You’ve settled on one of the many valid reasons to get a personal loan and determined that you meet basic personal loan eligibility criteria. Now it’s time for the next step: applying for your secured or unsecured personal loan.
First, you’ll need to lay the groundwork for your application. Here’s how to do that, and what to expect from the personal loan application process.
Preparing to Apply for a Personal Loan
Complete these tasks before sending in your first personal loan application.
1. Check Your Credit Score & Report
Even if you ultimately decide not to apply for a personal loan right now, get in the habit of periodically checking your credit score and report.
Getting Your Free Credit Score and Report
By law, you’re entitled to one free credit report per year from each of the three major consumer credit reporting bureaus. Go to AnnualCreditReport.com to get yours.
For more frequent score updates, create an account with a free credit score subscription service such as Credit Karma. Credit Karma lets you check your credit score whenever you want, without restriction or cost. If you want more robust information, you can also look into products like ScoreSense.
Checking your credit score these ways requires what’s known as a “soft pull,” which is distinct from the “hard” inquiries made by any lender with whom you apply for a new credit account, including a personal loan. A soft pull doesn’t adversely impact your credit score.
What to Do With Your Credit Score
Though it’s not the only factor lenders consider (others include your household income and debt-to-income ratio), your credit score says a lot about your borrower risk profile. Your FICO score, the gold standard for consumer credit reporting, has five distinct components:
- Credit utilization ratio (total revolving debt balances divided by total available revolving credit)
- Repayment history (including timely and seriously late or missed payments on credit accounts going back seven years)
- Length of credit history (the average age of open and closed accounts going back up to 10 years)
- Credit mix (types of credit, including installment loans, credit cards, and retail accounts)
- New credit (volume of recent credit inquiries and newly opened accounts)
If your number isn’t where you’d like it to be, look for near-term opportunities to improve your credit score before applying for a loan. For instance, you might apply for a new credit card to lower your credit utilization ratio and establish a pattern of timely payments. You can also sign up for Experian Boost which will use payment history from your cell phone and utility bills to help improve your credit score.
Getting your credit score is also a good way to set an initial expectation for the personal loan offers you’ll receive. Plenty of personal lenders issue loans to near- and sub-prime borrowers, so a sub-640 credit score won’t necessarily shut you out of the personal loan market. But you should expect any loan offers you receive to carry higher interest rates, lower principal (loan amount), and perhaps less favorable repayment terms than if you had a higher score.
Conversely, if your credit score is better than you expect – say, above 740 – then you’re likely to qualify for favorable rates and terms, and you may be in a position to apply with lenders that exclusively cater to prime and super-prime borrowers, such as SoFi and many traditional bank lenders.
2. Consider the Alternatives
If you’re seeking liquidity, personal loans aren’t the only game in town. Before you send in your first application, research these alternatives:
- 0% APR Balance Transfer Promotions. Balance transfer promotions are generally available to applicants with good to excellent credit. If you qualify, and your borrowing needs are modest enough to both a) come in under your card’s balance transfer limit and b) pay off the borrowed amount in full before regular APR kicks in, this may be your cheapest borrowing option.
- Home Equity Loans and Lines of Credit. If you have sufficient equity in your home – typically at least 15%, or an 85% loan-to-value ratio – you may qualify for a home equity loan or line of credit through Figure.com. Since these products are secured by the equity in your home, they’re less risky than unsecured loans, and their interest rates are lower as a result.
- Secured Loans. For the same reason, secured installment loans are usually cheaper for borrowers than unsecured alternatives. For instance, if you plan to use your unsecured personal loan to purchase a used car, consider applying for a secured vehicle loan through myAutoloan.com instead.
- Regular APR Credit Cards. Carrying credit card debt isn’t ideal, but a low-APR credit card may be the best option for borrowers whose personal loan applications aren’t strong enough to qualify for the lowest rates and terms. If your personal loan offers’ rates are all north of 15% APR, look for credit cards with lower rates before continuing your application.
To determine which of these options is best for you, if any, block out an hour to check your rates and loan terms with a few personal lenders. Compare the results of this exercise, then compare them against the rates and terms offered by the alternatives. You can glean a lot of information this way; credit card disclosure statements are especially transparent and don’t require an application to view.
No matter what you do, avoid high-interest alternatives like pawn shop loans and payday loans. They’re ruinously expensive and prone to trap borrowers in vicious cycles of debt.
3. Assess Your Ability to Repay
Depending on your loan’s structure, your monthly payment may include some or all of the following:
- Interest on the full principal
- An origination fee, calculated as a percentage of the principal and deducted from your loan’s proceeds before funding
- A prepayment penalty for making additional principal payments ahead of schedule or paying off your loan in full
- One-off fees, such as fees for late or returned payments
Use a personal loan payment calculator such as this one from Credit Karma to calculate your total expected monthly payment using different interest rates, principal amounts, and repayment terms.
Your goal is to determine whether you can afford to add a personal loan payment to your monthly budget at all, and if so, the maximum payment you’re comfortable making and for how long. You might decide that early payoff and lower total interest charges justify a shorter-term loan with a larger monthly payment – or, conversely, that lower monthly payments justify a longer term and higher interest payments.
