How to Get a Personal Loan in 2024

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ByChristopher Boston
Reviewed byAlvin Yam, CFP
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ByChristopher Boston
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Reviewed byAlvin Yam, CFP
Edited byCasie McCoskey
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Updated: February 27, 2024

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Imagine suddenly needing to cover a hefty medical bill or wanting to merge various high-interest credit card debts into a single, more manageable payment. In these situations, getting a personal loan can be a practical option. It’s a sum of money borrowed from a financial institution that you pay back in monthly installments over a set period.

Before applying for a personal loan, it’s helpful to understand the various steps to navigate the process. Doing so not only simplifies the borrowing process but also empowers you to make informed decisions that can positively impact your financial future.

Key Takeaways

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A personal loan is a credit product from a lender that you can use for many purposes, such as debt consolidation, home improvement, student loans and other expenses.

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Typically, the process of getting a personal loan includes calculating the loan amount you need, determining if you qualify, comparing lenders and applying.

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Opting for a fixed interest rate and long repayment terms can make repayment more manageable. You can often get your funding in a lump sum immediately.

How Personal Loans Work

Unlike specific-purpose loans like mortgages or auto loans, a personal loan provides the flexibility to use the money for almost any personal need. Most personal loans are unsecured, meaning they don’t require collateral and are based on creditworthiness, but some are secured, which requires some form of collateral.

When you apply for a personal loan, the lender will determine how much money you can borrow and at what interest rate based on your credit history and financial situation. Loan amounts can vary widely, but they’re typically between $1,000 and $100,000. The repayment term, the time you have to pay back the loan, can also vary from 12 to 60 months, depending on the loan amount and the lender's terms.

Monthly payments are calculated based on the amount borrowed, the interest rate and the length of the loan. Consider how these payments fit into your budget, as failing to make payments can negatively impact your credit score and lead to additional fees, which add to the cost of borrowing.

Common Reasons to Get a Personal Loan

Personal loans are flexible, allowing you to use the funds for almost any purpose. The adaptability of these loans makes them a go-to financial solution for various needs, catering to individual situations without the constraints often associated with more specific types of loans. Consumers frequently turn to personal loans to help with the following goals and circumstances:

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    Debt Consolidation

    Consolidating debt with a personal loan can simplify your finances by combining multiple debts into a single, manageable payment. This strategy often results in lower interest rates compared to high-interest credit cards, potentially saving you money over time. It also helps in improving credit scores by reducing credit utilization ratios.

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    Home Renovations

    A personal loan provides homeowners with the necessary funds to improve or repair their homes without tapping into their home equity. This can be particularly appealing for new homeowners who may not have enough equity in their homes. The fixed repayment terms allow for predictable budgeting for the project costs.

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    Medical Expenses

    Unexpected medical bills can be overwhelming, and a personal loan offers a way to cover these costs immediately while allowing for repayment over time. This can relieve the stress of finding the funds on short notice. Additionally, it prevents the need to use high-interest credit cards, making it easier to manage health care expenses.

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    Major Purchases

    Whether buying a new appliance or financing a dream wedding, a personal loan can provide the upfront cash needed for significant expenses. A personal loan allows for immediate purchase by offering a lump sum, avoiding the wait to save up the full amount. The clear repayment plan aids in fitting this large expense into one's budget without financial strain.

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    Emergency Expenses

    Life's unpredictability can lead to sudden financial needs, such as urgent home repairs after a natural disaster or immediate travel due to a family emergency. A personal loan can provide a swift solution, offering the necessary funds to address these unexpected costs right away. This quick access to cash allows you to manage emergencies efficiently, alleviating financial stress by spreading the cost over a manageable period.

Steps to Getting a Personal Loan

Navigating the path to getting a personal loan involves several key steps. Understanding this process makes for a smoother application experience and ensures you get a loan that fits your needs. Below is a simple guide to walk you through these steps.

Step One: Calculate How Much You Need

Before diving into the process of getting a personal loan, determine exactly how much you need. This step helps prevent you from borrowing more than necessary, which can lead to unnecessary debt.

