How to apply for a personal loan in 5 steps

Personal loans can be versatile tools in supporting your financial goals. Whether you want to use the money to pay off debts or finance a major purchase, a personal loan can get you the funds you need in one lump sum.

You can get a personal loan through a bank, credit union, an online lender and other financial institutions. These loans are usually unsecured, which means you don’t have to offer collateral like you would with a traditional car loan or mortgage.

Most personal loans are unsecured, and personal loan payments typically stay the same each month. Your term may be as short as six months or as long as 10 years, depending on the lender's requirements and your preferences.

What do you need to apply for a personal loan?

When you apply for a personal loan, your potential lender will require some information and documents to establish things such as your identity, how you plan to use the funds and your income.

Application requirements

You’ll need to provide your full legal name, date of birth, address and Social Security number, as well as how much money you'd like to borrow and how you plan to use the funds if you’re approved.

Lenders also ask about your financial situation, including your income and debts. Be prepared to list all sources of income, assets and obligations to creditors.

Proof of identity

Lenders need to verify that you are who you say you are, that you’re a U.S. citizen or permanent resident, and that you’re at least 18 years old. Some lenders may also require your bank account and routing numbers.

You'll usually have to provide two forms of identification, including a form of government-issued ID. You may need to provide some combination of:

• Passport
• Certificate of Citizenship
• Driver’s license
• State-issued ID
• Military ID
• Social Security card
• Birth certificate

Income and employment verification

You may be able to verify your income  and employment with one or more of the following documents:

• Pay stubs
• W-2s and 1099s
• Employer's contact information
• Bank statements
• Income tax returns

Proof of address

In some cases, you’ll have to prove your address. You can often do so by showing any of the following documents:

• Mortgage statement
• Lease or rental agreement
• Utility bill
• Proof of insurance
• Property tax receipt
• Credit card or bank statement

If you've recently moved, you may be able to use your change of address confirmation from the U.S. Postal Service.

5 steps to apply for a personal loan

Applying for a personal loan doesn’t need to be complicated. You can easily handle the process by following these five steps.

1. Figure out how much to borrow

The first step to getting a personal loan is deciding how much money you want to borrow. Think about why you need the money and whether you have the financial capacity to repay the loan plus fees and interest.

If you know how much you'll pay in fees and have an idea of how much interest the lender may charge, you can use an online calculator to figure out your monthly payments. Make sure you can easily fit those payments into your budget before proceeding. Making even one payment late can hurt your credit score, which could make it difficult to get loans and credit cards with favorable terms in the future.

2. Check your credit and DTI

Lenders examine your credit history and score when determining approval for a personal loan, so it’s smart to check your credit before applying. Visit annualcreditreport.com to get access to your Experian, TransUnion and Equifax reports at no charge. You might be able to get your FICO Score free through your bank, credit union or credit card company. If your score is in the mid-600s or higher, you have a better chance of getting lower interest rates and fees.

A debt-to-income ratio of less than 40% is ideal for a potential borrower.

Lenders also look at your debt-to-income (DTI) ratio. Your DTI ratio is your total monthly debt payments divided by your gross monthly income.

So, if you have a $650 car payment, a credit card with a minimum monthly payment of $75, student loan payments totaling $800 and a mortgage payment of $1,350 per month, your total debt payments add up to $2,875. Your gross monthly income is equal to your paycheck before health insurance, 401(k) and tax deductions. If your gross monthly pay is $9,500, for example, your DTI ratio would be 30%.

Lenders typically consider a 20% DTI ratio low, which is good if you want to qualify for a personal loan. Each lender has different standards for maximum DTI ratios; most lenders prefer to see a DTI ratio of 40% or below.

3. Pre-qualify and compare lenders

Pre-qualification helps determine the likelihood of a lender approving your application based on a soft pull of your credit, which doesn't impact your credit score.

If you’re pre-qualified for a personal loan, you aren't obligated to accept the lender's offer. In fact, it's smart to shop around and consider multiple lenders to make sure you get the best possible terms.

Be sure to compare the annual percentage rate (APR), which is the total of all fees and interest expressed as a yearly percentage of the loan amount.

4. Submit the application and other info

Once you choose to apply with a specific lender, the institution will perform a hard inquiry on your credit, which may cause your score to drop by a few points.

When you submit your formal application to get a personal loan, the lender may ask for additional information, like recent savings and checking account statements, to assist with underwriting. Try to respond to any requests in a timely manner so the loan process stays on track.

5. Close on the loan

After you've been formally approved for a personal loan, you'll sign the appropriate documents and close on the loan. Funds may be transferred to your bank account immediately, or you may have to wait a few days to get access to the money.

Read your closing documents carefully so you fully understand how much you’ll pay monthly, how many payments you'll make over the course of the loan and when your first payment is due. If possible, it’s a good idea to set up automatic payments through your bank's bill-pay system so you don't accidentally make a late payment.

Bottom line

Personal loans provide access to a lump sum of cash you can use for almost any reason. While it may make sense to use this type of loan instead of savings for large purchases or to consolidate debt, it's crucial to compare a number of lenders to make sure you get the best possible interest rates and terms. 

For borrowers with lower credit scores, a personal loan may be too expensive. It may be smart to wait and work on improving your credit score before proceeding with a personal loan to avoid paying high fees and interest.