How to get a personal loan

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In a Nutshell

A personal loan could be a good option if you’re looking for a way to consolidate debt or pay for a sudden expense. Plus, as you pay it back you could help build a positive credit history. Once you know how to apply for a personal loan, you can decide if getting one is right for you.

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There are a few steps to take when you’re looking into getting a personal loan. Whether you need money for debt consolidation, a home improvement project or an emergency expense, taking out a personal loan can help you pay for different things — and it can be relatively simple to apply.

Personal loans are a type of installment loan, which means you borrow a set amount of money upfront and pay it back in installments, with interest, over a period of time.

Financial institutions — including online lenders, banks and credit unions — offer personal loans. The amount you qualify for and your terms will vary based on a number of factors, including your credit health.

Like a roadmap that helps you navigate a new city, having a plan to apply for a personal loan can help you find the best options for you. A good plan should include how you’ll use the money, the amount you need and how much you can afford to pay back every month.

Here are some steps to take when you want to get a personal loan and are getting ready to apply.


  1. Check your credit
  2. Apply for prequalification
  3. Compare loan offers
  4. Apply for a personal loan
  5. Review the terms
  6. Close on the loan

Step 1: Check your credit

Your credit scores, combined with other factors, can affect your approval odds for a personal loan.

You can request one free credit report every 12 months from each of the three major consumer credit-reporting bureaus — Equifax, Experian and TransUnion — by visiting AnnualCreditReport.com.

You can also use Credit Karma to check your Equifax® and TransUnion® credit reports and monitor your VantageScore® 3.0 credit scores from Equifax and TransUnion for free year-round.

Although it’s important to know your credit scores, there are other factors that affect the terms of your personal loan. A low debt-to-income ratio, or DTI, which is a comparison of your income to your outstanding debt obligations, might improve your chances of getting approved for a personal loan with a lower interest rate. To get an idea of the DTI that a lender might see, use your credit reports, which show your account balances, to calculate your debt-to-income ratio.

A borrower with good-to-excellent credit, a good debt-to-income ratio and a steady income may be seen by potential lenders as a good candidate for a personal loan.

By checking your credit reports and ensuring the information on them is correct and up to date, you’ll be able to talk to lenders with confidence.

Step 2: Apply for prequalification

Getting prequalified gives you a sneak peek into the personal loan offers you might qualify for.

Many lenders can do a prequalification check by performing a soft credit inquiry, which won’t affect your credit. They may also ask for your income, monthly debt obligations and personal information like your Social Security number.

If you get prequalified for a personal loan, you’ll have a better idea of what a lender may be willing to offer you — but remember, prequalification isn’t a guarantee.

FAST FACTS

Work to boost your chances of getting approved

You may not qualify for a loan if, among other factors, your income or credit scores are lower than what the lender requires or if your debt-to-income ratio is considered too high. If there is room for improvement on your credit health, here are a few steps you can take.

  • Reduce your debt: Reduce credit card spending and pay down debt to improve your debt-to-income ratio.
  • Pay your bills on time: Payment history is one of the major factors influencing your credit scores. So if you haven’t consistently paid your bills in the past, focus on paying your bills on time.
  • Don’t close unused credit card accounts: One element of your credit scores takes into account the length of time you’ve used credit. Keeping an account open for a long time can benefit your scores. It can be a good idea to keep card accounts open unless they have an annual fee you can’t afford.
  • Don’t apply for other loans or credit: Opening too many credit accounts in a short period of time may make you seem like a risky borrower. If you can avoid it, try to stick to just applying for one thing at a time.

Step 3: Compare loan offers

Make a list of the best personal loans you find. Include the financial institution, loan amount, annual percentage rate, whether the interest rate is fixed or variable, loan term, fees and total interest paid over time.

This will help you determine the offer that works best for you.

The average interest rate for a two-year personal loan from a commercial bank is 10.7%, according to Federal Reserve data from the fourth quarter of 2018. It’s common to see personal loans that range from $2,000 to $50,000.

Step 4: Apply for a personal loan

Once you’ve found the lender and loan that fit your needs, fill out the loan application.

You’ll typically need to supply an official form of identification, address verification and your income. The lender will perform a hard credit inquiry, which may briefly lower your credit scores by a few points.

Step 5: Review the terms

Reading your loan agreement may sound like a snooze fest, but you need to know what you’re promising before taking on debt.

Make sure you understand the monthly payment, interest rate, fees, whether the lender can change the loan terms (and when), and how much interest you’ll pay over the life of the loan.

If there’s anything you don’t understand, ask the lender to explain it. Need a quick primer? Check out our guide on the personal-loan terms to know.

Step 6: Close on the loan

Once you understand and are comfortable with all of the loan details, sign on the dotted line. If you’re consolidating debt, the lender may pay off the accounts for you or send the money directly to your bank account — often within a business day or two.

After closing on your loan, you can use the funds as planned and begin making your scheduled loan payments.


Bottom line

Getting a personal loan can help you consolidate credit card debt and finance expenses with a low interest rate, and using one responsibly can also help you build credit.

Having a mix of credit types, making on-time payments and lowering your credit utilization can all help improve your credit health. As you pay back your loan, check your credit scores to see whether your creditworthiness is improving.

If you’re able to put in the work and improve your credit, the next time you need to apply for credit you may find that you qualify for better rates.