A personal loan is a significant financial commitment, requiring regular monthly payments over an agreed period. Borrowing more than you need can strain your budget and affect your long-term financial health.

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    Determine Your Loan's Purpose

    Knowing the specific reason for the loan, be it debt consolidation, home renovation or covering an emergency expense, helps you tailor the loan to fit your exact needs. For instance, if you're looking to consolidate debt, calculate the total sum needed to pay off your existing debts.

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    Use a Loan Calculator

    Using a personal loan calculator can help you understand the financial implications of a loan before committing. Most of these online tools allow you to input different loan amounts, interest rates and repayment terms to see how they affect your monthly payments and the total interest paid over the life of the loan.

    By experimenting with these variables, you can compare various scenarios and find a loan structure that aligns with your budget and repayment capabilities.

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    Know the Fees

    Different lenders may charge various fees at differing costs. These fees, such as origination fees or prepayment penalties, can significantly impact the total amount you end up paying back.

    Researching the fees associated with a personal loan allows you to calculate the true cost of borrowing. This helps determine the exact amount you need to borrow, ensuring that you cover not only your primary financial need but also any additional charges, leading to a more informed and financially sound borrowing decision.

Step Two: Determine Your Eligibility

Lenders often have varied eligibility criteria for personal loans. For example, while some may require a minimum credit score of 650, others might accept lower scores but with higher interest rates.

Knowing your eligibility helps avoid unnecessary applications to lenders whose criteria you don't meet, saving time and potentially protecting your credit score from the impact of multiple hard inquiries. It also directs you toward lenders who are more likely to approve your application, increasing your chances of successfully obtaining a loan tailored to your financial situation.

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    Check Your Credit Score

    Your credit score plays a significant role in the personal loan process, influencing a lender's decision to approve your loan and affecting the interest rate and terms offered. Lenders often look for a fair credit score, at minimum, which is a score between 580 and 669. That said, having a higher credit score gives you a better chance of getting favorable interest rates.

    To check your credit score, you can obtain a free copy of your credit report annually from AnnualCreditReport.com. This report is provided by the three major credit bureaus — Equifax, Experian and TransUnion. It gives you a detailed overview of your credit history and score, enabling you to gauge your standing with potential lenders and understand your likelihood of loan approval.

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    Determine Income Requirements

    Lenders set income requirements for personal loans to ensure that borrowers have the financial capacity to repay the loan. These requirements vary from one lender to another, and some may not explicitly disclose their minimum income threshold.

    To prove your income during the application process, you'll typically need to provide documentation such as recent pay stubs, tax returns or bank statements. These documents give lenders a clear picture of your earnings, helping them assess your ability to manage the monthly loan payments alongside your other financial obligations.

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    Calculate Your DTI Ratio

    Your debt-to-income (DTI) ratio helps lenders assess your ability to manage and repay the new loan. An ideal DTI ratio for personal loans is typically below 36%, although some lenders may accept higher ratios.

    To calculate your DTI ratio, divide your total monthly debt payments (like credit card bills, existing loans and mortgage) by your gross monthly income. Multiply the result by 100 to get the percentage. A lower DTI ratio indicates a better balance between debt and income, making you a more attractive candidate for lenders.

Step Three: Shop Around for Lenders

Different financial institutions, including banks, credit unions and online lenders, offer personal loans with varying terms and interest rates. Shop around and compare these offers to find the best loan that fits your financial needs.

By doing so, you can ensure you're getting a loan with the most favorable terms, such as lower interest rates and fees that align with your financial capabilities.

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    Know Your Lenders

    You can obtain a personal loan from banks, credit unions or online lenders, each with distinct benefits and drawbacks. Banks are known for their reliability and comprehensive services but often have stricter eligibility criteria and longer processing times. On the other hand, credit unions may offer lower interest rates and more personalized services, but you need to be a member to access their loans.

