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Published: Apr 08, 2024 9 min read

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A personal loan allows you to pay for big-ticket items or unexpected expenses that you might not otherwise be able to afford. However, taking out a personal loan is a serious financial commitment, so it’s best to educate yourself on the process.

Read on to explore our step-by-step guide for how to get a personal loan, which includes valuable insights on determining how much you should borrow, identifying potential fees and understanding how your credit score can affect your options.

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What is a personal loan?

A personal loan allows individuals to borrow a specific amount of money from a bank, credit union or other financial institution. Borrowers are then obligated to repay that money, plus interest, within an agreed-upon timeframe.

When determining eligibility, loan providers consider a person’s creditworthiness as a key factor that indicates their ability to repay the loan. Your financial standing will affect the loan amount you qualify for, as well as the interest rate and repayment terms offered to you.

Unlike a mortgage or auto loan that has a specific loan purpose, a personal loan can be used for almost anything, including:

  • Emergencies
  • Student loans
  • Weddings
  • Home improvements
  • Medical bills
  • Debt consolidation
  • Major purchases

Most lenders require monthly loan payments for six months to seven years. However, these terms will vary depending on the lender and your creditworthiness.

How to get a personal loan in 6 steps

Step 1: Check your credit score and debt-to-income ratio (DTI)

Lenders evaluate your eligibility for a personal loan based on your credit score and your debt-to-income (DTI) ratio.

Under the Fair Credit Reporting Act (FCRA), you have the right to check your credit report for free once per week. There are three major credit reporting bureaus: Equifax, Experian and Transunion. Additionally, you receive a score from both FICO and VantageScore, which use data from these three credit reporting agencies.

While most lenders require a credit score of at least 580 for personal loans, if your credit score is lower, you may still qualify for a loan with less favorable interest rates and repayment terms. If your credit history isn’t as strong as you’d like, it may be beneficial to explore ways to improve your credit score before applying for a loan.

Lenders also consider your debt-to-income (DTI) ratio when assessing your creditworthiness. Your DTI is determined by comparing your monthly income to your monthly debts. Use Money’s debt-to-income ratio calculator to calculate yours. The lower your DTI, the better, as most lenders prefer borrowers with DTIs of 40% or lower.

Step 2: Gather documents

When you apply for a loan, you may be asked to provide:

  • Proof of identity - Valid government-issued photo ID, birth certificate, military ID, certificate of citizenship
  • Social Security number
  • Proof of address - Recent utility bill, mortgage statement, copy of your lease agreement
  • Proof of income - Tax returns, bank statements, pay stubs

Make sure you have the documents necessary before getting started on your loan search.

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Step 3: Compare reputable personal loan lenders

You can look to banks and credit unions for a personal loan, but there are also online lenders to consider. Minimum credit score requirements, loan repayment terms and starting interest rates vary, so be thorough in your search.

Check out our list of the best personal loans to get started. You can also ask for recommendations from friends and family members who have taken out loans and had positive experiences.

Step 4: Prequalify for a personal loan

Once you’ve identified a few potential lenders, apply for prequalification through their online application. (If you prefer, you can also check to see if the lender offers prequalification by phone or in person.)

It’s important to note that prequalification is not the same as applying for a loan. Unlike an official loan application, prequalification requires only a soft credit check, which won’t impact your credit score. Most lenders offer this option to allow borrowers to explore potential loan offers without any negative effect on their credit scores.

To prequalify for a personal loan, you’ll need to provide personal information such as your name, address, income and desired loan amount. With most lenders, you’ll receive loan options within minutes of submitting your information.

Keep in mind that regardless of whether or not you decide to proceed with the application process, you will likely receive communications via phone or email from these lenders. (You can opt out of these communications by informing the representative who contacts you.)

Step 5: Review loan offers

Before committing to a loan offer, study the repayment terms, fine print and other disclosures. Below you’ll find a checklist of details to verify.

  • Annual percentage rate (APR) - Compare APRs across your loan offers.
  • Fixed rate or variable interest rate - A fixed interest rate stays the same until the loan is repaid. A variable interest rate, however, could go up or down depending on market conditions.
  • Loan amount - Check your final loan amount and compare it to what you asked to borrow to see if fees have been included in the total cost.
  • Origination fee - Also called a document fee, this lender fee is added to the total of your loan. The cost varies, and some lenders don’t charge an origination fee at all.
  • Prepayment penalty - Few lenders charge a fee if you pay your loan before the repayment term is up, but some do.
  • Late fees - Find out how much you’ll be charged if you’re late on a payment.
  • Repayment terms - Payments could be monthly or weekly, and could require automatic debits from your checking account (also known as Autopay).
  • Loan term - The longer your loan repayment term, the more interest you’ll ultimately pay.

Step 6: Apply for a loan and get funding

Once you’ve chosen one of your prequalified offers, proceed to formally apply online, in person or by phone. Note that this step will result in a hard credit inquiry, which may cause a slight drop in your credit score. While many lenders offer fast loan approvals or rejections (within minutes), some may take up to a week to make a decision.

If approved, you’ll receive a guaranteed offer. However, it may look different from what you received at prequalification, so be sure to evaluate all of the information thoroughly. If you have questions or are unhappy with the terms, don’t hesitate to contact a representative of the financial institution. Remember that you are under no obligation to accept any loan offer.

Typically, funding is disbursed within five to seven business days via direct deposit to your bank account. However, there are some lenders that provide funding within 24 hours.

You should expect to start making monthly payments on your loan approximately 30 days after you receive the loan funds.

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How to Get a Personal Loan FAQs

How to get a personal loan with bad credit

You can get a personal loan with bad credit, but your loan terms, especially the interest rate, will be less favorable. You can boost your chances by adding a co-signer with good credit (if the lender allows). Also, if you have collateral to offer, you may be eligible for a lower interest rate with a secured loan.

What is a good personal loan interest rate?

A good personal loan rate is a competitive rate as compared to the national average, which is reported by the Federal Reserve. The average rate as of April 3, 2024, is 11.87% for a personal loan with a repayment term of 24 months. Note that the lowest rates are offered to borrowers with excellent credit.

How long does it take to get a personal loan?

Once you're approved and complete all the necessary paperwork, it takes about five to seven business days to get a personal loan. However, this varies by lender. Some lenders offer same-day funding or by the next business day.

What should you do if the lender rejects your loan application?

If the lender rejects your loan application, you may still have options. One possibility is to get a co-signer. A co-signer is a trusted person who agrees to assume legal responsibility for the debt in case you are not able to repay it. Your chances of approval may increase if your co-signer meets the eligibility requirements set by the lender.

If you applied for an unsecured personal loan and got rejected, you can try applying for a secured loan. Because secured loans use collateral as a guarantee, it reduces the lender’s risk and will improve your chances of receiving a loan.

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