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.
Applying for a personal loan is a multistep process. Depending on your personal creditworthiness, your loan’s purpose, your preferred lender, and other factors, it can take anywhere from a few days to a few weeks.
How to Get a Personal Loan
This process comes with no guarantees that you’ll be given the loan in the end. But following these steps and keeping some ground rules in mind can increase your chances of success.
1. Calculate How Much You Can Afford to Pay
First, you need to determine what you can afford to borrow. This means crunching the numbers and arriving at the maximum monthly payment your budget can bear.
Your loan’s monthly payment depends on several factors:
- Principal. This is your loan’s gross funding amount, or the initial balance on which you pay interest. The higher the principal amount you borrow, the higher the monthly payment.
- Origination Fee. This is a fee some lenders charge to cover their operating costs and lock in additional profit upfront. If your lender charges an origination fee, your actual funding amount is smaller than the principal.
- 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 (24 to 60 months), but terms as short as one year and as long as seven years are possible. The longer the repayment period, the higher the monthly payment.
- Interest Rate. Your interest rate is a function of your perceived risk of defaulting on the loan. The lower your credit score, the higher your interest rate. And the higher your interest rate, the higher the overall cost of the loan.
Depending on your loan’s structure, your monthly payment may also include:
- 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
How to Calculate Your Personal Loan’s Monthly Payment
Use a personal loan payment calculator such as the 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.
2. Check Your Credit Score
In the context of applying for a personal loan, your credit score is a crucial determinant of what’s possible — and how much it’ll cost you. The relationship between your credit score and interest rate is inverse — a higher score means a lower rate and vice versa.
So, before you apply for your loan, find out where you stand by 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
Although 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, put your loan application on the back burner and look for near-term opportunities to improve your credit score.
For instance, you might apply for a new credit card and pay it off in full each month 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 cellphone 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 subprime 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.
3. Get Prequalified
- Your loan’s intended purpose, such as debt consolidation or home improvement
- Your desired loan amount (although your actual offer may be lower than your goal)
- Your approximate credit rating
You may also be asked to provide general information about your income and assets. Before getting too far into the process, you’ll need to provide an email address and confirm your identity as well.
Once you’ve confirmed your identity, you’ll move into the heart of the prequalification process. Expect to answer specific questions about your identity, income and employment, educational attainment, and financial situation (assets and credit history). At part of this process, you’ll need to consent to a soft credit pull that won’t affect your credit score.
Questions About Your Identity
This section covers basic information about who you are and where you’re from. You should know most of it by heart:
- Your name and any aliases or former names
- Your current mailing address and past addresses, if you haven’t lived at your current address for very long
- Your phone number and email
- Your Social Security number
You may also need to provide additional information, such as your spouse’s name and your mother’s maiden name.
Questions About Your Income and Employment
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.
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)
Questions About Your Financial Profile
This final step in the prequalification 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 and formally apply, 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 vehicles
- Your credit profile, including loan types and balances
- Whether you plan to use a cosigner for your loan
Depending on the lender, these questions may be cursory at this point; the real work comes during the actual application process. But it’s important to be honest because the lender will confirm these details when they pull your credit report. Any discrepancies could jeopardize your application.
4. Compare Loan 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, research each lender to confirm that they’re on the up and up. Then, compare each offer you receive.
Reading a Truth-in-Lending Disclosure
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 due 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.
Using the information in each TIL, you’re now ready to evaluate your options, choose the one that best fits your needs, and formally apply.
5. Gather Application Documents
The personal loan application process goes much more smoothly when you have all the necessary documentation in hand. Before putting in your application, gather everything you’ll need to back up the claims you make on your loan application. This may include:
- Pay stubs and bank account statements
- Recent tax returns (more likely to be required if you’re self-employed)
- Other asset-related information, such as securities account statements and vehicle titles
6. Apply for the Loan
You’re now ready to pull the trigger and accept a loan offer, but don’t rush.
True, your loan offer will probably have an expiration date — a common pressure tactic — but it’s not an official cutoff date. And it could pay to wait because 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.
What to Expect After Applying for Your Loan
First, 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.
Second, know that the application process doesn’t end when you hit “Send” on your initial application. It continues until the lender officially approves your application and your loan closes.
Before approving your loan, the lender needs to run your credit and examine your finances. 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
- Confirming funding account information
Again, you’ll find it much easier to address these requests if you have all your required documentation on hand.
7. Close on the Loan
Sooner or later, your lender makes an up-or-down decision about whether to approve your loan. If the news is good, you move onto the final step in the process: closing on the loan.
Closing on a personal loan is easier than closing on a house. There’s much less paperwork involved. But you still need to e-sign important documents that formalize your obligation to your lender and codify your promise to repay.
You also need to set up monthly payments — autopayments from your primary bank account work best and may qualify for an interest rate discount, usually 0.25%.
Once all that’s done, the ball is in the lender’s court. Depending on the terms of your loan and the lender’s policies, expect to receive the loan’s proceeds — less the origination fee, if any — in your funding account within a week. Some loans take as little as 24 to 48 hours to fund.
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.