    Online lenders provide convenience and faster approval times, making them ideal for those who need quick funding. However, they might have higher interest rates and less personalized customer service. Understanding these differences helps you choose a lender that best aligns with your financial situation, whether you prioritize lower rates, convenience or eligibility requirements.

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    Get Prequalified

    Some lenders offer the option to prequalify for a personal loan, which provides an early glimpse of the loan terms you might receive, including the potential interest rate, without impacting your credit score. Prequalification typically requires you to submit preliminary financial information to the lender, such as your income, debts and employment status.

    Through this process, you gain insight into whether you're likely to be approved and under what terms, allowing you to compare offers from different lenders more effectively.

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    Compare Rates and Offers

    As a rule of thumb, don’t jump at the first loan offer you receive. Comparing interest rates and offers from different lenders is beneficial as it can lead to significant savings and more favorable loan terms.

    As of November 2023, the average interest rate is 12.35% for a two-year personal loan. Because each lender has unique interest rates, fees and terms, you’ll want to find the best match for your financial situation. By shopping around, you can identify the loan with the lowest possible cost and terms that align with your repayment ability.

Step Four: Apply for a Personal Loan

Once you've selected the lender and determined the appropriate loan amount, you can apply for your loan. Knowing what information and documents to submit will prepare you for a smooth application process. This typically includes personal identification, proof of income, employment verification and credit information.

Proper preparation and organization of these documents not only expedites the application process but also reduces the likelihood of delays and increases your chances of a successful loan approval.

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    Prepare Your Documents

    Lenders require certain documents that provide verifiable information about your identity, income and financial stability. These help lenders determine your creditworthiness and ability to repay the loan. Common documents required by most lenders include:

    • Completed loan application form
    • Proof of identity (driver’s license, passport and other IDs)
    • Income verification
    • Proof of address
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    Apply and Get Approved

    Depending on the lender's offerings and your preferences, you can apply for a personal loan online or in person. The convenience of online applications makes them a popular choice, allowing for a quick and easy submission process from anywhere. In-person applications, typically at a bank or credit union, might be preferred by those seeking more personalized assistance.

    The time it takes to get approved varies among lenders. Online lenders often provide faster decisions, sometimes within a day or even instantly. Due to more comprehensive review processes, traditional banks and credit unions may take several days to a week.

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    Receive the Funds

    Upon approval of your personal loan, most lenders will deposit the funds directly into your bank account, though a few might send a check through the mail. As soon as the funds are received, it's essential to establish a clear repayment strategy. Creating a consistent payment schedule that aligns with your income flow is crucial.

    Setting up automatic payments can ensure you never miss a due date, potentially avoiding late fees and negative credit impacts. Timely repayment helps maintain a good credit score and reduces the total interest paid over the life of the loan, making it a financially sound decision.

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MONEYGEEK EXPERT TIP

If your credit improves, you may be able to refinance your personal loan for a lower interest rate. A higher credit score represents lower risk for lenders, which could make you eligible for more favorable loan terms. By refinancing at a lower rate, you could potentially save on total interest payments over the life of the loan. Consider any associated fees, as they could offset some of the potential savings. — Alvin Yam, CFP®

Pros and Cons of Getting a Personal Loan

Taking out a personal loan is a significant commitment that can have lasting financial implications. As such, be sure to carefully weigh the pros and cons before proceeding. Understanding both the advantages and disadvantages ensures that you make an informed decision, aligning the loan with your financial goals and capabilities.

Benefits of Getting a Personal Loan

  • Flexibility and Versatility: You can use personal loans for a variety of purposes, from debt consolidation to funding major life events. This flexibility allows you to address specific financial needs without the restrictions that come with other types of loans.

  • Fixed Interest Rates: Most personal loans come with fixed interest rates, which means your monthly payments remain the same throughout the term of the loan. This predictability makes budgeting more straightforward.

  • No Collateral: Unsecured personal loans don’t require any collateral, like your home or car. This aspect can be particularly appealing if you don’t want to risk an asset or don’t have one to offer as security.

  • Fast Funding: Personal loans, especially from online lenders, can provide quick access to funds, often within a few days of approval. This speed benefits those who need money urgently for unexpected expenses or time-sensitive investments.