The details matter. For instance, according to Credit Karma, you’ll pay $311 per month on a five-year, $15,000 loan at 9% APR. Shorten the term to three years, and the same loan’s monthly payment rises to $477.
4. Research & Evaluate Lenders
With so much competition for your business, there’s no reason to go with the first lender you find – at least, not simply because you found them first.
Use a credible personal loan resource to find lenders that make the type of loan you seek and work with borrowers who roughly match your credit profile. If you have excellent credit, avoid lenders specializing in sub-prime loans; if you have sub-prime credit, don’t bother with exclusive lenders unless you have a cosigner.
Check your rates with each suitable lender – see Steps 1 through 5 below for more detail on that part of the process. Checking your rates for conditional approval purposes doesn’t affect your credit, so you don’t have to worry about multiple inquiries appearing on your credit report unless you accept and formally apply for multiple loan offers.
5. Organize Your Application Materials
Next, organize all the information and documentation you may need during the application process. In general, you’ll want to have:
- Current and recent contact information (including recent addresses)
- Details about your employment and income, including length of service and employer contact information
- Bank and investment account statements and tax documents going back at least two years (you may not need to provide every single statement or schedule, but have them at hand anyway)
- Information about other liquid accounts, such as taxable investment accounts
- Details about your education, including degree and institution
- Proof of major assets, such as the title to a vehicle you own free and clear (any loans secured by assets, such as mortgage loans or car loans, will be visible in your credit report)
6. Commit to Evaluating Multiple Offers
Block out sufficient time to complete multiple initial applications and evaluate all offers that result.
Once you’re ready, complete your applications in quick succession to maintain momentum and reduce the likelihood that you’ll relegate this process to the back burner. While researching this post, I completed six initial applications and reviewed about 10 credible loan offers. All told, I spent a little over two hours on the process – not the most fun way to spend an evening or weekend morning, perhaps, but not outrageous, either.
Pro tip: You can use a website like Credible.com to get personal loan rates from multiple lenders in just minutes.
Personal Loan Application Process
Once you’ve laid the groundwork, expect the application process to unfold in three parts:
- Checking Your Rate. This initial stage comprises Steps 1 through 5 below. In some cases, the “checking your rate” phase is perfunctory, with just a few basic questions. In others, it’s far more extensive, with detailed inquiries about your employment, income, assets, and credit utilization. However, no matter how extensive, you shouldn’t have trouble completing this stage in one sitting.
- Weighing Your Offers. This stage comprises Step 6. For some lenders, you may see just one offer per application; for others, you may need to weigh several at once. Either way, increase your offer choice – and, hopefully, offer quality – by completing the rate-checking process with several lenders.
- Making Your Application Official. Consisting of Steps 7 through 9, this final phase is almost always the longest part of the application process. It begins when you accept an offer and consent to a credit inquiry, continues through an underwriting process, during which you’ll be asked to supply detailed documentation to back up your claims, and ends with – fingers crossed – the balance of the loan deposited into your funding account.
Here’s more on what to expect from your personal loan application. This is a general, high-level guide only; every personal loan provider is different, so the information here might not line up with the exact questions you’re asked to answer or documents you’re required to provide during the application process.
Step 1: Specify Your Loan Purpose, Desired Principal & Desired Term
First, you’ll be asked to set your loan’s parameters. Usually, this entails:
- Loan Purpose. Common purposes include debt consolidation, home improvement, and business expenses. You should already know why you’re applying for the loan by this point.
- Principal. This is your loan’s gross funding amount – the initial balance on which you pay interest. If your lender charges an origination fee, your actual funding amount may be smaller.
- Repayment Term. This is the period over which you’ll repay your loan, usually monthly. Personal loan terms commonly range from two to five years, but terms as short as one year and as long as seven years are possible.
Don’t expect to have any say over your loan’s interest rate or origination fee; these are determined by the lender and dependent on your borrower profile.
Step 2: Provide Your Contact Information & Personal Details
You’ll need to provide:
- Your name
- Your mailing address (and past addresses, if you’ve lived at your current address for less than five years)
- Your phone number and email
- Your preferred contact method
- Your Social Security number
You may need to provide additional information, such as your spouse’s name and your mother’s maiden name, at this point or later in the application.
Step 3: Answer Basic Questions About Your Employment & Income
This section covers your:
- Employment Status. The list varies by lender, but you can generally specify whether you’re traditionally employed, self-employed, employed as an independent contractor, or own a formally incorporated business.
- Personal Income. This is the income you earn as an individual from employment or business activities and certain other sources, such as taxable investments. You can exclude certain types of income, such as child support and alimony.
- Household Income. This is your total household income. If you’re married or in a domestic partnership, you’ll generally include your partner’s income, minus any sources you’re not required to report.
Some lenders ask for more detail about your employment. For instance, traditional employees might need to provide their employer name, contact details, title, and length of service. Business owners might need to name their business, specify total revenue, and indicate how long they’ve been in business. Be prepared to back up your answers with documentation later in the process.
