Credit Karma determines Approval Odds by comparing your credit profile to other Credit Karma members who were approved for the personal loan, or whether you meet certain criteria determined by the lender. Of course, there’s no such thing as a sure thing, but knowing your Approval Odds may help you narrow down your choices. For example, you may not be approved because you don’t meet the lender’s “ability to pay standard” after they verify your income and employment; or, you already have the maximum number of accounts with that specific lender.