  • Boosts Credit Score: Regularly paying off a personal loan on time can positively impact your credit score. This is due to the improvement in your credit mix and the demonstration of your ability to manage and repay debt responsibly.

Drawbacks of Getting a Personal Loan

  • Fees: Personal loans may come with additional fees, like origination or prepayment fees. These can increase the overall cost of borrowing, making it more expensive than initially anticipated.

  • Potential for High Interest Rates: If you have a lower credit score, you might face higher interest rates on a personal loan. This can significantly increase the amount you repay over time, especially compared to rates offered to those with better credit scores.

  • Risk of Debt Accumulation: Taking out a personal loan increases your total debt burden, which can be risky if not managed properly. Ensure that the loan doesn't lead you into a cycle of debt, especially if you're using it for consolidating credit card debt without curbing spending habits.

  • No Co-Signers: Many personal loan providers do not allow co-signers, which can be a limitation if you have a lower credit score or insufficient income. A co-signer can sometimes help secure a loan or get a better interest rate, so the absence of this option can be a significant drawback for some borrowers.

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MONEYGEEK EXPERT TIP

You may be able to deduct the interest from a personal loan on your taxes if you use the loan for things that help you make money, such as investing in a business, purchasing income-generating property or funding education related to a job or profession. However, if you use the loan for non-income-generating purposes, like personal expenses, you typically cannot claim the interest on the loan as a tax deduction. — Alvin Yam, CFP®

Alternatives to Getting a Personal Loan

Consider exploring alternatives if a personal loan isn't a viable option, either due to eligibility issues or if it doesn't suit your financial situation. Here are some alternatives to getting a personal loan:

  • Opt for a Credit Card Installment Plan: Many credit cards offer installment plans that allow you to convert high-cost purchases into manageable monthly payments. This option can be suitable for smaller expenses or taking advantage of a low-interest promotional period. However, try to be mindful of the interest rates after the promotional period ends.

  • Borrow From Friends or Family: Borrowing money from friends or family can be a no or low-interest option. This alternative avoids traditional lending formalities and can offer more flexible repayment terms. Be sure to consider the potential impact on personal relationships and to have a clear agreement to prevent misunderstandings.

  • Tap Into Your Home Equity: If you own a home, you may consider a home equity loan or home equity line of credit, which can offer lower interest rates compared to unsecured personal loans. This option is tied to the equity in your home and often has more extended repayment periods. Remember, your home serves as collateral with this option, so there's a risk of foreclosure if you can't meet the payment terms.

  • Borrow From Your 401(k): Some 401(k) plans allow you to borrow against your retirement savings. This option may offer lower interest rates and isn't reliant on your credit score. However, it's important to consider the potential drawbacks, such as missing out on investment growth and the risk of a penalty if you're unable to repay according to the plan's terms.

There are many ways to access funds, each with its own set of advantages and drawbacks. Consider what option best suits your circumstances.

FAQ About Getting a Personal Loan

The steps to getting a personal loan can be challenging at first, but MoneyGeek answered some commonly asked questions to make the process easier.

What’s the difference between a secured personal loan and an unsecured personal loan?
What disqualifies a candidate from getting a personal loan?
How much can you borrow from a personal loan?
How much will a personal loan cost?
How long does it take to get a personal loan?

About Christopher Boston


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Christopher (Croix) Boston was the Head of Loans content at MoneyGeek, with over five years of experience researching higher education, mortgage and personal loans.

Boston has a bachelor's degree from the Seattle Pacific University. They pride themselves in using their skills and experience to create quality content that helps people save and spend efficiently.


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The content on this page is accurate as of the posting/last updated date; however, some of the rates mentioned may have changed. We recommend visiting the lender's website for the most up-to-date information available.

Editorial Disclosure: Opinions, reviews, analyses and recommendations are the author’s alone and have not been reviewed, endorsed or approved by any bank, lender or other entity. Learn more about our editorial policies and expert editorial team.