A personal loan can be a helpful resource when you need to pay for large or unexpected expenses. But to make the most of one, it’s best to have a reliable plan to pay it off. If you have decided to apply for a personal loan, consider all of the factors that go into taking a loan, including your financial standing, the lender you use, and how you will pay it off. Follow our eight-step guide to walk through the process.
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Before you begin the process of applying for a personal loan, gather all the documents and information you need along the way. Doing so will allow you to move through each step of the process efficiently and get your funds as quickly as possible.
There are many reasons to get a personal loan, like an unexpected hospital bill or a necessary car repair. If you’ve decided that a personal loan is the right type of financing for you, follow these eight steps to apply.
The last thing you or lenders want is for you to take out a personal loan and not be able to afford to pay it off. While lenders typically do their due diligence to make sure you have the ability to repay the debt, it’s smart to run your own numbers to make sure it’ll work out.
Start by determining how much cash you’ll need, keeping in mind that some lenders charge an origination fee, which they deduct from your loan proceeds. Make sure you borrow enough to get what you need after the fee.
Use a personal loan calculator to find out what your monthly payment will be. This can be difficult if you don’t know what kinds of rates and repayment terms lenders will offer, but you can play around with the numbers to get an idea of what the loan will cost you and decide if your budget can handle it.
Takeaway: Before you apply for a personal loan, find out whether the lender charges an origination fee — and if it does, ask what the fee is. Figure out how much cash you’ll need after fees, and a monthly payment you can comfortably afford.
Most lenders will run a credit check to determine how likely you are to repay your loan. While some online lenders have started to look at alternative credit data, they will still typically look at your credit score.
The best personal loans typically require that you have at least fair credit — usually between 580 and 669. Good and excellent credit above 670, however, will give you the best chance of getting approved with a competitive interest rate.
You can get a copy of your credit report from AnnualCreditReport.com. It will provide a free copy of your credit report from all three credit bureaus every 12 months. Check to see if there are any errors on the report. If you find mistakes, contact the major credit reporting agencies (Equifax, TransUnion, and Experian) to get them corrected.
If your credit score is low for other reasons, you may still have a chance to get a loan. But the interest rates and fees may be too high to make it worth it, so take steps to improve your credit before applying.
Depending on your creditworthiness, you may need a co-signer to get approved for a personal loan with a decent interest rate. If you can’t find a co-signer, or the lenders you’re considering don’t allow co-signers, you may have the option to get a secured personal loan instead of an unsecured one.
Secured loans require collateral, such as a vehicle, a house, or cash in a savings account or certificate of deposit, in exchange for more favorable terms. If you fail to repay the loan, the lender can seize the collateral to satisfy the debt.
You’ll also need to think about where to get a personal loan. With traditional banks, for instance, you may have a hard time getting approved if you have bad credit. Some online lenders, however, specialize in working with bad-credit borrowers, and some credit unions have short-term loans that serve as cheap alternatives to payday loans.
If you don’t meet the typical qualifications and your purchase can wait, take some time to build up your credit score so you can qualify.
Takeaway: If you don’t meet the qualification requirements for a decent rate, and you need a loan right now, a co-signer, a bad-credit loan or a secured loan could improve your chances of approval.
Next steps: If you don’t think you’ll get approved, research your loan options or reach out to a family member or friend with good financial health about being your co-signer.
Once you know where your credit stands and you’ve considered your options, determine which type of loan is best for your situation. While some lenders are flexible in terms of how you use the funds, others may only approve loan applications if the money will be used for specific purposes.
For example, one lender might let you take out a personal loan to fund your small business, while a different lender might not allow you to use borrowed funds for business purposes at all. It’s generally smart to find a lender that is comfortable loaning you money for the exact reason you need it.
Avoid settling for the first offer you receive; instead, take some time and shop around for the best possible interest rate. Compare several types of lenders and loan types to get an idea of what you qualify for.
You can generally find personal loan offers from banks, credit unions, and online lenders. If you’ve been a longtime account holder with your bank or credit union, consider checking there first. Often, showing that you’ve made positive financial choices for years means your bank or credit union may be willing to look past recent credit missteps or give you a better rate.
Some online lenders also allow you to get prequalified with a soft credit check, which won’t impact your credit score. Check with the lenders you are considering to see if they offer a prequalification process. Utilize this option to get a full understanding of the rates available to you.
Lenders that don’t offer a prequalification process will typically run hard credit inquiries as part of the loan application process. To limit the effect of hard inquiries on your credit score, it’s best to do your rate shopping within a 45-day period to count them as a single inquiry for credit-scoring purposes.
After you’ve done your research, pick the lender with the best offer for your needs, then start the application process.
Depending on the type of lender, you may be able to do the entire application process online. Alternatively, some lenders may require you to apply in person at your local bank or credit union branch.
Every lender is different regarding what information it’ll need on the application, but you’ll typically need to provide your name, address, and contact information, your income, and employment information, and the reason for the loan.
The lender will also request you share how much you want to borrow. It may then give you a few options to consider after a soft credit check. You’ll also have a chance to review the complete terms and conditions for the loan, including fees and your repayment period. Read through the loan agreement thoroughly to avoid hidden fees and other pitfalls.
Every lender is different when it comes to what you need to apply. Once you submit your application, your lender will likely ask you to provide some additional documentation. For example, you might need to upload or fax a copy of your latest pay stub, a copy of your driver’s license, or proof of residence.
The lender will let you know if it needs any documentation from you and how to get it to the right person. The faster you provide the information, the sooner you’ll get a decision.
After the lender notifies you that you’ve been approved, you’ll need to finalize the loan documents and accept the terms. Once you do this, you’ll typically get the loan funds within a week — but some online lenders get it to you within one or two business days.
When you are approved, start keeping track of when your payments are due, and consider setting up automatic payments from your checking account. Some lenders even offer interest rate discounts if you set your account to make autopayments.
Consider paying extra each month. While personal loans can be cheaper than credit cards, you’ll still save money on interest by paying the loan off early. Adding even a small amount to your monthly payments can help you do so.
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