A personal loan is a type of loan with various uses, including debt consolidation, medical bills, student debt, home repairs, funeral costs and other personal expenses.
Before applying for a personal loan, it’s important to note the various steps to get a personal loan. Different lenders may have different requirements and processes. So, it’s smart to research and compare lenders to find the best deal.
A personal loan is a credit product taken out from a bank, credit union or another type of lender. It can be used for various purposes, such as debt consolidation, home improvement projects, student loans and other personal expenses.
There are various steps involved in getting a personal loan. The process typically includes calculating the loan amount needed, determining the qualification requirements, shopping around for lenders and applying for a personal loan.
Lenders typically allow borrowers to choose a fixed interest rate and long repayment terms, which helps with money management. Additionally, you can get the funding in a lump sum immediately. Some lenders even release funds the same day the loan is approved.
What Is a Personal Loan?
A personal loan is a type of credit product known for its versatility. It can be used for just about anything. Depending on the borrower’s needs, a personal loan can be taken out for debt consolidation, home improvement projects and even student loans. It can also be for personal expenses like tax debt repayment, moving costs, medical expenses and funeral costs. That said, it’s wise to always weigh the pros and cons before deciding to get a loan.
While a personal loan is typically an unsecured loan with no collateral, there are certain cases when it could be considered a secured loan. This is usually the case when a valuable asset like a home or a vehicle is involved.
Requirements for getting a personal loan vary depending on the lender. However, the lender will always assess the borrower’s credit score and income. Personal loans can also be considered short-term loans offered by banks, credit unions and private lenders. They usually have loan terms ranging from 24–60 months but can extend longer.
Like a home mortgage or a car loan, a personal loan must be repaid in monthly installments. Rates and fees vary from lender to lender.
Four Steps to Getting a Personal Loan
Applying for a personal loan will take more time than applying for credit. This is because the borrower needs to submit documentation. That said, the application process for getting a personal loan is significantly faster than applying for a home equity line of credit (HELOC).
While the requirements that borrowers need to meet may vary based on the lender, there are general steps that should be taken by an applicant. Below is a simple guide to help you get started.
Step 1: Calculate How Much You Need
No matter the loan you’re getting, it’s important to always run the numbers first. Evaluate your needs and determine the loan amount based on that. You should also think about the repayment.
A loan is a big financial responsibility. Aside from the money you borrow, you’d also have to pay off the interest. So, make sure you only borrow what’s necessary.
Borrowing more than needed can land you in a debt trap. The best way to determine the right loan amount is to determine what it’ll be used for. While a personal loan can be used for any purpose, it’ll help if the borrower already knows where the money is going.
Let’s say you want to do some major upgrades to your home. It makes sense to crunch the figures first to see how much you’ll need to complete the project and what it will cost to pay off the loan over time with interest.
It’ll help you get a rough estimate of how much your monthly payments are going to be. Play around with the numbers to compare different terms and loan amounts. Using a personal loan calculator can also give you a general idea of how much you’ll need to shell out to repay the loan amount.
Keep in mind that lenders may offer different interest rates and repayment terms, so you probably won’t always get the same estimate. Using a personal loan calculator will at least give you a helpful benchmark.
Find out what fees are involved. For example, some lenders charge an origination fee. It’s a one-time fee that borrowers need to pay to take out a loan.
Ask the lender how much the origination fee is. You need to know the amount, as this fee is often deducted from the loan proceeds. It’ll also help you make sure you borrow just enough so that even with the origination fee deducted, the loan proceeds will be enough to achieve your goals.
Step 2: Find Out if You Qualify
The requirements to apply for a personal loan vary per lender. Thus, it’s important to check first whether you’re eligible for a loan. Generally, lenders will consider your credit score, income and debt-to-income (DTI) ratio. But there may be additional requirements specific to a lender.
You should check your credit score first. As a rule of thumb, lenders typically look for a fair credit score, at minimum, which is a score between 580–669. Having a higher credit score gives you a better chance of getting favorable interest rates.
You can request a free copy of your credit report online from AnnualCreditReport.com. Another option is to call (877) 322-8228. You may also request your report by mail. Download and fill out the form from the agency’s website. Then send it to the address below.
Annual Credit Report Request Service
P.O. Box 105281
Atlanta, GA 30348-5281
You can get a free credit report every 12 months from the major consumer reporting companies — Equifax, Experian and TransUnion.
Lenders have income requirements to ensure that the borrower is capable of paying back the loan. The minimum required income varies per lender. In some cases, the lender may opt not to disclose their income requirement.
You may have to submit documents that will prove your income. These can include bank statements, tax returns or pay stubs from employers.
Your DTI ratio represents how much of your gross monthly income goes to your monthly debt service. It’s represented by a percentage. Lenders use DTI to determine whether a candidate can repay the new loan. To calculate your DTI ratio, you must divide your total monthly debt payments by your gross monthly income. Multiply the result by 100 to get the percentage.