Step 4: Answer Questions About Your Education
You’ll almost certainly be asked to reveal the level of education you’ve attained: high school diploma, some college, associate’s degree, bachelor’s degree, graduate degree. Some lenders ask for more detail, such as:
- Your undergraduate, graduate, and professional schools, if applicable
- Your graduation year(s)
- Your degree
- Your outstanding student loan balance (this may come up in the next step)
Step 5: Answer Questions About Your Financial Profile
This final step in the “checking your rate” stage involves basic questions about your financial situation. To be clear, your lender will thoroughly examine your credit report and financial details after you accept a loan offer, but you may need to give an overview before checking your rate. Expect to be asked about:
- Your liquid assets, including cash reserves and taxable securities accounts
- Tangible assets, such as your home and vehicle(s)
- Your credit profile, including loan types and balances
Depending on the lender, these questions may be cursory at this point. But it’s important to be honest; the lender will confirm these details when they run your credit, and any discrepancies could jeopardize your application.
Step 6: Evaluate Your Offers
Most online lenders accept or reject borrowers’ initial approval questionnaires within minutes after they’re submitted.
If you’re conditionally approved for a loan, you’ll receive one or more formal loan offers. If the information you’ve provided doesn’t meet the lender’s standards for approval, you may be:
- Asked to provide additional information
- Directed to apply with one of the lender’s partners (where underwriting standards may be lower or more appropriate for certain types of borrowers)
- Told that you don’t meet the lender’s borrowing standards
If you’re applying with a multilender network, such as Credible, you may receive:
- Multiple offers from multiple lenders
- One or more offers from a single lender deemed best suited to your borrower profile
In either case, you’ll want to research each lender to confirm that they’re on the up and up.
Reading a Truth-in-Lending Disclosure
By law, every personal loan offer must include a Truth-in-Lending (TIL) disclosure, a plain-English disclosure form mandated by law and regulated by the Consumer Financial Protection Bureau.
Your offer’s TIL disclosure should include:
- Total Finance Charge. This is the total amount you’re obligated to pay over the life of your loan.
- APR. Your annual percentage rate (APR) is your loan’s annualized cost, including interest and fees such as your origination fee. Your APR is not just your interest rate; it’s likely to be higher than this, perhaps significantly.
- Amount Financed. This is the total amount you’re borrowing. Your loan’s origination fee, if any, is subtracted before your loan is funded, but you still pay interest on the full amount financed.
- Total Payments. This is the sum of your finance charges, principal repayments, and non-optional fees. For example, a loan with a $10,000 initial loan amount and $2,000 in finance charges has a $12,000 total payment.
- Payment Schedule. This section lays out your payment amounts and dates. Payments are always fixed and usually made monthly.
- Fees. This section lays out additional fees that the lender may charge under certain circumstances, such as late payment fees.
- Prepayment Policy. This section outlines any penalties you’ll incur for early payment. Many personal loans don’t have prepayment penalties, but they can be significant where they do exist.
Step 7: Accept a Loan Offer
Take your time with this step. Your loan offer will probably have an expiration date – a common pressure tactic – but it’s not an official cutoff date. Some lenders try to win over fence-sitters with more enticing offers – such as lower interest rates or longer repayment terms – a few days or weeks after the initial query.
If you’ve applied with multiple lenders, do your due diligence on each one and consider each offer carefully. Know that accepting an offer and beginning the formal application process means consenting to a hard credit pull that will likely knock down your FICO score by a few points.
Step 8: Provide All Requested Documentation
Don’t confuse your acceptance with your lender’s approval. Your lender still needs to run your credit and examine your finances, and you can expect to be called upon to back up statements you made during the qualification process. This could mean:
- Providing pay stubs, tax returns, or bank account (or credit union account) statements as proof of income and employment (self-employed applicants generally face more scrutiny than traditional employees)
- Providing checking account and investment account statements as proof of liquid reserves
- Providing information about your spouse’s finances, if necessary
If you plan to accept funding by direct deposit, you’ll also need to provide funding account information.
Step 9: Respond Promptly to Lender Communications
The origination process begins when you accept the loan offer. Depending on the lender and your credit profile, this process can take anywhere from one business day to longer than a week.
During this period, you may hear from the lender, often because they’re requesting additional documentation and sometimes because a more complicated issue needs clarification. Respond promptly to all such requests. Be sure to specify your preferred communication method; if you rarely check your email, don’t make your email address your primary point of contact.
Applying for a personal loan isn’t as tedious as applying for a mortgage loan, but it takes time nevertheless – at least several days from the moment you begin your research to the day your approved loan is funded.
The process has plenty of off-ramps. After familiarizing yourself with the best personal loans on the market and checking your credit score, you may conclude that your loan can wait until you’ve shored up your borrower profile. Following conditional approval, a close read of your loan’s Truth-in-Lending disclosure may give you pause. A last-minute 0% APR balance transfer offer may outshine the higher-interest personal loan you’re considering.
Whatever your circumstances, treat the process of applying for a personal loan with the gravity it deserves. The last thing you need, months or years down the road, is a crushing obligation you can’t afford to repay.