While the required DTI may vary per lender, the ideal is usually 43%. That’s typically the highest ratio someone can have and still get a mortgage loan.
Step 3: Shop Around for Lenders
Do your research and compare deals from different lenders. Doing this will help you find the lender with the best offer suitable for your needs and goals.
Lenders may ask about the amount you want to borrow. This will help them narrow down your loan options after conducting a soft credit check.
Don’t jump on the first offer you see. Compare rates and assess offers from various lenders. You can start your search from banks, credit unions and private lenders offering different personal loan types. Generally, you would want to go for a lender with competitive rates.
Depending on the lender, applicants may get prequalified with a soft credit check. You can take advantage of this offer to understand what types of loans you qualify for. Note that a prequalification doesn’t automatically mean you get approved for a loan.
Once you’ve narrowed down the lenders you think will offer the best deals, determine which ones are most likely to grant you a personal loan. You can do this by checking if you are prequalified. Prequalification means you fit the general financial profile of the borrowers who have gotten approved loan applications from the lender in the past.
Most lenders will offer to see if candidates prequalify. The process involves completing a form, which asks for basic information about the borrower, their income and the amount they need to borrow. Once the lender receives the form, they will do a soft credit inquiry to see if the applicant has prequalified for the loan or not.
Before finalizing your decision, read the fine print. Read thoroughly the terms enclosed within the loan and ensure you understand them. Some important factors you can focus on are the different fees, such as origination fees, late payment fees and prepayment penalties.
You may also want to look into automatic payments. A lender can automatically withdraw loan payments from your checking account. Some lenders offer discounts for auto payments.
Consider setting up a low-balance alert to avoid overdraft fees or charges for insufficient funds.
Step 4: Apply for a Personal Loan
Once you’ve chosen the lender and determined the right loan amount, the next step is to apply for a personal loan. Prepare the necessary documents. If you’ve gone through prequalification, you may find details on additional documentation you may need for the actual application.
After selecting the offer that you think is best for you, gather all the necessary documentation. Typically, lenders request different types of documents to process loan applications.
Some of the most common documents required include the following:
- Completed loan application form
- Proof of identity (driver’s license, passport and other IDs)
- Income verification
- Proof of address
These are only some examples. Your lender may have additional requirements. Make sure you clarify these with them to prevent any issues or delays with your application.
After compiling all required documents, prepare to go through the application process. Depending on the lender, you may finish the process online and simply wait for the approval. Other lenders, however, may require applicants to appear in person at their nearest branch.
The funding time after receiving approval may also vary depending on the lender. For instance, banks and credit unions tend to disburse funds on the same day or after several days. Clarify this with your lender so that you know when to expect the money.
Funding depends on the lender and borrower. Typically, the money will be deposited directly in your account. Borrowers who opt out of direct deposit may receive a paper check by mail.
Keep track of payment deadlines to avoid late fees. You may sign up for auto-payment to make sure that you’ll make monthly payments even if you forget. Some lenders may even offer discounts to borrowers who sign up for autopay.
Creating a plan to set up monthly payments can also help you budget your money.
Pros & Cons of Getting a Personal Loan
As with other types of loans, some benefits and drawbacks come with personal loans. It’s important to remember that a loan is a big financial responsibility. Make sure you weigh the pros and cons before proceeding with an application.
Pros of Getting a Personal Loan
Getting a personal loan can be easy. You can finish the application process and receive approval fast. Additionally, personal loans offer many advantages. Here are some of them:
- Fast Funding: Lenders usually allow borrowers to get the money quickly. In some cases, it’s possible to get the funds as soon as the same day the loan is approved.
- Lump Sum: The loan amount is disbursed in one lump sum. This is particularly beneficial for people needing immediate access to a large amount.
- Fixed Interest Rate: Typically, personal loans come with fixed interest rates. This makes it easier to predict monthly payments and budget your money.
- Fair Terms: Depending on the loan amount and lender, you may get longer repayment terms. This helps you plan your payments.
- No Collateral: Most personal loans are unsecured loans. That means you don’t need a form of collateral like your vehicle or home to get a loan.
Cons of Getting a Personal Loan
Despite the many benefits that a personal loan offers, there are also drawbacks you need to be aware of. Here are some of them:
- Credit Qualification: Depending on the lender, it can be difficult to qualify for a personal loan if you have a low credit score. Lenders typically require a fair credit score (580–669).
- Fees: Some lenders charge fees, such as origination fees, late payment fees and early repayment penalties.
- Higher APRs: The interest rates for personal loans tend to be higher than for secured loans. That’s because they are often not backed by collateral and are considered riskier.
- No Co-signers: Some lenders don’t allow co-signers. That means the lender only checks the applicant’s credit score and history to see if they qualify.
Frequently Asked Questions About Personal Loans
Personal loans can be challenging to navigate. MoneyGeek answered some commonly asked questions to make finding a high-quality lender easier.
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